Have We Turned All Economic Authority Over to Highly-Principled Accountants? 18 comments
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Bob McTeer suggests that we have turned all authority over to the highly-principled accountants.
Accountants take pride in their professionalism, and it just wouldn't look right for them to modify an accounting rule just to save the financial sector and the economy.
In Bob's nightmare, his assets all go to zero and his house is sold, even though he has done nothing. Here is his assessment:
"Speaking of that, I read on the plane that the Federal Reserve, probably the most conservative institution in America, if not the world, has been pulling out all the stops-taking unprecedented steps-to get the country through this national emergency. And I understand the Treasury has also taken extraordinary, unprecedented steps to save the economy. Am I right?"
"You are right."
"And I believe there is a provision in the Emergency Powers Act, or some such law, that gives the President the right to suspend even the Bill of Rights in a national emergency. Am I right about that too?
"I believe so."
"So the Bill of Rights may be suspended in a national emergency, but not mark to market accounting?"
"It would appear so."
If only those in the Obama Administration would pay some attention, we might end the death spiral and get on the road to recovery.
When we get around to analyzing lines of authority and oversight, eventually someone will ask why we allowed the accountants to rule the world. FASB is not an elected body, and has highly indirect oversight. This should be a prominent feature of hearings on SEC appointments -- more important than Madoff.
The accounting mission - informing people about the holdings of public corporations -- could be accomplished without destroying the regulatory capital of every financial institution.
Or else we could commit trillions of TARP funds in a never-ending quest. Those looking for a market catalyst need merely to watch for a sign that any public official in power gets this message.
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They should live with transparent accounting rules, or perish. The market should not be a black box, or should I say a black hole !
It's pretty clear that the financial markets will not stabilize until banks either writedown their troubled assets or dispose of them. And like it or not, it's a fluid and changing environment and the value of troubled assets is likely to grow.
The Japanese acknowledge they made a number of mistakes, including delaying the process of writing down troubled assets. Sweden, however, forced banks to write-down troubled assets and formed the equivalent of the RTC to buy toxic assets for which there was no market.
If you think you just put these toxic assets in a file drawer and wait for the residential and commercial real estate market bounce back, you are sadly mistaken.
Assuming mark-to-market accounting is an attempt to provide current value information about the assets of publicly traded, for-profit entities, I’m not sure how hiding this information from the public makes these entities more profitable, or a better investment.
Some assets lend themselves to this kind of value determination, especially those such as publicly traded securities that have adequate volume. Others, such as real property, may have to rely on the techniques of appraisers… comparable sales, income capitalization, etc.
Other assets do not lend themselves to current value determination because they are unique, and/or have no market, that is, no willing buyers and sellers.
Accounting actually has as its mission to provide useful information to all the users of that information. Throughout modern history the accounting profession has provided verifiable, objective (i.e. historical cost) information to financial statement users, leaving subjective adjustments such as price level changes and the effect of other “moving targets” to the user.
I think the accounting profession should go back to reporting strictly objective information on the face of financial statements, while providing subjective information in the notes to financial statements and/or other supplemental information that will facilitate subjective analysis and adjustment by users. In this model, there would be no mark-to-market adjustments reflected on the face of the financial statements, but mark-to-mark adjustments, along with their calculations and assumptions would be provided supplementally.
Regarding auditing, the audit marketers would like everyone (especially those in a position to affect fees) to believe auditing provides truthful results. In reality, auditing delivers process. That is, the audit report bases its opinion on the fairness of the financial statements (taken as a whole) on the processrs required by generally accepted auditing standards. In other words if you object to the auditors conclusions, you would have to prove they didn’t follow those auditing standards to sue.
Bail-outs and TARP are designed to help us get back, but I do not believe we have yet heard all the bad numbers that are out there. It's gonna get worse before it gets better, and I hope that the politicians listen as much - if not more - to the ordinary people, than they do to the financial wizards and accountants asking for and getting our hard-earned tax dollar. If they do, we will recover quicker, but if they do not, we've still got a long way to go.
