A House panel approved a provision Thursday that calls for a new oversight body dominated by bank regulators to advise on accounting rules for banks, a toned-down version of an earlier proposal that would have stripped the independence of the board that sets financial accounting standards.
The previous amendment, offered by Rep. Ed Perlmutter (D-Colo.), would have effectively allowed banks to set their own accounting standards in rough economic times. In effect, a board dominated by bank regulators would have been allowed to change the rules so banks could appear healthier than they actually are by overvaluing assets and undervaluing losses and liabilities.
A variety of investor groups joined with the U.S. Chamber of Commerce to oppose the move. The Securities and Exchange Commission (SEC), which oversees the Financial Accounting Standards Board (FASB), also opposed it. Prominent investors, like legendary hedge-fund manager James Chanos, called it "a monstrous idea". Former Federal Reserve chairman Paul Volcker said it was "terrible".
Perlmutter's new amendment, jointly offered with Rep. Frank Lucas (R-Okla.), simply calls for the proposed council overseeing systemic threats to the financial system to "review and submit comments... with respect to an existing or proposed accounting principle, standard, or procedure."
"There's absolutely no need for the legislation whatsoever. The banking regulators can already send in comments to FASB -- in fact, they already do it," said Lynn E. Turner, former chief accountant for the SEC from 1998 to 2001. "This is nothing other than an effort to give banking regulators and the banks control over the standards-setting process."
One thing to note is that of the proposed council's nine voting members, seven of them oversee banks and other financial firms that would benefit from a relaxing of accounting rules in tough economic times.
"It's intended to give banking regulators a greater voice to bring pressure on FASB and the SEC to make standards more banker-friendly, as opposed to investor-friendly. In doing so, this amendment guarantees we'll end up with less transparency coming out of this crisis than we had going in," Turner said.
The American Bankers Association, which had vigorously supported Perlmutter's original amendment, immediately applauded Thursday's vote.
"It is well-documented that accounting policies contributed to the financial crisis," Edward L. Yingling, ABA president and CEO, said in a statement.
By that Yingling means that because banks were forced to recognize potential losses, their balance sheets were hit hard. People could see that banks had made some terrible loans and in some cases took excessive risk.
"This amendment would, for the first time, instruct other regulators acting in their capacity as members of the Council to monitor accounting policies and comment on them," Yingling said. "The Perlmutter-Lucas amendment will empower the Council to work with the SEC to mitigate concerns over accounting standards that pose systemic risk and threaten the stability of the United States financial system."
The Huffington Post earlier reported that:
Astonishingly, at a time when the public is crying out for greater regulation to limit excessive risk-taking by financial institutions, the banks are trying to get Congress to agree that the next time there's a big downturn, they should have the ability to alter their accounting standards -- essentially, fudge the numbers -- so that the public and investors won't be able to tell how insolvent they really are. By ignoring their declining asset values, they can avoid the standard requirement of raising more capital.
The provision amends the Financial Stability Improvement Act of 2009. The full bill continues to be debated by the House Financial Services Committee.