Monday, January 12, 2009

TARP Reform Bill Introduced, Hearings Slated, As COP, GAO Issue Reports

On Jan. 9, House Financial Services Committee Chairman Barney Frank (D-MA) introduced H.R. 384, the TARP Reform and Accountability Act, to amend the Troubled Assets Relief Program (TARP) established under the Emergency Economic Stabilization Act of 2008 (EESA). As noted in this press release, “The legislation will strengthen accountability, close loopholes, increase transparency, and require Treasury to take significant steps on foreclosure mitigation.”

TARP Hearing Jan. 13
The House Financial Services Committee’s hearing on Priorities for the Next Administration: Use of TARP Funds, originally scheduled for Jan. 7, has been rescheduled for Jan. 13 at 2pm.

COP Issues Second Report on TARP
In related news, on Jan. 9, the Congressional Oversight Panel (COP) released the second in its series of reports on the TARP program. According to COP’s Jan. 9 press release, four key areas that demand attention, as detailed in COP’s Second Report, include:

  1. Bank Accountability—the Panel still does not know what banks are doing with the taxpayer money they have received.
  2. Transparency—confidence in markets can only be restored when information is transparent and reliable, but we still have no clear mechanism to ensure transparent and accurate asset valuation and no confidence that the dangers posed by toxic assets have been addressed.
  3. Foreclosures—Treasury has yet to take any steps to use TARP funds or develop plans to “maximize assistance to homeowners,” as required by law.
  4. Overall Strategy—Treasury’s shifting explanations for its purposes and the tools used have exacerbated the Panel’s concern that Treasury does not have a coherent overall strategy and goals for use of the TARP funds.
COP Hearing On Reg Refom Jan. 14
The COP’s members include Harvard law prof. Elizabeth Warren (chair of the committee), Rep. Jeb Hensarling (R-TX), New York State Superintendent of Banks Richard Neiman , AFL-CIO Associate General Counsel Damon Silvers , and former Senator John E. Sununu.
COP has a third report coming up, as instructed by Congress, will be on the subject of regulatory reform. In connection with preparing its report, COP will conduct a hearing on Jan. 14. Additional information is available at COP’s updated website, .

GAO Issues Report on Regulatory Reform
Separately, the U.S. Government Accountability Office (GAO) released a report on Jan. 8 on Financial Regulation: A Framework for Crafting and Assessing Proposals to Modernize the Outdated U.S. Financial Regulatory System. As noted in GAO’s summary and detailed in the GAO Report on Financial Regulation, GAO has found that:

[T]he current U.S. financial regulatory system is in need of significant reform.
To help policymakers better understand existing problems with the financial
regulatory system and craft and evaluate reform proposals, this report (1)
describes the origins of the current financial regulatory system, (2) describes
various market developments and changes that have created challenges for the
current system, and (3) presents an evaluation framework that can be used by
Congress and others to shape potential regulatory reform efforts.

GAO observed that significant regulatory gaps formed in recent decades, in part as a result of changes in financial markets and new products introduced. Five such areas noted by GAO include the need to address: (1) systemic risk, (2) less-regulated market participants, including nonblank mortgage lenders, hedge funds, and credit rating agencies, (3) the increasing prevalence of new and more complex investment products, which GAO says have challenged regulators, investors and consumers, and for which GAO observes a failure of regulators to adequately oversee the sale of mortgage and credit products, posing risk to consumers and the stability of the financial system, (4) challenges to accounting and auditing standards (see below), and (5) complication of some efforts on international regulatory coordination due to the U.S.’ fragmented regulatory structure.

Regarding accounting and auditing standards, the report observes:

“[S]tandard setters for accounting and financial regulators have faced growing
challenges in ensuring that accounting and audit standards appropriately respond
to financial market developments, and in addressing challenges arising from the
global convergence of accounting and auditing standards.”

I found it particularly interesting that GAO’s report notes the tremendous expansion in volume of accounting standards in recent years, noting: "As the pace of financial innovation increased in the last 30 years, accounting and financial reporting requirements have also had to keep pace, with 72 percent of the current 163 standards having been issued since 1980—some of
which were revisions and amendments to recently established standards, evidencing the
challenge of establishing accounting and financial reporting requirements that respond to needs created by financial innovation. "

Maybe it isn't surprising that 72% of FASB's standards were issued since 1980 given that FASB was formed in 1973, although there were predecessor standard-setting organizations to FASB under the AICPA. However, the point about the challenge of standards in keeping pace with the market, and a related point not directly made by GAO regarding the challenge posted to those who must implement and audit the increasingly accelerated volume o standards is daunting; this phenomenon has been referred to generically in the past by some as standards overload. I believe if you were to look at the number of FASB standards (GAO apparently looked at actual FASB standrds only, which currently number 163) and related guidance (including EITF consensuses, FASB interpretations and FASB staff positions) issued since 1990 and 2000 the volume of new standards would show an even more accelerated pace.

Among the current accounting challenges noted in GAO's report are off-balance sheet entities (GAO notes FASB has proposed eliminating qualifying special purpose entities or QSPEs), and implementation of FASB’s new standard, FAS 157, fair value measurement, (GAO notes the SEC and FASB issued guidance on Sept. 30 and Oct. 1, 2008 relating to fair value in inactive markets). GAO does not make any specific recommendations on accounting or auditing standard-setting, other than noting what some of the challenges are and that the standard-setters have dealt with (as noted above) and are continuing to deal with these challenges. Additional comments on this subject and other matters included in the report are contained in a letter of the American Bankers Association sent to GAO included as an Appendix to the report. Also included in the Appendices are other letters from various financial services, regulatory, and consumer organizations that reviewed a draft of the report.

Print this post


Cara Patterson said...

Stats showing the upward (presumably) trend in standards and guidance would certainly be interesting.

Faye said...

This won't succeed as a matter of fact, that's exactly what I consider.