WASHINGTON -- An obscure accounting rule is getting fresh attention in the current financial crisis, with critics saying banks are hurt by being forced to recognize losses quickly instead of holding assets until they recover.

The irony is that the new accounting standards, which went into effect last November, were in response to scandals at Enron and WorldCom and aimed at providing more transparency in corporate finances.

The rules require banks to recognize the "fair value" of their assets and book losses immediately instead of allowing them to wait for a recovery -- in some cases pricing the troubled mortgage assets as worthless.

The rule called FAS 157 is an update of the so-called "mark-to-market" standard requiring accounting for assets at fair-market prices.

Critics argue say it has had the perverse effect of weakening financial firms, forcing them to raise capital to offset the anticipated losses -- which can put them into a death spiral if cash is scarce.

"Right now, mark-to-market creates a vicious circle vortex that drags securities prices into the abyss and threatens the viability of the financial system itself," said Robert Brusca at FAO Economics.

"There was no commandment saying 'Mark thy securities to the prices prevailing in markets or suffer the wrath of God.'"

Edward Yingling, president of the American Bankers Association, said in a letter to regulators this week that unrealistic accounting standards were a "key factor" in the financial crisis.

Yingling said in a letter to the Securities and Exchange Commission that with financial markets frozen in some areas "there is not a true 'fair value'" that can be assigned to troubled assets.

Brian Wesbury at First Trust Portfolios said Merrill Lynch's woes underscore the problems. The Wall Street investment bank was forced to sell $30.6 billion of illiquid mortgage securities for $6.7 billion, or 22 cents on the dollar.

"If it did not sell, these bonds might have fallen to 18 cents and further eroded its capital on a mark-to-market basis," Wesbury said. "It couldn't take the chance.

"But what if Merrill was allowed to hold those securities on its books, without marking them to an illiquid market? The company would not have had to take a $24-billion loss. And maybe investors in Merrill Lynch would not have had to settle for a $29-a-share buyout from Bank of America, a 60 percent markdown from the share price less than a year ago."

John Mauldin, an author and president of Millennium Wave Advisors, said that if the current accounting standards had been applied during the Latin American debt default in the 1980s "every major US bank was bankrupt because they had loaned Latin American countries far more than their capital they had on their books."

"The current mark-to-market rule, while nice in theory, works in normal times. But it has the unintended consequence of making things worse in crisis times," he said.

Ed Yardeni of Yardeni Research said modifying the rule might eliminate the need for the massive $700-billion government rescue package being debated for the financial industry.

"I'm not convinced that (the plan) is even necessary," Yardeni said.

"I think a simpler solution would be for the SEC to immediately and temporarily suspend mark-to-market accounting rules for mortgage-backed assets. Firms could hold them to maturity (or until the market settles) without having to take crippling write-downs in the process."

The accounting industry's CFA Institute said however that ending "fair value" reporting "will only serve to undermine the confidence of investors in our financial institutions and lead to a further crisis of confidence in our government."

Federal Reserve chairman Ben Bernanke also cautioned against tinkering with the accounting standards.

"Many banks support this, but doing this would only hurt investor confidence because nobody knows what the true hold-to-maturity price is," Bernanke told lawmakers.

Robert Eisenbeis, a former Federal Reserve official and economist at Cumberland Advisors, said it was wrong for banks to blame accounting standards.

"The accounting serves as the canary in the mineshaft, in pointing out where the problems are," he said.

Although some bad assets may rebound in value, he said others do not.

"Pretending the losses didn't happen doesn't make it so," he said.