Moneyed Interests Lining Up For Battle Over Accounting Standards

In the midst of what was supposed to be a Congressional push for increased financial regulation and accountability, a powerful coalition of moneyed interests is increasing pressure on Congress to undermine the independence of accounting standards. Banks and major real-estate players are pushing for a system that would actually relax accounting rules in times of economic distress.

Instead of treating a fever, suspending accounting standards when the economy is in turmoil is like telling a patient that 104 degrees isn't so bad and that they'll be just fine.

The group behind the move sent a letter to members of the House Financial Services Committee on Monday, pushing them to back an amendment that will be introduced by Rep. Ed Perlmutter (D-Colo.) and could be voted on as early as Wednesday.

The letter was obtained by HuffPost and is signed by representatives of eight major players that would benefit from looser accounting standards: the American Bankers Association, Commercial Mortgage Securities Association, Council of Federal Home Loan Banks, the Financial Services Roundtable, the National Multi Housing Council, the National Apartment Association, National Association of Home Builders and the Real Estate Roundtable.

The bank and real estate interests, however, have gone too far in the eyes of their usual allies, leading to a corporate rumble of epic proportions. Accountants, investors, the Chamber of Commerce and regular businesses with tangible products are lining up against it.

An unusually potent opposition has formed, including Ernst & Young, the American Council for Capital Formation, American Institute of Certified Public Accountants, CalPERS, Center for Audit Quality, Center for Capital Markets Competitiveness, CFA Institute Centre for Financial Market Integrity, Committee on Capital Markets Regulation, Council of Institutional Investors, Deloitte Touche Tohmatsu, Financial Accounting Standards Advisory Council, Financial Executives International, Grant Thornton LLP, Institute of Management Accountants, Investment Company Institute, KPMG LLP and the U.S. Securities and Exchange Commission.

"The Perlmutter accounting amendment is fundamentally flawed," reads a separate letter from E&Y CEO Jim Turley to committee members. "Under the amendment, financial institution regulators -- through their majority membership on the underlying bill's systemic risk council -- would be able to set or suspend generally accepted accounting principles for the entire corporate community."

The amendment has yet to be introduced but an advance copy that was floating around K Street was forwarded to HuffPost. A Perlmutter spokeswoman confirmed it is authentic.

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The amendment would give bank regulators the power to, "either publicly or privately," order the "suspension, modification or elimination of such accounting principles, standards or procedures as they may apply to the stability of the financial system or the safety and soundness of financial companies, as a whole, for such duration as is reasonable and appropriate."

Perlmutter and Committee Chairman Barney Frank (D-Mass) said that community banks were driving the change hard. That may be, but the Independent Community Bankers of America, the small banks' leading lobby shop, didn't sign on to the letter. The ABA, while it mainly represents big banks, also includes smaller ones in its association and did sign the letter. Other signers of the missive -- the Commercial Mortgage Securities Association and the Financial Services Roundtable -- are Wall Street groups.

"We don't have anything against Perlmutter['s amendment], but we're focusing on amendments that are a higher priority," said Steve Verdier, director of the congressional relations group for ICBA. "We think that to the extent that it raises an issue and challenges FASB, that's a positive, but it doesn't really address the problems that community banks have with mark-to-market accounting."

Verdier was referring to the Financial Accounting Standards Board, which is the bane of bankrupt banks because it sets standards that say that they are, in fact, bankrupt. Banks would prefer that a regulator who had other interests, beyond accurate accounting, be put in charge of accounting standards.

Frank and other committee Democrats say that community banks are the financial institutions with real clout in the House, because Wall Street has been discredited by the collapse and continue massive bonus payouts. The fate of the Perlmutter amendment, if small banks don't get strongly behind it, will be a test-case of that theory.

Former Fed Chairman Paul Volcker, who has been a critic of the mark-to-market accounting that the banks despise FASB for enforcing, is cited by the financial institutions in their letter praising the Perlmutter amendment. But Volcker himself hates it.