Bailing out failed banks who failed because they played insane games with risk, trying to eliminate it so they could make reckless loans, is stupid. It is now bankrupting the entire nation. Bailing out banks that created this massive $66 trillion derivatives beast is impossible. We have to force the banks to declare bankruptcy.
Bankruptcy, incidentally, originally referred to banks. When a bank ceases to be capitalized, they cease to be a bank. A bank is where one has savings that earns profits. When this vanishes, the bank just isn't there anymore. It is not a bank but a sinkhole. How easy is this to understand?
As far as I can see, Americans do not, collectively, want a clear accounting. We want to live in a fantasy world where we are the richest nation, not one mired deep in debt. Until we face reality, we will continue to try to evade the obvious truth: America squandered all our future wealth. Our grandchildren will pay our bills. This is outrageous.
Right now, I think America needs some sober, careful accountant who will go over the Pentagon's messy books, who will audit Fort Knox and who will sit down and crunch the numbers of the derivatives market and then impose the cures we badly need. We will NOT get richer anymore, playing stupid games that wreck the industrial base and adds more debt.
Regards,
Elaine Supkis, emsnews.wordpress.com
What we need is more, not less, transparency and accuracy, in all accounting and all statistics, whether by accountants or government agencies.
It was the investor community that pushed the accountants to adopt FV during the Greenspan real estate bubble of 2001-2006, when the bubble was expanding. When the bubble burst, FV worked the way it was supposed to. It revealed that the banks were overleveraged and needed to deleverage. Is FV only supposed to work on the way up?
Further, the SEC has heavy input to the standards set by FASB. Standards of which the SEC doesn't approve are not published.
The accounting mission - informing people about the holdings of public corporations - has been accomplished. The investing public continue to be informed about the overleverage of American banks and their need to further deleverage.
"And I believe there is a provision in the Emergency Powers Act, or some such law, that gives the President the right to suspend even the Bill of Rights in a national emergency."
Mr. McTeer is obviously not familiar with legalalities. The Bill of Rights is part of the Constitution, which is the highest law in the land. Laws passed by Congress, by definition, cannot override the Constitution (hence the ruling of being "unconstitutional" by the Supreme Court on occasion). Any clause of any law which purports to do so is in fact invalid and if enforced, illegal. There is only one way to override the Constitution and that is via an amendment.
Also, Mr. McTeer's example is apparently a bit of an exaggeration to make a point about the MTM standards. If he had purchased all those assets discussed on his blog posting and paid in full, what difference does it make if they are marked to zero? He is still not insolvent, his net worth is still non-negative.
Absent any need to pay for loans used in the purchases (as the banks and hedge funds did), he needs do nothing except wait for the assets to mature. In the meantime, one would assume that interest payments would continue to arrive until at maturity the principal is paid off.
The true difficulties with MTM rules is that the institutions suffering from their application used immense amounts of borrowed money to buy illiquid assets. When MTM rules devalue them sufficiently, the remaining debt used in their purchase is no longer offset by the asset's value and the institution's insolvency becomes apparent.
What caused the problem is not the MTM rules, it was the institutions foolish reliance on excessive debt to purchase the assets whose value was reduced.
His arguement is sort of like a drunk claiming that his DUI is the alcohol's fault and not his for drinking too much of it.
I received Bankstocks.com for during the last runup to disaster. Thought I'd get insight. Mostly, it was apologia for the present and soothing predictions for the future. Accountants seem to look at system as it exists and work with that, not seeing the forest for the trees. And they love the arcane insanity of our system. I knew from the terrible conditions of the real world that the mortgages being aggressively pushed couldn't be paid unless the economic nirvana our politicians promise came to pass. I was not impressed with commentary that, subprime was a small part of housing and housing wasn't that big a deal for the economy.
In fact, one blog mentioned that the instrument for puts Goldman Sachs created for housing came because, I believe, their CEO heard an air conditioner repairman griping about his difficulty paying his bills when his mortgage readjusted. That's a fairly well-paid technician.
