William M. Isaac, former chairman of the Federal Deposit Insurance Corporation (FDIC) during the saving and loan collapse of the 1980s, wrote an open letter to Senator Bob Corker (R-TN) in Forbes.
In the letter, Isaac maintains that, “Mark-to-market accounting senselessly destroyed over $500 billion of capital in our financial system, panicking the markets as banks reported massive paper losses while still producing large cash-basis profits.”
Mr. Isaac then argues that systemic risk oversight of accounting rules issued by the Financial Accounting Standards Board (FASB) and the Security Exchange Commission (SEC) is essential, “…particularly now that the FASB is proposing to extend mark-to-market accounting to nearly the entire balance sheet of banks, including loans. It is clear that the FASB is living in an ivory tower world in which accounting rules are divorced from economic and business reality, and the SEC has failed to provide effective government oversight.”
“If this proposal by FASB moves forward, it will spell the end of banking as we know it and will make it next to impossible for smaller businesses and consumers to obtain medium- and long-term credit,” Isaac cautions.
Isaac wrote the letter in support of Senator Coker’s amendment to the Financial Regulatory Reform Bill calling for, in part, a systemic risk council. He fears that if a systemic risk council is not give the authority to examine accounting pronouncements by the SEC and FASB, “the next crisis will be just around the corner.”
A systemic risk council was included in the Senate version of the financial regulatory reform bill recently passed. Its exact function is still being debated.
In conclusion, Bill Isaac rocks.
In his prepared statement to the Senate Permanent Subcommittee on Investigations, Chief Risk Officer of Goldman Sachs Craig Broderick explained how Goldman Sachs believes in a rigorous mark-to-market value assessment.
The central tenet is our daily discipline of marking all of the firm’s financial assets and liabilities to current market levels. We do so because we believe it is one of the most effective tools for assessing and managing risk, providing the most transparent and realistic insight into our risk positions and associated exposures. Goldman Sachs is one of the few financial institutions in the world that carries virtually all financial instruments held in its inventory at current market value, with any changes reflected immediately in our risk management systems.
Chief executive Lloyd C. Blankfein foreshadowed Broderick’s remarks in his own opening statement, “We believe that strong, conservative risk management is fundamental and helps define Goldman Sachs.”
During the contentious session, Mr Broderick credited Goldman’s risk management and mark-to-market accounting for minimizing its CDO losses in 2007-08.
This is an appropriate application of MTM. MTM for trading firms only. MTM disclosure for investors/banks/insurance. The accounting for investors should be different for traders and broker/dealers.
On Wednesday, Rich Berg testified as an expert witness before the United States House of Representatives, House Sub Committee on Banking. The subject of the hearing was informally titled, “Mixed Messages”. The Committee was inquiring about credit availability in the US banking system, and whether current regulatory or accounting structures were inhibiting lending.
The first panel called were representatives of the FED, OCC, OTS and SEC. Rich addressed the statement by Tim Long, Director of the OTS and his obervation that lending would not begin, until the securitization market was cured.
Watch Rich Berg’s testimony below.
The House Committee on Financial Services is holding a hearing entitled, “Exploring the Balance between Increased Credit Availability and Prudent Lending Standards”. The morning session included testimony and question and answers from the top regulators from the Federal Reserve, FDIC, OCC, OTS and the SEC.The afternoon session consisted of testimony from various community bankers, representatives of banking organizations and Rich Berg who all discussed how the credit crunch was effecting the market. Rich Berg focused on how the current credit rating system consisting of a single letter grade is hard coded in investment policies, regulatory policies, and counterparty agreements and is limiting credit. This single letter grade is exaggerating the risk of multiple-obligor securities removing all the natural buyers of the securities and further depressing the market prices. This also takes away market incentives for new securitizations.
Full testimony from all witnesses is posted on the House Committee on Financial Services website. Please read Mr. Richard S. Berg’s testimony to the committee - final witness on Panel Two.