Archive for março \26\+00:00 2008

Marcação a mercado

março 26, 2008

Mark-to-Market Accounting Is not the Major Problem

March 21st, 2008

I’m not a fan of mark-to-market accounting, partially due to the loss of comparability across firms. It introduces a level of flexibility that can be gamed by the unscrupulous. That said, any accounting method can be gamed. Accounting attempts to assign the value of economic activity at and across points in time.

Now, with financial firms, there are typically several accounting bases going on at the same time. There’s GAAP, Regulatory, Tax, and then the accounting for special agreements, which may be different than any of the three major accounting bases.

Why has mark-to-market come up as an issue recently? Because it has seemingly created downside volatility in the financial statements, leading investors to panic, which pushes down security prices.

In my opinion, the greater problems are how a firm finances itself, how it is regulated, and negative optionality in its assets and positive optionality in its liabilities. I’ll give some examples to illustrate:

With Thornburg, the problem was over-reliance on short-term lending to finance long term assets. It doesn’t matter how you do the GAAP accounting here. The brokers will look at the day-to-day market value of the positions versus the capital supporting them. If the capital becomes insufficient to carry the position, the positions will be liquidated. Given that there were a lot of players with similar trades, and funding in the repo market, that created an ideal setup for the most levered to lose a lot as financing dried up.

Bear Stearns also relied on short-term financing. Bear ran with high leverage that made them vulnerable to attacks from those that bought credit protection in the credit default swap market… as those spreads went up, the willingness to extend credit went down. Ratings downgrades pushed up, and in some cases eliminated the willingness of lenders to extend short term credit. (Bear also lacked friends to help them in their time of need, a payoff for not helping on LTCM. Lehman had similar leverage, but the Street supports it.) Also, derivative agreements often specify a need for more collateral if downgrades occur, which is exactly the wrong time to have to provide more collateral. Again, this has nothing to do with GAAP accounting, but it has a lot to do with positive optionality in the liabilities of the firm. (I.e., the liability can get more onerous under conditions of stress.)

Consider PXRE, which recently merged with Argonaut Group. When the storms of 2005 hit, they claims against them were bad enough, but many of their reinsurance agreements had downgrade clauses, saying they would have to post collateral. Though it didn’t bankrupt them, it could have, and they had to find a buyer. Nothing to do with GAAP accounting.

General American wrote a bunch of floating rate Guaranteed Investment Contracts that had 7-day put provisions after a ratings downgrade. They wrote so much of them, that they comprised 25% of their liability structure. When they got downgraded, they could not meet the call on liquidity. They wen insolvent. Nothing to do with GAAP accounting.

CIT got downgraded and drew down their revolver because of a liquidity shortfall. The stock has fallen more then 80% in the past year. Mark-to-market accounting to blame? No, deteriorating assets and too much short-term financing.

I could go on. Regulators are under no obligation to use mark-to-market accounting, and they can set capital levels as they please. Optimally, regulators should look at risk based liquidity. How likely is it that a financial firm will have adequate liquidity in all circumstances? How safe and liquid are the assets? Is the liability structure long enough to support them? Can the liability structure dramatically shorten? (I.e., a run on the bank.)

Deterioration in the value of assets has to be addressed by accounting somehow. But regardless of the method, those that finance the company will look beyond the published GAAP financials, and will look at the cash generation capacity of the firm over the life of the loan, and how prone to change that could be. Even if a firm could take an asset worth 80 cents and mark it at $1.00, the sophisticated lenders would only assign 80 cents of value.

Along with The Analyst’s Accounting Observer, I don’t see mark-to-market accounting as a major threat to the solvency of firms. The companies that have gotten into trouble recently have held assets of dubious quality, and have financed themselves with too much leverage, borrowing short-term, and/or implicitly sold short options against their firms that weakened themselves during a crisis. Dodgy assets and liquid liabilities are poisonous to any firm, regardless of the accounting method.

Pequenas empresas

março 26, 2008
Small fish wriggle on IFRS hook.

Financial Times – 25/3/2008 –Surveys ICA1 -Page 2You might expect a system to simplify financial reporting in smaller companies would be universally supported and acclaimed. After all, complaints about the complexities of international financial reporting standards (IFRS) are common.

But proposals from the International Accounting Standards Board (IASB) for an IFRS-related system for small and medium-sized companies (SMEs) have become some of the most hotly argued-over ideas in the IASB’s short history.

