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Two Sets of Books Require Two Sets of Accounting Standards

Posted by Larry Doyle on December 8, 2009 2:43 PM |

What was at the core of the current economic crisis?

The financial transactions embedded in the SIVs (structured investment vehicles) located off-balance sheet within our major financial institutions brought our country to its knees. As the securities housed in these SIVs plunged in value, Uncle Sam was forced to ride to the rescue and bail out Wall Street.

Uncle Sam’s bailing required not only billions in dollars but also the coordination and complicity of the accounting industry. The Federal Accounting Standards Board (FASB) knows that Congress, supported by Wall Street, jammed revised accounting standards in place in order to facilitate Uncle Sam’s bailout.

The FASB, in an attempt to save face and a degree of integrity, has pushed back on Wall Street by passing FAS 166 and 167 which would require investments in off-balance sheet vehicles to be brought on-balance sheet. The implementation of FAS 166 and 167 is imminent and would require financial institutions to set aside increased capital against selected assets.

Wall Street is asking for a reprieve from FASB 166 and 167 . . .  and just may get it. I addressed this development last week in writing:

12th Street Capital provides us updated developments on this very important topic with the following release:

A bit of good news for banks today. In a Bloomberg interview, FDIC Chairman Sheila Bair said that she is in favor of giving banks “some breathing room” to raise the additional capital that will be required to support the hundreds of billions of dollars of securitized assets that will be consolidated onto their balance sheets as as result of the implementation of FASB Statements 166 and 167. Bair said she hopes to have the matter voted on at the December 15 meeting of the FDIC’s board.

I get the strong feeling that the executives at FASB are becoming increasingly peeved by the manner in which the banking industry has been able to run roughshod over basic accounting principles.

Investors are beyond challenged to determine the overall health and well being of our banking institutions given the lack of real transparency and integrity in their accounting practices. Who knows this? None other than the FASB itself. To that end, FASB is now promoting an effective new set of accounting rules for bank regulators to utilize in assessing the overall financial health and well being of banks. New accounting rules? Disregard the rules implemeted by FASB earlier this year? In so many words, FASB is indicating that if banks are effectively utilizing two sets of books to run their businesses, then regulators should use two sets of accounting rules.

How might this work? The New York Times addresses this dramatic development in its article, Board to Propose More Flexible Accounting Rules for Banks:

In the prepared text of a speech planned for a conference in Washington, Robert H. Herz, the chairman of the Financial Accounting Standards Board, called on bank regulators to use their own judgment in allowing banks to move away from Generally Accepted Accounting Principles, or GAAP, which his board sets.

“Handcuffing regulators to GAAP or distorting GAAP to always fit the needs of regulators is inconsistent with the different purposes of financial reporting and prudential regulation,” Mr. Herz said in the prepared text.

“Regulators should have the authority and appropriate flexibility they need to effectively regulate the banking system,” he added. “And, conversely, in instances in which the needs of regulators deviate from the informational requirements of investors, the reporting to investors should not be subordinated to the needs of regulators. To do so could degrade the financial information available to investors and reduce public trust and confidence in the capital markets.”

In so many words, Herz is addressing the fact that regulators need to utilize different accounting rules than those currently in place in order to protect investors.

Herz’s comments are a veiled indictment of the integrity of the books of the financial industry.

Two sets of books and two sets of accounting standards never portend a favorable outcome.


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