Throwing stones December 19, 2008
Posted by wonderingin in Accounting, Banking, The Economy.add a comment
The current credit and financial crises have produced more than their share of scapegoats – unreasonable politicians; greedy executives, mortgage brokers and investment bankers; lax regulators; tight-fisted accountants, etc., etc.
Now, the putative scapegoats are throwing stones at each other!
In a recent interview, Gerrit Zalm, former Dutch Minister of Finance and recently named CEO of the combined ABN Amro and Fortis operations in the Netherlands, claims that the credit crisis is a regulatory problem and not an accounting problem (referring to the furor over whether the new fair value accounting standard in the U.S. is a cause of the credit crisis).
Zalm says the accountants merely report what they see. Zalm also serves as a trustee of the IASC Foundation which oversees the work of the International Accounting Standards Board (IASB).
In reality, it’s more like an incestuous ecosystem – all are to blame or none are to blame. We’re all in it together.
Ring around the Rosie December 18, 2008
Posted by wonderingin in Accounting, Banking, Corporate Finance.add a comment
Modern financial reporting contains elements similar to the observer effect in physics where the act of observing the behavior of sub-atomic particles actually changes their behavior.
Investment banking and financial services have focused much of their energy on creating innovative (black box) financial instruments (e.g. derivatives, mortgage-backed securities, structured financial products) which generated wealth (for their creators) while often skirting existing capital, regulatory, or accounting requirements. SIVs (off balance sheet special purpose investment vehicles) were also involved in many instances.
Financial gurus create products designed to get around particular accounting or regulatory constraints for which their clients gladly pay. Something blows up, regulators clamp down and demand that the accountants write new (often heavy-handed) rules to limit or eliminate the offending practices or products and then the game starts all over again.
Chuck Prince of Citigroup said it best, “As long as the music is playing, you’ve got to get up and dance.” This time around, however, when the music stopped, all of the chairs were knocked over, some broken beyond recognition. It reminds me of the nursery rhyme Ring around the Rosie.
Let’s hope the credit crisis is not a financial version of the bubonic plague.