"That's a terrible idea," he told the New York Times on Monday, when asked about the amendment, which could come up for a vote as early as Wednesday.

On the Senate side, Banking Committee Chairman Chris Dodd (D-Conn.) rejected the bank entreaties and left the FASB with the independence it currently has.

The letter supporting the Perlmutter amendment::

November 16, 2009

The Honorable Barney Frank
Chairman, Committee on Financial Services
U.S. House of Representative
2129 Rayburn House Office Building
Washington, DC 20515

The Honorable Spencer Bachus
Ranking Member, Committee on Financial Services
U.S. House of Representative
B371A Rayburn House Office Building
Washington, DC 20515

Dear Chairman Frank and Ranking Member Bachus:

The undersigned trade associations representing home builders, the top owners and investors of U.S. commercial and multifamily real estate, traditional banks and other financial companies urge you to support the Perlmutter-Lucas amendment, expected to be offered at the Committee's mark up of the Financial Stability Improvement Act of 2009.

The Perlmutter-Lucas amendment would have no effect on the role of the Financial Accounting Standards Board (FSAB) in setting accounting policy or the oversight of accounting issues vested in the Securities and Exchange Commission (SEC). If an accounting principle or standard poses systemic risks that threaten the stability of the United States financial system, the Financial Oversight Council (Council) would work with the SEC to ensure that those risks are mitigated.

The Perlmutter-Lucas amendment:

* Retains existing oversight of FASB by the SEC.
* Preserves FASB's existing independence.
* Provides the Council with oversight authority to address accounting issues that pose systemic risk in a similar manner as its oversight of other financial issues.
* Provides the Council with authority to review any accounting principle or standard that poses a systemic risk. Based on the majority view, the Council may make a recommendation to the SEC that it take action to ensure that systemic risk concerns are mitigated. The SEC is a member of the Council and would be a party to any determination made by the Council.
* Provides the Council with authority to act on a systemic risk issue if the SEC fails to do so.

The Perlmutter-Lucas amendment would help address global concern that accounting standards can exacerbate systemic risk and instability in the financial system. For example:

* The Group of 30, chaired by Paul Volcker (former Chairman of the Trustees of the International Accounting Standards Board and former Chairman of the Federal Reserve), noted the importance of examining the effect on the credit markets before implementing a proposed accounting standard.(1)

* The G20 provided recommendations for strengthening the financial system, which included the need to improve specific accounting standards and the need to reduce the procyclicality of certain of the standards. It further recommended that the Financial Stability Board(2) and others work with the accounting standards setters to implement changes by year-end 2009.(3)

* Financial Stability Forum (which includes central banks, supervisory authorities, finance ministries, international financial institutions, and international regulatory and supervisory groups) identified a number of accounting issues as being problematic with respect to procyclicality, and the FSF noted ways to mitigate the problems in order to strengthen the financial system.(4)

We believe it is extremely important that Congress address accounting policy as part of financial reform. Although the SEC is responsible for accounting oversight, it has not been charged with systemic risk issues. Since the SEC's mandate is too narrow to take into consideration potential systemic risk created by accounting standards, the Council should be able to review and make recommendations on any accounting principle or standard that it believes poses a systemic risk. The SEC is a member of the Council, and would be engaged in, and vote on, all Council actions.

Without providing the Council with the ability to address systemic risk relating to accounting, the Council will not be able to address one of the significant issue areas that exacerbated the nation's current financial problems.

We appreciate your consideration of our view on this most important issue.

American Bankers Association

Commercial Mortgage Securities Association

Council of Federal Home Loan Banks

Financial Services Roundtable

National Multi Housing Council

National Apartment Association

National Association of Home Builders

Real Estate Roundtable

Footnotes

(1) "Off-Balance-Sheet Vehicles: Pending accounting rule changes for the consolidation of many types of off-balance-sheet vehicles represent a positive and needed improvement. It is important, before they are fully implemented, that careful consideration be given to how these rules are likely to impact efforts to restore the viability of securitized credit markets." Financial Reform - A Framework for Financial Stability, The Group of 30, January 2009.

