Tuesday, November 4, 2008

Today's Reading List

Interested in the likelihood of final rules coming from the SEC during the remainder of this year? Take a look at: “Dissecting the SEC's Ability to Rulemake During a Moratorium,” by Broc Romanek in The CorporateCounsel.net blog.

Also of note, see Blackstone CEO Stephen Schwarzman’s OpEd in today’s Wall Street Journal, “Some Lessons of the Financial Crisis.” Schwarzman suggests seven principles to guide financial reform, in brief: (1) finalize a common set of accounting principles across borders ; (2) structure financial regulatory regimes in the world's major markets along broadly the same lines (Schwarzman adds: The regulatory agencies in the U.S. are too small, too fragmented and often not powerful enough to cope with a system-wide crisis); (3) full transparency for financial statements. (Schwarzman adds: Nothing should be eliminated. Off-balance-sheet vehicles that suddenly return to the balance sheet to wreak havoc make a mockery of principles of disclosure); (4) full disclosure of all financial instruments to the regulator. (He adds: No regulator can do its job of assessing risk and systemic soundness if large parts of the financial markets are invisible to it. A regulator must be able to monitor all derivatives, including, for example, $60 trillion in credit default swaps.); (5) the regulator should have oversight over all financial institutions that participate in the markets, regardless of their charter, location or legal status. (He adds: For example, it makes no sense if you are worried about leverage in the system to exclude major categories of borrowers, such as hedge funds.); (6) abolish mark-to-market accounting for hard-to-value assets. Schwarzman adds: “There is now emerging a broad realization that mark-to-market accounting has exacerbated the current crisis.” He further explains: “We are not talking about publicly traded equities with a readily ascertainable value. The problem involves securities held for investment purposes, and those instruments during certain times of the cycle for which there is no readily observable market. These securities and instruments would be fully disclosed to the regulator. However, a financial institution would not be forced to suddenly take huge write downs at artificial, fire-sale prices and thus contribute to financial instability.” (7) move to a principles-based regulatory system rather than a rules-based system. He states, “A system of rules and regulations is utterly incapable of dealing with the speed and complexity of the modern financial system,” adding, “Current SEC and bank regulation was unable to stem the current crisis.”

Schwarzman’s recommendation to ‘abolish mark-to-market accounting for hard-to-value assets’ is largely consistent with former FDIC Chairman William Isaac’s views at SEC’s mark-to-market roundtable last week. However, as we noted in our posts about the SEC roundtable, not everyone agrees with that view.

For an opposing view, Prof. Robert Jensen, Emeritus Accounting Professor From Trinity University, has posted some teaching material called “Don’t Blame Fair Value Accounting Standards,” posing questions for classroom discussion based on former FDIC Chairman Isaac’s Sept. 19 WSJ Op-Ed, “How to Save the Financial System.”

In related news, FASB and the IASB announced yesterday that the first in their series of 3 global roundtables on the financial crisis will be held in London on Nov. 14, and dates of roundtables to be held in Norwalk, CT and Tokyo will soon be announced. The roundtables will be webast.

Print this post

No comments: