Thursday, November 06, 2008

CFO Magazine

Walter Isaac, Ronald Reagan's appointed head of the FDIC (and now a consultant to the banking industry) blames fair value accounting (FAS 157) for the financial crisis. In short, because the SEC requires banks to show their investments at fair value, rather than cost, the banks have had to report their weakened condition in their published financial statements, and this reduced their ability to make loans. If only we had had the wisdom to allow the banks to show their holdings at cost instead, all would be well, insists Isaac, in this CFO magazine piece.

Isaac rhetorically asked the participants how the financial system could have come upon such hard times in under two years. "I gotta tell you that I can't come up with any other answer than that the accounting system is destroying too much capital, and therefore diminishing bank lending capacity by some $5 trillion," he asserted. "It's due to the accounting system, and I can't come up with any other explanation."
So the answer to the financial crisis is to let banks pretend that these loans/investments are worth what they paid for them? What Isaac doesn't understand is that financial markets depend on trust and trust depends on honest accounting - any argument that we could have avoided this crisis by letting the banks post misleading financial statements is moronic.

Of course, Isaac is a Republican, so who can be surprised that he thinks regulations are to blame for the market meltdown, the bailout, and who knows what else? (Assuming Isaac were correct, then FAS 157 is also partly responsible for the election of Barack Obama!)

How does CFO justify publishing such nonsense? What should we expect next week - Nancy Reagan's astrological interpretation of the market decline?

The detachment from reason and reality that pervades Republican thinking is not new. It has been evident since the election of Ronald Reagan and came to full flower under the ignoramus from Crawford. It was evident in the selection of Sarah Palin, who thinks men walked with dinosaurs. But CFO magazine? I thought that we could depend on accountants to be rational.

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