Tuesday, September 23, 2008

Wall Street says Accounting Caused Meltdown

It's obvious that lobbyists for Wall Street firms are taking a hard line of suspending or revising mark to market rules (for a review of the basics go here). The WSJ has several articles a day over the past few days citing the FAS 157 rules as the villains of the current meltdown. The Washington Post summarizes some of their comments in the excerpt below. Accountants quoted are generally on the defensive. University profs are divided on the issue.

Wall St. Points to Disclosure As Accounting Rule Cited in Turmoil
Carrie JohnsonWashington Post September 23, 2008

Wall Street executives and lobbyists say they know what helped push the nation's largest financial institutions over the edge in recent months. The culprit, they say, is accounting. Lynn E. Turner, a former SEC chief accountant, said he remembered fielding questions about the accounting provision six months ago from lawmakers on Capitol Hill. "What the banks are telling everyone is that the accounting has caused the problem," Turner said. "The only thing fair-value accounting did is force you to tell investors you made a bunch of very bad loans." "[Mark to market rules are] intended to be more or less for orderly markets," said Dennis R. Beresford, an accounting professor at the University of Georgia. "But we don't have orderly markets these days. It's not so much that mark to market has people complaining, but marking to a particular market. Today it's more kind of fire-sale prices."

Martin Sullivan, chief executive of AIG, decried fair-value accounting in a February conference call with investors and called for regulators to make changes after AIG took an $11 billion write-down this year. Joe Norton, a spokesman for AIG, declined to comment yesterday.
Arizona Sen.
John McCain, the GOP presidential candidate, mentioned fair-value accounting as a problem in a recent stump speech.

Banks also have been fighting their auditors, some of which have reasoned that downmarket conditions have persisted for so long that assets are no longer "temporarily impaired" but now require write-downs and capital infusions. Banking trade association officials are scheduled to meet with SEC regulators this week to discuss the issue, which could prompt some banks to attract new capital to meet regulatory requirements. "The accounting rules and their implementation have made this crisis much, much worse than it needed to be," said Ed Yingling, president of the bankers' association. "Instead of measuring the flame, they're pouring fuel on the fire."

The odds of a wholesale regulatory reversal in the near term, however, are slim, according to two sources briefed on the process, because a shift away from fair-value accounting would only intensify trouble with pricing complex assets in an unruly market. The sources spoke on condition of anonymity because they were not authorized to speak publicly about the matter.
"It is extremely unlikely they are going to back off of market-value accounting in the midst of a crisis," said a financial services policy expert with long government experience. "When things stabilize, I guarantee you that you're going to see a revised procedure."

J. Edward Ketz, an accounting professor at Pennsylvania State University, says he "doesn't buy" the argument that fair-value accounting is a root cause of the problems. Executives never complained about mark-to-market accounting standards when they helped banks post huge gains on derivative investments during the economic boom, or when fair-value accounting for stock options produced tax benefits, Ketz said. "If anything, I think that market-value accounting has helped to bring the problems to a head earlier and with less damage, than if market-value accounting hadn't been applied," said Charles W. Mulford, an accounting expert at the Georgia Institute of Technology.

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