The fiercest arguments have been in Europe.

Back in 2005 the European Commission said it supported the IASB’s efforts. Yet two years later, once the IASB’s draft proposals had been published, the Radwan report from the European Parliament said it was “unclear who gave a mandate to the IASB to suggest such an IFRS for SMEs”.

The parliamentaries suggested it was “even questionable whether there was ever a need or demand for such a standard”.

Around the rest of the world there is clearly a demand for the proposals.

South Africa was so enthusiastic it decided not to wait for the final standard and instead implemented the draft proposals last year.

The attitude within the European Parliament has upset practitioners. “There is an element of ‘not invented here’,” says Brian Shearer, senior technical partner with Grant Thornton International.

“We are disappointed,” says Richard Aitken-Davies, deputy president of accounting body, the ACCA, and chairman of its financial reporting committee.

And to some the European stance is irrelevant. “I don’t take the European position all that seriously,” says Peter Holgate, senior technical partner with PwC.

“Even if they end up not endorsing it, various countries could adopt it in their national generally accepted accounting principles, (GAAP). If a few major players do that you have it brought in by a different door even if the EC doesn’t want to play ball.”

But the proposals are likely to be refined and then approved as a final standard by the end of the year. At the IASB, the period for comments on the original draft has just closed and it has some 160 comment letters to deal with.

“Reaction to the proposals is generally favourable,” says Paul Pacter, director of standards for SMEs at the IASB. “In those countries that have required full IFRS for small companies, or that have closely converged their national GAAP to full IFRS, the IASB’s SME proposal is viewed with a great sigh of relief.”

“We believe there is value in going down that route,” says Mr Aitken-Davies. “There is a value of an element of global comparability even for small companies. It helps to level the playing field for companies and it makes it easier to transfer accounting skills across borders.”

The end result is likely to be a three-tier system in most countries around the world.

Listed companies will produce their figures under the full IFRS system. The remaining larger companies would follow the route of the SME standard and the smallest end of the corporate world would either produce no accounts at all or accounts under a further streamlining of the system.

This is where the problems really lie.

The smallest of companies may only need its accounts to convince its bank of its stability.

“At the bottom end of the market,” says Phil Coleman, national head of audit at accounting firm RSM Bentley Jennison, “accounts are produced for the taxman or the banks or the credit reference agencies.”

“The bottom tier is almost so irrelevant that it doesn’t matter what they do,” says Mr Holgate.

Different countries have different rules and it can be hard, for fundamental legal reasons, to change the system.

“In some countries,” says Mr Pacter, “there are obstacles to adopting the IFRS for SMEs, particularly where SME standards are written into law or where financial reporting and tax reporting are traditionally linked.

“As a private sector body, the IASB cannot tell any jurisdiction that it must adopt the IFRS for SMEs. Each jurisdiction will have to make that assessment based on its assessment of the public interest and local needs.”

The experience following South Africa’s early adoption is likely to be influential.

“South Africa is a massive real-life case study,” says Mr Holgate. “It is so much more valuable than armchair theorising and comment letters.”

“We are getting a mixed reaction,” says Sue Ludolph, project director for accounting at the South African institute of chartered accountants (SAICA).

“We used to have only one financial framework for every company, from the listed to the fish shop. We now have a second tier for SMEs and that includes anything not listed.

“The larger companies stepping down to that level are enthusiastic and are reporting huge benefits. But the micro-entities are unhappy. It is still too much of a step up for them.

“They feel they are accounting for things which are not relevant to them when the owners of the business are a few shareholders and the users of the accounts are the bank.”

So further simplification is likely before the proposals are finalised.

And the end result may have greater consequences than originally intended. Expressing IFRS principles in a simpler form could bring pressure on the full IFRS system which has been so heavily criticised for its complexity.

“The end product will be simpler and more concisely expressed,” says Mr Holgate, “so why can’t that example influence big IFRS? Why do we need something complex and hard to deal with?

“Once the SME standard is established the pressure will be on for IFRS to become simpler.”

Iasb 2

março 26, 2008
A single standard for the world?

25 March 2008 – Financial Times –Surveys ICA1 -Page 1If Europeans and others can switch accounting standards in three years, how long will Americans need?

