Another To Blame: IFRS

Funny that the world markets would be tanking at the same time the US market tanks.  The arrogant American in me just presumes that it is the thrust of our power internationally that we can pull others into financial chaos when we have a large (seismic) correction.  But there is another explanation.  What a surprise – the rest of the world that uses IFRS utilize fair value accounting.  And our adoption of it was to conform better to the world’s accounting standards!

When proposing the adoption of FASB 157 (providing Fair Value Accounting for financial assets and liabilities), Leslie F. Seidman, FASB member and Board collaborator on the project, said

Today’s proposal also helps achieve further convergence with the International Accounting Standards Board, which has previously adopted a fair value option for financial instruments.

Oh my.  We are emulating the international community.  In fact, we are abandoning our own accounting standards for those employed internationally.  The same international group of nations that make up (at least part) of the United Nations, a body not known for its credibility.  Now we face an economic crisis not seen since the 1930′s and we can point to movement from the GAAP to IFRS for at least exacerbating the crisis.

Some have come out for the immediate suspension of the mark-to-market, or fair value accounting, rule. I am amazed that it hasn’t already been done.  In fact, it is surprising that the (unsuccessful) “bailout bill” only reiterated a power that is already in the hands of the SEC:  the power to suspend the rule.

The only reasons put forward are conspiratorial in nature so not worth discussing.   If in fact the suspension of the rule saves the taxpayers several billion dollars, it is in the best interest of our economy that it be suspended.  If it we do nothing but throw more money at the problem, it is my view that the correction will take much longer and a return to prosperity will be long delayed.

However, if we suspend the rule and our markets recover, then once again we can show the world how free markets prevail – without government intervention – and maybe help them re-think some of their accounting standards.

Keep in mind that even without our current crisis, our economy was already heading into an ugly time period where our growth was minimal and inflation was creeping up.  The prosperity we have enjoyed for many years is likely to end for at least a few years – perhaps more if government intervention doesn’t work or is employed improperly.

A great read on Fair Value Accounting, written by Robert E. Jensen, can be read by clicking here.

“Bailout” Includes Authority To Suspend Market-To-Market Accounting Rule

Last week I wrote about how the effects of the financial market implosion would affect law firms.  The National Review has posted a discussion draft of the House version of the “Emergency Economic Stabilization Act of 2008″ and it appears that at least one of the suggestions made by former FDIC chairmain William M. Isaac made it into the bill:  the suspension of market-to-market accounting rules (or at least the potential for suspension).  

Under section 132 of the Act,

The Securities and Exchange Commission shall have the authority under the securities laws (as such term is defined in section 3(a)(47) of the Securities Exchange Act of 1934 (15 U.S.C. 78c(a)(47)) to suspend, by rule, regulation, or order, the application of Statement Number 157 of the Financial Accounting Standards Board for any issuer (as such term is defined in section 3(a)(8) of such Act) or with respect to any class or category of transaction if the Commission determines that is necessary or appropriate in the public interest and is consistent with the protection of investors.

Further, section 133 requires a study be done to determine:

 (1) the effects of such accounting standards on a financial institution’s balance sheet;

(2) the impacts of such accounting on bank failures in 2008;

(3) the impact of such standards on the quality of financial information available to investors;

(4) the process used by the Financial Accounting Standards Board in developing accounting standards;

(5) the advisability and feasibility of modifications to such standards; and

(6) alternative accounting standards to those provided in such Statement Number 157.

Other provisions include (as reported by media outlets):

• creating an insurance program guaranteeing “troubled assets originated or issued prior to March 14, 2008, including such mortgage-backed securities”;
• creating a “financial stability oversight board” which will be responsible for:

(1) reviewing the exercise of authority under a program developed in accordance with this Act, including—

     (A) policies implemented by the Secretary and the Office of Financial Stability created under sections 101 and 102, including the appointment of financial agents, the designation of asset classes to be purchased, and plans for the structure of vehicles used to purchase troubled assets; and

     (B) the effect of such actions in assisting American families in preserving home ownership, stabilizing financial markets, and protecting taxpayers;

(2) making recommendations, as appropriate, to the Secretary regarding use of the authority under this Act; and

(3) reporting any suspected fraud, misrepresentation, or malfeasance to the Special Inspector General for the Troubled Assets Relief Program or the Attorney General of the United States, consistent with section 535(b) of title 28, United States Code.

• foreclosure mitigation efforts, including a requirement that “the Secretary shall consent, where appropriate, and considering net present value to the taxpayer, to reasonable requests for loss mitigation measures, including term extensions, rate reductions, principal write downs, increases in the proportion of loans within a trust or other structure allowed to be modified, or removal of other limitation on modifications;”
• Mortgage assistance, including encouraging mortgage holders “to take advantage of the HOPE for Homeowners Program under section 257 of the National Housing Act or other available programs to minimize foreclosures.”  Such assistance also includes reduction of interest rate and reduction of loan principal;
• Prohibiting “golden parachutes” for executives of companies in the event of involuntary termination, bankruptcy filing, insolvency or receivership – although the terms aren’t included in the Act.  Instead, the Act requires the Secretary of the Treasury to come up with guidelines within 2 months of the Act’s enactment;
• Minimize negative impact to taxpayers by selling the assets only when the asset’s value is high (among other provisions);
• Limiting authority to purchase assets to $250 billion at any given time, except when given the written certification by the President, in which case the amount may be up to $350 billion.  Congress then has 15 days to enact a joint resolution of disapproval – if none is made, the amount increases to $700 billion;
• Requiring the financial sector to reimburse the treasury for any assets sold at a loss.

To read all of the provisions of the House version, click here.

In my view, short term jubilee, long-term disaster and further eroding of capitalism in America.  As my contracts professor in law school would say when discussing government intervention in markets, “Hello Havana!”