The following article is from the BNA Accounting Policy & Practice Report. For more information about BNA's Accounting Policy & Practice Series and to take a trial to the BNA Tax and Accounting Center, visit this site.
By Steve Burkholder, BNA Staff Correspondent
The newly established Financial Crisis Advisory Group heard March 5 that off-balance-sheet activities and deficiencies in consolidations accounting are a bigger factor in the current global financial mess than mark-to-market accounting.
The message came from Gerald Corrigan, former president of the Federal Reserve Bank of New York, during the group’s third day of hearings.
"If looked at broadly," Corrigan said, the nonconsolidated activities of conduits, special investment vehicles, and similar investment entities were a "much more important factor" in the current crisis than fair value accounting issues which continued to dog the Financial Accounting Standards Board over the course of the week. Corrigan is currently partner and a managing director of Goldman Sachs.
Speaking at the third meeting of the FCAG, which was set up to advise FASB and the International Accounting Standards Board on issues arising from the ongoing financial turmoil, Corrigan said securitizations and related transactions failed repeatedly, and credit default swaps—meant to protect against bad investments—also failed. He and others watched "how these things played out" in the marketplace "with frustrating regularity," he said.
Worse Than the '30s.'
Considering the extent and rapidity of recent government intervention to stanch the financial bleeding, the current crisis "may well be, in some sense, worse than the '30s," Corrigan suggested. But, in August 2007, very few people among the "best minds in the country" predicted that the United States was on the cusp of serious crisis, said Corrigan, now with Goldman Sachs.
Discussion at the FCAG's Feb. 13 meeting also turned on issues of securitization, off-balance-sheet activities and credit default swaps, according to a staff-written summary of the meeting. Prompted by group co-chairman Harvey Goldschmid at the March 5 meeting, Corrigan said he stood by the conclusion that he and others described at the earlier meeting.
Off-balance-sheet activities and their accounting is an area that "a number of FCAG members have cited as far more contributing than fair value (including mark-to-market) accounting to the financial crisis," according to the meeting minutes.
Goldschmid asked Corrigan, "do I hear in your voice" a suggestion "to tighten up" the accounting?
"Yes," said Corrigan. He added that the main transactions at issue are "on the ash heap today." However, in the future, "some of that stuff will come back to visit us again."
For his part, Goldschmid said it is clear to him that collateralized debt obligations and credit default swaps "are going to be under whatever regulatory regime that comes out of Washington." The Obama Administration and congressional leaders are currently developing proposals to reform the financial regulatory and system, perhaps including a systemic risk regulator.
FASB plans to issue by June 30 amendments to Statement of Financial Accounting Standard 140, Accounting for Transfers and Servicing of Financial Assets and Extinguishments of Liabilities, and related changes to FASB Interpretation 46(R), Consolidation of Variable Interest Entities, aimed at improving and tightening up such accounting. FASB has decided to eliminate FAS 140's designation of a "qualifying special-purpose entity," (QSPE) which permitted entities to transfer assets off their books without taking sale accounting treatment.
"It gets you kind of a hallway pass, automatically," FASB Chairman Robert Herz said in describing the QSPE.
Herz has complained that the QSPE model was stretched beyond its original intent and used inappropriately, and enforcement was lax. At the March 5 FCAG meeting, Herz also observed that transferees did not know what their obligations from the transfers were.
The IASB and FASB are also working on a comprehensive revision of consolidations accounting, but, progress has been slow. Over more than two decades of on-again, off-again work at FASB, proposals to fully shift from the traditional majority-ownership consolidation principle to an alternative control-based notion have been shelved. IASB has a consolidations draft standard pending.
On derecognition of transferred financial assets, IASB has taken the lead on the topic. Last July, the international board moved the subject from its research agenda to its active rulemaking docket. FASB is monitoring the IASB's effort, the import of which has been driven home in the current financial meltdown.
While the FCAG discussed the topic derecognition, entailing removal from entities financial statements assets and liabilities transferred into securitizations and other structured entities, it did not arrive at conclusions or recommendations on the topic.
Michel Prada, former chairman of the French securities regulatory agency, the Autorite des marches financiers, told BNA that "the consolidations issue is key," whatever the outcome of standard setters' work on valuation.
Background materials prepared for the March 5 meeting are available at http://www.fasb.org/fcag/03-05-09_fcag_handout.pdf. Other issues before the boards are described by the boards' staffs at http://www.fasb.org/fcag/ and http://www.iasb.org/About+Us/About+Advisory+Groups/Areas+within+the+Financial+Crisis+Advisory+Group+scope.htm.
The following article is from the BNA Accounting Policy & Practice Report. For more information about BNA's Accounting Policy & Practice Series and to take a trial to the BNA Tax and Accounting Center, visit this site. |