Accountants work with the well-healed. They work together for messes that hurt the common person. Why do we continue to guard the henhouse with the foxes?
As for this:
"Speaking of that, I read on the plane that the Federal Reserve, probably the most conservative institution in America, if not the world..."
Conservative? It's a private org of bankers...who serve primarily bankers...certainly not the interests of the people. I don't call that conservative.
To blame accountants for the current economic crisis is like blaming your doctor when he tells you that you have cancer.
The same people that expect the Fed to regulate banks. The fed is made up of bankers and is a bank itself.
The same people who expect the ratings agencies to rate fairly when they make all their money getting paid by the corporations thay rate debt for.
The same people who expect Paulson who make money shorting mortgages his company packaged with derivatives they advised AIG to sell, to be ethical as the head of the Treasury.
When people ask why there is no transparency or regulation you really must ask yourself why? Or why no one did anything about this mess before and still aren't fixing it. The answer becomes quite apparent. Thus the loss of confidence and the erosion of the capital markets.
Frankly, looking at the facts this way, the market is 100% correct selling off and should keep doing so until they can convince the investor that the charades have stopped and real accountability has started. The type of accountability that doesn't involve everyonbe counting how much money went into their pocket when they reviewed a company.
We have given all economic authority not to accountants but crooks, liars, con artists, and theives.
With that in mind, let me make a couple of observations. This is an article about how the U.S. government delegates authority on specific, narrow, highly-specialized issues. Another example is the FDA and Scientific Advisory Boards. I write about these things because most people do not understand the policymaking process and how power is distributed. There is a particular danger when the implications of decisions reach far beyond the normal purview of these boards.
Some of those commenting agree with the FASB decision. Do you agree that it is the right body to make the decision? It is not elected. There is oversight only by the SEC, which has plenty of other major problems. Even the President cannot fire SEC Commissioners, but must wait for appointment opportunities.
Bob McTeer's point, and mine, is that the issue is too big and too important for delegation to such a body. It is probable that Congress will act to change SEC authority by new legislation.
As to the merits of various accounting methods (not the topic here), if you search Seeking Alpha or my blog you'll find plenty of discussion on the mark-to-market debate. We are all consumers of corporate information; we all rely upon the accounting profession for integrity and excellence. The glib analogies about doctors or thermometers add little information. If your doctor comes to you with a cancer diagnosis, you want to know that it is based upon the most accurate methods. If it is a mistake, your surgery and months of chemotherapy -- costly and painful -- might be for no purpose. Those of us asking the best from the accounting profession do not believe that forced sales in illiquid markets provide valid information. It is not the sort of data I would want my doctor to use.
Thanks to all for taking the time to comment.
Jeff
FASB and the SEC should be yaken out to the wood shed and given a good beating.
This ridiculous Sarbanes/Oaxley and 2004 Credit reform Act with their Mark to Market Fair value accounting has indeed put us into a death spiral driven by the accountig problem it has created, This accunting problem has led to a financial panic, which has led to everyon hoaring cash to rpotect themselves as they continue to mark down their balance sheets. The mark downs are driven by the redution in asset values as everyone hoards cash and does not trust anyone's balance sheet including their own.
When your gas gauge reads incorrectly about halfthe time, most drivers pull into to fill up - even when they do not need to, merely to avoid running out f gas.
When the balance sheet continues to be marked down because of the credit crunch and nerosness crated by MArk to Market accounting with its quarterly mar downs, the whole system is screwed up.
Is a nightmare "Do-Loop" a never ending spiral that will bankrupt us all.
Don't attempt to redesign reality to please some D/A regulators and accountants. Instead rewrite the code, get rid of the D/A Do-Loop causing th problem. and restore the accounting system to a semblance of normalcy, stability, and balance. Then credit will being to flow.
Do not throw money at an accounting problem, rewrite the accounting rules, restore the accounting rules that have served us so well since the last Great Depression.
How stupid and arrogant can you D/A politicians in Washington be?
A pox on both your PArties and Both your houses.