Legalized Cookin' the Books

While we're all focused on health care and spree shootings, bankers are quietly trying to sneak a new law in that would legalize falsifying financial statements.

We've been waiting for regulatory reform of the financial services industry and what we're getting instead is a permission for banks to use smoke and mirrors. 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. This is a Democrat sponsored bill. Rep. Ed Perlmutter, D-Colo., wants to amend the Financial Stability Improvement Act of 2009. Perlmutter’s proposal would hand over responsibility for overseeing accounting standards to the agencies being contemplated to oversee systemic risk, which could allow most companies to never comply with the law, and if that doesn't do enough harm it would also mandate a study to see whether it would be a good idea to exempt additional ones as well.

Sarbanes-Oxley was passed, almost unanimously, by a Republican-controlled House and a Democratic-controlled Senate. Now a Democratic Congress is gutting it with the apparent approval of the Obama administration. Wednesday they passed an amendment that exempt small and mid-size companies from audits required under the Sarbanes-Oxley corporate-reform law. Now they start sidsussing whether to extend these powers to the financial services. I don't understand why we're even considering this.

The American Bankers Association is now pushing Congress to give a new systemic risk regulator — either the Federal Reserve or some panel of regulators — the power to override accounting standards. The view of the bankers is that the financial crisis did not stem from the fact that the banks made lots of bad loans and invested in dubious securities; it was caused by accounting rules that required disclosure when the losses began to mount.

I can't believe I'm on the same side of an issue as the Chamber of Commerce but bad laws make strange bedfellows.

Of course the Chamber is looking at it in terms of investors but my point of view is that of a regulator. People think regulators have all the power and we can close financial institutions on a whim. Not so, generally we watch financial institutions that we know are not survivable limp along and waste away until they at last become insolvent and we can grab control. But by then it's too late to save anything so we end up liquidating It would really save money if we could conserve earlier rather than waiting until they are a corpse or zombie. If this new bill passes, it could become impossible to recognize an insolvent financial institution.

Braney Frank hasn't weighed in yet. I hope he comes with some common sense.