(2) The membership of the Financial Stability Forum was recently expanded and is now the Financial Stability Board.

(3) "...the FSB [Financial Stability Board], BCBS [Basel Committee on Banking Supervision], and CGFS [Committee on the Global Financial System], working with accounting standard setters, should take forward, with a deadline of end 2009, implementation of the recommendations published today to mitigate procyclicality, including a requirement for banks to build buffers of resources in good times that they can draw down when conditions deteriorate." Declaration on Strengthening the Financial System, G20, April 2009.

(4) Addressing Procyclicality in the Financial System, Financial Stability Forum, April 2009.

From a letter opposing the Perlmutter amendment, from Ernst & Young CEO Jim Turley:

The Perlmutter accounting amendment is fundamentally flawed. Under the amendment, financial institution regulators - through their majority membership on the underlying bill's systemic risk council -- would be able to set or suspend generally accepted accounting principles for the entire corporate community.

The amendment confuses the roles of the Securities and Exchange Commission and prudential supervisors of financial institutions. The primary objective of accounting standards is to meet the needs of investors and capital markets with transparent financial information. On the other hand, the primary objective of prudential oversight is to foster the safety and soundness and financial stability of regulated financial institutions. The amendment wrongly confuses who is responsible for what and ignores the existing authority of prudential regulators and the SEC to act as warranted.

While the amendment has received backing from representatives of the financial services industry, it is opposed by a wide variety of corporate, investor, and capital market players including American Council for Capital Formation, American Institute of Certified Public Accountants, CalPERS, Center for Audit Quality, Center for Capital Markets Competitiveness, CFA Institute Centre for Financial Market Integrity, Committee on Capital Markets Regulation, Council of Institutional Investors, Deloitte Touche Tohmatsu, Financial Accounting Standards Advisory Council, Financial Executives International, Grant Thornton LLP, Institute of Management Accountants, Investment Company Institute, KPMG LLP, U.S. Securities and Exchange Commission and the U.S. Chamber of Commerce.

Comments

[lvdragonlady]

Fox please watch these chickens for us........­..........
How can America trust a company to regulate themselves, when all the companies care about it profit?

[LITU]

Well, Mr. President, that fact that we're having this discussion today means you've let us down on your promise to address corporate lobbying. If anything, it's gotten worse.

Shame on you!

My wife has an interesting theory. She thinks the president and his fam!ly are al!ve today because he doesn't rock the boat too much. A little reform - sure. But meaningful reform - huh-uh, never happen; too dangerous.

[LITU]

Only in the La-La-Land of Freidman capitalism! They're nothing but thieves who failed at doing business the right way.

[abbienormal]

What a brazen and callous display of corporate and personal greed on the part of banks and the CEOs that run them.

These banking and investing institutions are owned by shareholders and their Boards of Directors and management have conveniently forgotten that. "What we are no longer a going concern (bankrupt)? I won't get my bonus and my reputation will be ruined because of my massively poor leadership and decision making skills." We can't have that.

Shareholder rights have to be strengthened, not weakened, by Congress.

My guess is that the investment community will be silent on this because a significant movement toward less transparency will give them the opportunity, with their huge market analysis infrastructure, to capture more profits due to more market inefficiencies because of differences in access to information.

[MrLeeGreaterHongKong]

This is what happens when we trust the government to regulate industry. The industry's monied interest will win out over the interests of the common man. After all, which group is more capable of sending full time paid lobbyists to Washington District of Corruption to wine and dine regulators? The common man or Fortune 500 companies? Only in an unregulated market can consumers vote with their wallet or with competition to change things. Shifting the power from the individual to government creates a barrier that is difficult for regular people to navigate and get their voice heard.

[LITU]

You're beyond d_mb! It is failure of government TO regulate that has led to the problem. Your laissez faire approach to capitalism is an abject failure, proven over and over again.