This is a hot topic in the accounting world as the US moves towards international financial reporting standards, or IFRS, and so towards dropping its own well-developed rules.

US acceptance of IFRS would be no small achievement, making it all but certain that a single set of accounting standards would be followed around the world.

European Union countries managed the change in three years, from 2002, when it was announced, to 2005, when the first financial statements in IFRS were required.

This year, there are great expectations for the US. After all the talk about convergence for many years, the first concrete signs of it happening are generating an enormous buzz.

Late last year, the US Securities and Exchange Commission (SEC) voted to allow foreign companies to file in IFRS without reconciling their accounts to US generally accepted accounting principles, or GAAP, in what amounted to a tacit acceptance of the higher quality of IFRS.

More recently still, the International Accounting Standards Board and its US counterpart produced their first joint accounting standard. More are in the pipeline.

This month, Christopher Cox, chairman of the SEC, said the commission would this year study formal proposals for moving from US GAAP to IFRS.

“The major questions now aren’t ‘if’, they’re ‘when’ and within that, ‘how will the SEC handle it?’,” says Ed Nusbaum, chief executive of Grant Thornton US.

“Will they force it, or allow companies a choice? The key right now is to set a time-frame for all of this.”

Expectations are that the US will look to the EU to learn from its experiences.

“Europe didn’t happen until the Commission set a date and the same will be true of the US,” says Will Rainey, global head of IFRS at Ernst & Young, who thinks the US will have a headstart on the EU, which had to cope with many languages and wildly varying standards and training.

“US GAAP is much more mature and developed than (were) a lot of local European GAAPs,” he says. “A lot of its principles are already similar to those in IFRS so US accounting will experience relatively minor tweaks rather than a complete overhaul.”

The US should also benefit greatly from the existing IFRS experience elsewhere. More than 100 countries – including Japan, Canada and China – are now using or adopting IFRS.

Europe and other first-wave adopters learnt from the problems of being early users. New rules were issued by the standard-setter almost up until the last minute, making it hard for companies, auditors and investors to get to grips with the new system.

The immediate questions for the US are more technical. Plans need to be put in place for training accountants and auditors, and for making investors and companies aware of the changes.

“Right now, IFRS is very rarely taught and not to the level of depth that’s required,” says Robert Dohrer, a partner at McGladrey & Pullen, who nonetheless believes this should not be allowed to slow unduly the switchover.

“My biggest fear is that the SEC moves forward with multiple milestones – in other words, they say something like ‘we agree to move forward, but not until we’ve reached a certain educational standard’, and this drags the process out.”

“If Europe could do it, then we should also be able to do it,” Mr Dohrer continues. “I don’t think that it takes a four-year degree in IFRS to be able to use them. I give our people more credit than that.”

There is another debate over whether the US should set a single cut-off date or, instead, “step” the process, pushing larger companies with greater accounting skills to switch first before requiring smaller companies to follow suit.

The European Union chose a partly-stepped route that required the largest, listed companies to lead the way for consolidated accounts, while legacy GAAPs have continued to appear at local levels.

So far, the idea of IFRS has won widespread approval in the US partly because discussions so far have taken place among insiders such as accountants and auditors who understand fully the issues and ramifications of the switch. But the success of such a radical change requires a wider commitment in business circles.

“Corporate America is barely aware this will touch them – many companies’ first response is to ignore the deadline until it’s in your face, then panic,” says Matt Kelly, editor of Compliance Week, a newsletter on corporate governance and compliance.

If not handled carefully, the switch to IFRS could lead to a relatively late, but powerful, political upsurge.

Making the change will involve high one-off costs and much company time – when there is already a groundswell of feeling, both corporate and public, against the sort of all-consuming regulation represented by Sarbanes-Oxley, the reform of business practices introduced in the US in 2002.

“The SEC and FASB have to think through ‘what if someone in Congress stands up and files some bill objecting to this?’,” says Mr Kelly. “Congress doesn’t need to approve the change, but they have the power to disapprove.”

There is a precedent. On the eve of the SEC’s decision to drop its reconciliation requirement for foreign filers, Senator Christopher Dodd, chairman of the Senate’s powerful banking committee, wrote to the regulator describing the move as “premature and… unduly rushed”.

Senator Dodd told the regulator that the differences between the two sets of standards were “too significant to warrant the removal of reconciliation”.

