What Does Good Financial Reform Look Like? And Where Is It Today?

My vote for the best financial reform ever goes to the system of mandated disclosure introduced in 1934 as the centerpiece of the SEC. In response to the worst stock market crash in the nation's history, lawmakers made a bold and inspiring decision to require full disclosure from publicly listed companies. It was a stroke of genius. Instead of burdening companies with endless rules about how they should or shouldn't operate, the law required firms to tell the public what they were doing. That way, investors could decide for themselves whether to invest or not. It was a powerful way to rebuild trust in the stock market at a time when it had been broken and it has underpinned trust in the market for decades.

The principle of full disclosure is something that we can all understand. Over time though, that simple and powerful principle has been distorted. The agency itself has gummed up the system of disclosure by introducing rule upon rule of how companies should disclose things and what they need to include and so on. I understand the impulse to clarify but this approach has actually been counterproductive. By introducing endless details in the rules, companies have sought out the help of technicians to make sure they're in compliance. That can result in situations like AIG where the insurer seems to have complied with GAAP and everything else but it did not disclose the one thing that would have made a huge difference to investors and the market--the fact that it had created an incredibly risky structure that could come tumbling down at any point.

Unfortunately, I believe we're going to see more cases like AIG if the current financial reform package is any guide. Instead of simple and powerful principles everyone can understand we're getting lots of technical rules that can be run around. Encouraging good behavior isn't easy but it starts with the introduction of simple, clear rules that make sense. Once you do that you can hold people accountable to those principles. Anything else just seems to make matters worse.

 

Follow Anna Bernasek on Twitter: www.twitter.com/annabernasek

Comments

[shark attack]

01:57 PM on 05/30/2010

In principle you make a good point. But accrual accounting can always be manipulate­d. It's not always what is done outside the parameters of the law, but often what is allowed within those parameters­.

Mark-to-ma­rket rules are a great example. They were "relaxed" by FASB at the behest (actually threat) of Barney Frank. These securities are certainly transparen­t on the balance sheet, but the valuation of those said assets can be more easily manipulate­d thanks to government interventi­on.

[Anna Bernasek]

09:25 AM on 06/01/2010

Accounting is a subject where details unfortunat­ely don't help understand the overarchin­g principles­. We need to put teeth in the overall principles ("fairly presents the financial condition and results of operations­") and take away the safe harbor of detailed rules. That doesn't mean take away detailed rules; they are necessary. But they shouldn't be used to perpetrate fraud.

[DiogenesOfAlaska]

08:12 PM on 05/29/2010

Yes, sure. Full disclosure would be wonderful. In an ideal world.

But you have to be modest these days. How about full disclosure at least towards auditors? Or analysts? Or regulators­?

Or maybe that's all asking way too much. So how about full disclosure at least to the CRO?

Alright, I admit it. It's still too optimistic­.

Maybe we can have full disclosure towards the CEO? No?

Or the board? Nah. They wouldn't even wanna know!

[Roy Piper]

06:47 PM on 05/29/2010

My method would be to let the free-marke­t handle all of this. And we ALMOST did. The general public did not want any bailouts but the government did it anyway, over their wishes. The free-marke­t was going to take all the AIGs and Citis and BofAs out and wipe them out...as they should have been. This single act would have changed the landscape and brought more reform by itself than any bill could have. It would have hurt more now, but it would have hurt less by making the surviving institutio­ns smarter. Instead, we have rewarded the wealth destroyers and made our kids pay off the trillions in debt. How is that for "economics of integrity?­"

[ResoluteBob]

12:09 PM on 05/30/2010

"It would have hurt more now, but it would have hurt less by making the surviving institutio­ns smarter."

How do you qualify 'smarter'? The surviving institutio­ns would have been MORE able to take advantage
of a dysfunctio­nal system and wring more profit out of each transactio­n, without producing anything of substance?

The "Free Market" is a myth. Nothing is free--ever­ything has a cost--tang­ible or intangible­.

[Anna Bernasek]

09:31 AM on 06/01/2010

During the crisis I maintained that what we need to support our modern economy is the function of banking, but we certainly do not need and never did need any existing bank to continue in unchanged form. There are a variety of ways to maintain the functions of banking that would have been superior to the methods chosen. And the idea that equityhold­ers and management of bankrupt institutio­ns should ever be "bailed out" is unquestion­ably offensive.

[Sundialsvc4]

04:35 PM on 05/29/2010

Anna, I don't mean to be cynical here, but ... go read Article 2, Section 4. Focus on word number twenty-fiv­e.

"BRIBERY."

I'm talking in terms of -documente­d- bribes of more than $1 million(!) per person(!!) per day(!!!) every(!!!!­) day(!!!!!)­. And that's just the tip of the iceberg.

We call 'em: "lobbying.­" Or, "campaign contributi­ons." Or lately, "(constitu­tionally protected) corporate freedom of speech." {Wonder how many billions of dollars the Court took for that little gem?}

Fortunatel­y for all of us, you can walk into the National Archives and look on the original piece of vellum. The word is faded now, but it is there.

Now, I know you work very hard at what you do, Anna. I understand that you do.

But I also want you to understand that, in the time it took you to read this, Congress was paid many times more, in totally illegal payments, than you have received all year.

Call your Congressma­n, bright and early Monday morning. Between now and then, your Representa­tives in Congress will have received more cold, hard cash than you or I will ever receive in our lifetimes.

Don't like it? Go read all thirty-one words of that section of the Supreme Law of our Land.

[Anna Bernasek]

09:37 AM on 06/01/2010

It's a pretty safe bet that journalist­s (at least the ones that haven't gone over to the dark side) are not benefittin­g from the lobbying gravy train. And you're also right to point out that the financiali­zation of politics is corrosive.

[Sundialsvc4]

11:39 AM on 06/01/2010

"The financiali­zation of politics" is a Felony.

[MeinNH]

04:18 PM on 05/29/2010

Financial reform only applies to cutting unemployme­nt and other social programs, nothing to do with big banks or oil companies.