A Welcome Delay

This is a welcome relief, and arguably, the right thing to do given today’s set of facts.

It’s the BASEL endorsement and encouragement of the holding of sovereign bonds as “ risk-free” that have lead to a lot of the pain in Europe. BASEL increased the holdings of risk-free sovereigns in the banks.

The SEC’s decision to delay the potential ruling is prudent and appropriate.

[$$] SEC Delays Call on Accounting Rules – The Wall Street Journal, December 6, 2011

Systemic Risk Council Essential

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.

Brown Proposes Fair Value Amendment

Senators Sharrod Brown (D-OH) and Edward Kaufman (D-DE) have offered an amendment to the Restoring American Financial Stability Act of 2010 that would essentially require the Securities and Exchange Commission (SEC), the Financial Accounting Standards Board (FASB) or both to establish a rule that publicly traded companies list all assets and liabilities on the balance sheet and that these be recorded at fair value.
Historically accounting standards have allowed off balance sheet financing via leases and repurchase agreements. It was recently learned that Lehman Brothers used repurchase accounting to remove liabilities from the balance sheet in a maneuver to increase leverage.
The amendment, if adopted and passed, would also present an obstacle to the effort to merge FASB ad IASB standards. The FASB prefers fair value basis, however the International Accounting Standards Board (IASB) is opposed.
The American Institute of Certified Public Accounts, the Center for Audit Quality, the Chartered Financial Analyst Institute, the Council of Institutional Investors, the Investment Company Institute, the Financial Executives International, and the U.S. Chamber of Commerce have objected to the Brown amendment. Their stated position, in part, is:

We believe political influences that dictate one particular outcome for an accounting standard without the benefit of a public due process that considers the views of investors and other stakeholders would have adverse impacts on investor confidence and the quality of financial reporting, which are of critical importance to the successful operation of the U.S. capital markets.

New Mark-to-Market Rules for Money Funds

In May the Securities and Exchange Commission will start requiring that money funds hold more liquid and high-quality assets.

Under the new rules, a fund will now need to disclose monthly its actual “mark-to-market” net asset value, on a 60-day lag. This is known as a fund’s “shadow NAV.” Currently the shadow NAV is reported only twice a year.

Funds will also need to shorten the average maturities of their holdings. The maximum weighted average maturity of a fund’s portfolio is shortened to 60 days from 90 days. Funds will also have to maintain 10% of assets in securities that mature in one day and 30% in securities that mature in one week.

These new rules are in response to when the Reserve Primary Fund “broke the buck” in 2008 when share values dropped below $1 and touched off a withdrawal panic.

These new rules will make it harder to earn any income in a sorry market and in a low interest rate environment.