Perlmutter Amendments Introduced to Ease Future Economic Downturns

November 17, 2009

Today, U.S. Rep. Ed Perlmutter (D-CO) will introduce amendments to the Financial Stability Improvement Act (HR 3996) aimed at helping prevent future economic downturns.


The first amendment enables regulators to limit the size of financial firms that could pose a risk to the system on an institution-by-institution basis. Once a financial holding company becomes subject to stricter standards, the amendment would allow the regulators to work with the company to divest its commercial or investment banking activities in an orderly manner without causing the traditional banking side of the organizations to fail.


“The banking system is the circulatory system of our economy. If we don’t have it, we don’t have a functioning economy that keeps credit and capital moving.” said Perlmutter. “This amendment ensures the risks taken by a financial institution don’t pull the entire banking and financial system down if we experience another economic downturn.”


Perlmutter will also introduce an amendment with Rep. Frank Lucas (R-OK) to allow corrective action to be taken if there is a threat to financial stability. The Perlmutter/Lucas amendment maintains oversight of the Financial Accounting Standards Board (FASB) with the SEC. But, it authorizes the Financial Services Oversight Council established in HR 3996 (of which the SEC belongs) to make recommendations to the SEC on any adjustments to accounting standards impacting financial institutions only when the council determines these accounting standards pose a significant risk to our financial stability.


“Last year we saw a dysfunctional market where there was no market for financial instruments,” said Perlmutter. “This amendment simply allows the regulators to make recommendations when there is a threat like this to our financial system on measures that could avoid exaggerating an economic downturn like we experienced last year.”


“We intend these changes to provide the accountability and transparency necessary for investors to assess their investments in financial institutions. At the same time, the amendment provides regulators with the flexibility they need to work with financial institutions to keep credit flowing to Main Street,” said Perlmutter.

“Essentially for the last couple of decades, we made it easer for these firms to gamble and the taxpayers were left picking up the bad bets. These amendments are aimed at preventing that from happening again in the future,” said Perlmutter.

The amendments are expected to be considered this week as the House Financial Services Committee continues it’s markup of the Financial Stability Improvement Act. No timeline for consideration of these amendments has been determined yet.

Below are some facts about the accounting amendment that might be helpful:


Fiction: The legislation will place accounting rulemaking under the Council.

Fact: Accounting rulemaking remains with the FASB and the oversight of accounting rulemaking remains with the SEC. The Council has no authority to oversee the FASB. The Council can only be involved on accounting issues with systemic risks.


Fiction: The legislation will impair the FASB’s independence.
Fact: FASB will continue to report to the SEC and will not report to the Council. It will retain its independence.


Fiction: The legislation introduces government oversight for accounting standards.
Fact: The amendment does not introduce government oversight. The government already has oversight through the SEC. The amendment focuses solely on systemic risks.


Fiction: No additional oversight of the FASB is needed.
Fact: The amendment would not provide further oversight over the FASB. The SEC has that authority now, and the SEC will continue to do that. However, the Council must be permitted to address systemic risks, one of which includes accounting standards. Only if an accounting standard poses systemic risks would the Council make recommendations, and those recommendations would be with the SEC.


Fiction: The legislation is the result of the problems with “mark to market” accounting.
Fact: Mark to market accounting and loan loss accounting rules did exacerbate the financial crisis; however, the amendment is not about mark to market. It is about ensuring that, in the , we have a way to examine our systemic risks going forward, while working together to ensure that financial statements remain fairly presented for investors and other users of financial statements.


Fiction: Accounting treatment has not exacerbated the financial crisis.
Fact: Accounting treatment has had a dramatic impact on individuals and on our economy. The G20, Group of Thirty, Financial Stability Board, Basel Committee on Banking Supervision, and many others have spent an unparalleled amount of time identifying accounting issues that have exacerbated the financial crisis. Over the past 10 years or so, banks have not been permitted to report as much in loan losses as they believed the accounting rules permit. Today, we wish they could have. This is one of the issues being discussed globally as needing repair and has been acknowledged as having exacerbated the financial crisis.