Arthur Leavitt Has This Backwards

In Leavitt’s article, Weakening A Market Watchdog, he gets it wrong. The FASB proposals will enhance disclosure and improve transparency by demonstrating the difference between the economic value and liquidation value.

Real dollars vs. accounting dollars.

Bob Herz didn’t back down, or change position. He reiterated existing policy. This is what he said:

Financial Accounting Standards Board Chairman Robert Herz defended the standards set by his independent body and suggested businesses weren’t applying them correctly. When markets dry up, management and auditors are permitted to use other factors, such as cash flow, to determine an asset’s value. They don’t have to rely solely on a price set in traded markets, Mr. Herz said.  “The intent is to try to get a reasonable valuation,” he said. “I’m saying here on live public television: The standard allows for the exercise of appropriate judgment. I’m going to say that and say that again.”

I agree with Arthur Leavitt, however about the creeping politicization of the capital markets.

Market/ Government Regulators are supposed to keep a level playing field and punish rule breakers. They are not supposed to pick winners and losers, distort market price through the unintended consequence of well meaning regulation or be unwilling to change with market evolution.

By the way… There is momentum in DC for a “Global Risk Regulator”. We used to have that in the markets: It’s called “LOSS”. If you were bad at risk taking, you lost your money and were out.

We have a current environment where government is more involved than ever in the markets. Capital injections, first loss positions, conservatorship, cram down, servicer safe harbor are all current or proposed intrusions. I am not debating the merits of these programs, but they DO distort market signals.