ABA Banking Journal - March 2009 - (Page 18)
COVER STORY Burning billions T he debate over fair-value accounting is tailormade for argument by analogy. Commentators on either side of this controversial matter draw a comparison to some physical situation—a favorite seems to be home prices—to illustrate their views on the technical, often arcane concepts involved. But after delving deeply into the debate, the image that comes to mind is a roaring furnace. And that ushers in William Isaac, former FDIC chairman. He has made repeal of fair-value accounting as we know it his current mission in life. (Quite literally, to hear some tell it). “To me, it’s beyond dispute that market-to-market accounting has been senselessly destructive of bank capital and is a major cause of the current crisis we have in the financial markets and the economic decline we’re facing,” Isaac testified during a Securities and Exchange Commission roundtable hearing on the matter last year. Note Isaac didn’t use the term, “fair value accounting.” He won’t. He refuses. He sees nothing “fair” or accurate about it. “The rules,” Isaac continued, “have destroyed hundreds of billions of dollars of capital and have depleted lending capacity by ten times that amount. It’s imperative that the Financial Accounting Standards Board and the SEC withdraw immediately FASB Standard 157, and I hope that SEC will recommend in its report to Congress that we do away with mark-tomarket accounting all together.” (Standard 157 brought together many threads throughout generally accepted accounting principles for a unified definition of fair-value accounting.) Consensus grows that “fair-value” accounting, especially in its “other than temporarily impaired” facet, causes more harm than good. The good news: Momentum may be building towards remedial action Pundits, purists, and practitioners Call this school of accounting thought what you will, By Steve Cocheo, executive editor it is banking’s issue of the moment. In some way, it affects banks of every size and stripe. At a time when bank capital is threatened, when government intervention, consolidation, and more loom, it is not just a matter of intellectual interest. It could come to be a matter of survival of banking as we know it. Many experts who oppose its current use, and proposals for expanding its use, consider it a “procyclical” factor. This is an economic element that tends to hasten or magnify the effects of the business cycle. In other words, something that can accelerate a downward spiral when the economy least needs that push. Why do FASB and its supporters continue to press for fair-value accounting in all of its forms, notably on the OTTI [“other than temporarily impaired”] front? Backers of suspension or reexamination of the concept believe the push comes from “accounting purists,” even moreso than the investor community, some of which also line up on that side. This goes a long way towards explaining the image one derives from the debate, of an industry drifting towards Niagara Falls in a boat with a functional motor, but captained by someone who insists that the crew rely instead on an insufficient set of broken oars to fight the current. Why such zeal? Speaking at ABA’s recent National Conference for Community Bankers, Donna Fisher, association senior vice-president, tax, accounting, and financial management told bankers plainly that FASB sees fair-value accounting as “the truth, just the truth. And that’s what we have to work on trying to fix.” “There’s been no leadership” in the accounting profession,” in spite of fair-value’s shortcomings, says Robert Clarke, former Comptroller of the Currency and now senior partner at Bracewell & Giuliani LLP, Houston. “The major accounting firms, at the top, at least, seem to favor fair-value accounting. The regulators haven’t been standing up, either.” (Cont’d p.22) 18 MARCH 2009/ABA BANKING JOURNAL Subscribe at www.ababj.com
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