Eight House Democrats Tuesday proposed an alternative plan for unfreezing credit markets without putting taxpayers at risk that includes dropping "mark to market" accounting rules for mortgage-backed securities and allowing the FDIC to buy "net worth certificates" in troubled banks.

The plan (view the proposal here) — based on ideas floated by former FDIC Chairman William Isaac in a Washington Post editorial — was put forward by Rep. Peter DeFazio, D-Ore., and seven other Democrats as an alternative to a $700 billion troubled-asset repurchase program voted down by the House Monday.

The bill’s supporters are not among Congress’ most influential lawmakers, and their proposal is not considered a serious rival to the plan backed by the Bush administration and House and Senate leaders. Some of its ideas have already been discussed by lawmakers who are looking at whether to amend the proposal shot down by the House Monday.

Fair-value accounting standards require banks and financial institutions to value mortgage-backed securities — investments backed by home loans — and other investments by estimating what they would be worth if they were sold on market. Because no meaningful market for such securities exists now, the "mark to market" requirement forces banks to value many of their assets at fire-sale prices, according to a summary of DeFazio’s "No Bailouts Act." That creates a capital shortfall that exists only on paper.

Returning to the economic value standard formerly employed by bank examiners would free many banks from capital shortfalls that are based on accounting issues, proponents said. Economic value standards take into account the potentially greater value of investments if they are held to maturity.

The plan voted down by the House Monday would reaffirm the U.S. Security and Exchange Commission’s authority to suspend the application of fair-value accounting standards, and requires the SEC to conduct a study of the rule’s effects on financial institutions’ balance sheets within 90 days.

DeFazio and the other lawmakers said they would introduce legislation to implement Isaac’s ideas, which also include permanent restrictions on naked short-selling of stock, restoration of the uptick rule limiting short-selling of stock, and increasing the FDIC insurance limits for individual savings accounts from $100,000 to $250,000.

Rep. Barney Frank, D-Mass. — one of the architects of the bipartisan bill to implement the Bush administration’s $700 billion troubled-asset repurchase program — has said he supports raising FDIC insurance limits.

Other lawmakers endorsing DeFazio’s proposal were Rep. Marcy Kaptur, D-Ohio; Rep. Bobby Scott, D-Va.; Rep. Elijah Cummings, D-Md.; Rep. Lloyd Doggett, D-Texas; Rep. Rush Holt, D-N.J.; Rep. Donna Edwards, D-Md.; and Rep. Mazie Hirono, D-Hawaii.

***

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