The days of your ilk are gone, Buddy.

[cybexg]

Modern Market Theory indicates that a free market works efficently only under SPECIAL and LIMITED conditions. There is an ENTIRE field of business strategy that presents competition in ways that preclude the simple functioning that you state.

Please read some basic texts (I'd suggest Hyper Competitive rivalries from D'Aveni) and any number of introductory texts on market theory before commenting next time.

[autumncolors]

If the congress is not listening and does not end corporate lobby ism, the next step is to sue the congress via supreme court for NOT representing the interest of a common man.

[LITU]

I think the only way you can sue Congress is with knives and pitchforks. And that idea appeals to me.

[autumncolors]

{{In the midst of what was supposed to be a Congressional push for increased financial regulation and accountability, a powerful coalition of moneyed interests is increasing pressure on Congress to undermine the independence of accounting standards.­}}

Guess who will win? The lobbyists of course!

This keeps getting better and better.

Why bother electing any politician at all? Why not elect a group of people who can lobby for the common man in the congress?

[Manhattanite]

Mark-to-market is the only way to appropriately value investments (or mark-to-model when the securities trade infrequently). Suspending that rule would allow banks and other financial institutions to completely manipulate their books and mislead investors. It is a terrible idea. FASB rules exist to keep bankers, etc..., honest.

[canuck59]

It all comes down to strong regulation folks, just the facts.
http://network.nationalpost.com/np/blogs/fullcomment/archive/2008/10/09/it-s-official-canada-has-the-world-s-soundest-banking-system.aspx

[autumncolors]

{{Banks are looking for a way to legally lie. Misrepresenting their financial situation by making up the balance sheet. Isn't that the legal difficulty that sunk Enron? Fictitious financials -- when they tell you everything is rosy, you'll know to hold on to your loot and take it to your local credit union (or your mattress).­}}

There are always people who would commit murder if there is no accountability.
Why blame the banks only? Why not look at the cause which is letting the banks get away with fraud and theft. We all know what the cause is: Corporate lobbyists and sold politician­s..

[SecretSister]

Yes. The American voters need to vote out Congressional members who continue their corrupt practices and inept deadwood ways.

[autumncolors]

It is not that simple . Besides will take a long time, people will forget who voted for what bill etc.

The goal should be to eliminate corporate lobbyist so nobody is tempted to be corrupt.

[politicky]

Thank you for exposing the banksters before they push through another harmful amendment.

[research]

The Bankster extorted 24Trillion dollars in loans and guarantees from the Taxpayers, via TARP.

The Bankser now control where all the money and creidt goes.

1/3 of the worlds GDP is no in the hands of banster who have just been rewarded for crashing the system.

Guess what they do with it?

The grow even larger, spending more money buying congress and the DLC.

The OF COURSE continue CDS investment insurance hedging without reserves.

Insurance without reserves is always fraud.

But who's going to stop them now?

See my new profile for details and links.

[autumncolors]

{{Try intelligently managing a business or any other enterprise without accurate and honest accounting. It can't be done. Accounting and the numbers proper accounting generates can be described as the "dashboard" for any business or organization. You can tell how well or badly the thing is operating through these numbers and their relationships to one another. If the numbers aren't honest and standardized, there is no possible way to see if things are going well or badly, where the good and bad is, and what to do to fix it.}}

I agree.
What is the solution?

[autumncolors]

If you think that any bill is passed without the influence of lobbyists , then you are deluded.

Until we get corporate lobbyists out of DC, we can only dream of reform. Nothing is going to change , nothing till we change the system. Besides it is too tiring to fight one battle at a time. Everyday we hear of the influence of lobbyists in DC. When are we going to say ENOUGH?

[loki]

Never fear, the Lobbyist are here. Flying into DC with fist full of dollars, and some hot embarrassing photographs of congressmen and women in compromising positions. There will never be a law passed that does any good which is not out weighted with loopholes giving away more than corporations could ever envision.