March 12, 2009

Today, U.S. Reps. Ed Perlmutter (D-CO) a members of the House Financial Services Committee, called for regulators to take action now to adjust fair value accounting standards.

During a Capital Markets, Insurance, and Government Sponsored Enterprises Subcommittee hearing on Mark to Market accounting principles, Perlmutter noted that fair value accounting standards have exaggerated or multiplied the problems our economy is currently experiencing. Below are some excerpts of Rep. Perlmutter’s comments from the hearing:

“I want to start with the definition of Fair Value Accounting. Fair Value is the amount at which an asset can be sold or paid to trade a liability in an orderly transition at a set measurement date.”

“Since September, the issue has been whether fair value accounting has been exaggerating or multiplying the cycle we are in…. It is clear that this caused a lot of damage and continues to cause damage by exaggerating the downturn of our economy.”

“This problem has been apparent for six months. Since September, we have been dithering while this patient has gotten sicker. We have been giving this patient medicine that is making him sicker. It is now time for us to consider the overall health of our economy and not treat just one symptom.”

“The rapidity of this cycle is not anything we could imagine. Time is of essence. You [the SEC] can make changes now.”

“In Colorado, businesses can’t renew lines of credit and people are being laid off. We can turn this around, but you [SEC] have to move. We can’t study this anymore.”

“The mission of the SEC is not to supervise the banking industry. The SEC has a narrower vision of what needs to be considered. We need a broader view than the SEC provides in determining how accounting standards apply to the banking sector. Mr. Lucas and I have a bill that allows regulators to look beyond the current accounting standards.”

“The reality is we have spent $700 billion on the banks to keep the economy moving. This is resting on your [the SEC] shoulders. It starts with you, and this [accounting standard] is exacerbating the problem.”

“The reality is there are two interest groups we must now consider – the depositors in our financial institutions and the taxpayers. The taxpayer is getting clobbered, and we need to deal with this problem now. It is not the time for more study. It is time for action.”

Last week, Perlmutter and Rep. Frank Lucas (R-OK) introduced HR 1349 which creates a new Federal Accounting Oversight Board to oversee the application of Generally Accepted Accounting Principles (GAAP) to the financial markets. The Board will include five influential members of the federal regulatory community, the Chairman of the Federal Reserve, the Sec. of Treasury, the Chairman of the SEC, the Chairman of the FDIC, and the Chairman of the Public Company Accounting Oversight Board. Currently only SEC plays a role in how GAAP applies to financial markets

This new board fits into responsible regulatory reform because a broader group of individuals with a view of the greater economy should be in charge of applying GAAP.

The Perlmutter-Lucas legislation:

· Creates a new oversight board, the Federal Accounting Oversight Board (FAOB) comprised of the Federal Reserve, Treasury, the FDIC, and the SEC, to approve the standards set by the independent Federal Accounting Standards Board (FASB).

· Instructs the FAOB to look beyond current accounting standards and balance sheets to consider broad national and international financial markets and economic conditions when applying GAAP.

· The Federal Accounting Standards Board (FASB) is an independent board with the authority to set GAAP. The legislation does not change GAAP, but it creates an environment where FASB will have the tools and flexibility it needs to adjust GAAP for future economic conditions. The legislation provides for discretion in the regulatory community to consider the overall condition of the financial markets in applying GAAP so the principles are not applied in a way that exaggerates or multiplies cycles in the markets.

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