Bloomberg (emphasis added):

Myron Scholes and Robert Merton shared the 1997 Nobel price for economics, and they are now united in calling for banks to give more accurate valuations on their illiquid assets….Banks that oppose new accounting standards on asset values want to conceal depressed prices, Merton wrote in the Financial Times yesterday. He composed the column with Robert Kaplan, a professor at the Harvard Business School along with Merton, and Scott Richard, a professor at the University of Pennsylvania’s Wharton School.

From the FT comment by Merton (emphasis added):

Legislators and regulators fear that marking banks’ assets down to fair-value estimates will trigger automatic actions as capital ratios deteriorate. But using accounting rules to mislead regulators with inaccurate information is a poor policy. If capital calculations are based on inaccurate values of assets, the ratios are already lower than they appear. Banks should provide regulators with the best information about their assets and liabilities and, separately, allow them the flexibility and discretion to adjust capital adequacy ratios based on the economic situation. Regulators can lower capital ratios during downturns and raise them during good economic times.

Bank regulators (FDIC and the Federal Reserve) don’t listen to Nobel prize winners much – they don’t have enough political clout and are not usually big hitters in the banks that control them.  The regulators are obviously in cahoots with the banks to “conceal depressed prices” – so it’s inaccurate to think that the regulators are “mislead”.  The banks and the regulators will, of course, fight Merton’s and Scholes’ suggestions to the death – perhaps (in a financial survival sense) literally…