Change The Rules
by digby
Wow. The banks are trying to create a new oversight board that can change accounting standards whenever they need to hide risk and insolvency from investors and the public. Seriously. And they are doing it in the name of making the economy more stable, if you can believe that. See the real problem comes when people know that banks are failing. So they need to keep that information hidden lest the whole system becomes unstable.
Unsurprisingly, the business community (led by the Chamber of Commerce, even) is a teensy bit upset by this. Ryan Grim has the story:
The mechanism is contained in an amendment set to be introduced in mid-November by Rep. Ed Perlmutter (D-Colo.) that would move final authority over the Financial Accounting Standards Board (FASB) from the Securities and Exchange Commission to a new body, a so-called “oversight” board, that would include the officials charged with managing systemic risks to the financial markets. These regulators would have the authority to override FASB’s accounting guidelines by taking into account economic conditions. The move is so radical that it has split corporate America. The bankers and members of Congress who support it have earned themselves an unlikely enemy: the U.S. Chamber of Commerce. A typical business or investor, after all, prefers honest, independent accounting, because they buy and sell real things based on real value. “Washington isn’t thinking straight,” said Josh Rosner, managing director of Graham, Fischer & Co, a New York-based financial analyst who advises regulators and institutional investors. “Financial statements are for the benefit of investors.”
Something very, very strange is happening in our financial sector. When even the Chamber of Commerce gets nervous, you know it’s bad. The business community and the banks are now on opposite sides of the fence. How’s that going to work out?
Asking accountants to change standards based on economic conditions could very well make their heads explode, however. It’s not their job, they say, to keep the system from collapsing. It’s their job to give honest numbers. If a company is bankrupt, it’s bankrupt. “Accounting standards are not policy,” remarked one person involved in the fight. But they have become policy. In the spring, Kanjorski’s subcommittee hauled the head of FASB in for a hearing and demanded the number-crunchers change their mark-to-market standards within three weeks or Congress would do it for them. FASB’s head pushed back during the hearing, saying that banks who called him asking for such a change were usually bankrupt fairly quickly. “They practically dragged him into the hallway and beat him to death,” said Rep. Brad Miller (D-N.C.), a committee member skeptical of the Perlmutter amendment. Three weeks later, they eased their accounting rules. But it wasn’t simple for the banks. Even with the intense congressional pressure, the change only sneaked by by a single vote and created tension on a board accustomed to a freedom from politics. The Perlmutter amendment would make such a battle unnecessary for the banks. “There are a lot of banks that are in a lot of trouble and have a lot of exposure to commercial real estate,” Miller said. “You can’t fix that with accounting.” Rep. Alan Grayson (D-Fla.) fought a lonely battle last spring to stave off the loosening of the accounting rules and opposes this more dramatic shift, as well. Banks may have good reason to want to overstate the value of their assets, he said, and it may work for a time. But an economy can’t be run indefinitely on imaginary numbers. “I enjoy reading fiction, but not in financial statements,” he said.
It’s not just fiction. It’s fantasy.
Back in the day when we all jabbered on about the Reality Based Community, I used to joke about this very thing. I said we should apply these same lies we use in foreign policy to the economy and see what would happen. By God, it looks like they are actually trying to do that.
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