One of the biggest perceived differences lies in the greater reliance by IFRS on broader principles compared with US GAAP’s rules-based framework.

This has resulted in the complete IFRS being about 2,500 pages long compared with 25,000 for its US counterpart – although the simple numbers go no way towards reflecting US GAAP’s far longer development.

The problem for the US is that it is used to more detailed rules. “We have a more litigious society and these are fuzzier standards,” says Mr Kelly. “It could lead to more lawsuits.”

There is also a concern that principles will lead to a greater range of results because of the wider interpretations they allow, but accountants are sanguine about this. “I happen to think it’s a strength of IFRS to allow good reasoned judgment, but there is a fear before people get used to the concept,” says Mr Dohrer.

As those best placed to understand the rules, the accounting profession will certainly have its work cut out in explaining the switch to the American people.

But they are confident that they can do it.

“IFRS isn’t really scary,” says Mr Rainey. “It’s just a little bit different.”


março 26, 2008
Barriers fall as new world order fast emerges.

Financial Times – 25/3/2008 –Surveys ICA1 -Page 2For the International Accounting Standards Board (IASB), success is producing headaches as well as plaudits. It was set up in 2001 with the task of bringing order to international financial reporting standards (IFRS).

Then IASB was then thrust into the front line by the European Commission’s decision that all listed companies in Europe should follow IFRS from 2005 onwards.

Not only did the IASB have its work cut out to achieve the deadline, it also found itself in a political minefield. Here was an independent and privately-funded standard setter telling French banks, for example, what they could and could not do in their accounts.

Seeing the European corporate world heading down the IFRS route, the rest of the world started to follow suit. Now more than 100 countries are in the IFRS fold.

And China, Japan, India and others have announced deadlines by which they will join in. Regulators in the US are formally on the route to acceptance of IFRS.

The greatest barriers to a true global accounting language have fallen.

Back in 2001 this sequence of events would have been thought an astonishing fantasy.

But such development have brought with it calls for greater accountability at the IASB, making the board a victim of its own success. In a paper produced for Bruegel, the Brussels-based thinktank, Nicholas Veron, put his finger on a paradox.

The IFRS system was “a body of norms prepared by a private-sector organisation with global scope but no democratic accountability”. By so doing, he wrote, “the European Union has started a worldwide experiment whose rapidly unfolding consequences will provide lessons for other areas of policy in the financial sector and beyond. This experiment is unique by its combination of global reach, private-sector governance and significant economic impact.”

But not everyone in Europe has been happy at how the success in establishing an IFRS regime in Europe has so rapidly spread around the world.

It has diluted what some saw as their right to control their own fiefdom.

“The Europeans and now the Americans may have to compromise because globalisation means they can’t pull the strings they once did,” says Allen Blewitt, chief executive of accounting body, the ACCA.

“It is important to acknowledge that governance of a body like the IASB is a dilemma,” says Andrew Watchman, director of IFRS at Grant Thornton International. “Its success comes from its independence of jurisdiction. But there is room for improvement in how it goes about accountability.”

Mr Veron sees two different issues here. “There are the behaviours and the decisions made. Do they look independent? And then there are governance issues.”

As a result, the IASB has now published proposals it hopes will resolve both these issues and lift the criticisms. In particular, it recently announced it would accelerate the creation of an independent group to approve the appointments of the IASB trustees and review trustee oversight activities, including the IASB’s funding arrangements.

This has been broadly welcomed. The process of trustees, in effect, appointing themselves could not continue.

“It is good that the trustees are abandoning the myth they could stay a self-appointing group,” says Mr Veron. “It strengthens the legitimacy of the IASB.”

The key will be ensuring that the monitoring body can endorse trustee appointments and test the effectiveness of trustees without diluting the strength of the IASB’s independence by trying to influence or direct its activities.

“Accountability,” says Mr Watchman, “must stop short in the ability of other bodies, governments or regulators, for example, to intervene. If they had the power to hire or fire members of the IASB, it would take away the independence.”

Other proposals increase the use of feedback statements, deepen engagement with stakeholder groups, broaden funding arrangements, and widen the board’s geographical representation.

The hope is that much of the proposed reforms will satisfy the criticism, particularly from the European Parliament.

The newly appointed chairman of the trustees, Gerrit Zalm, previously deputy prime minister and finance minister of the Netherlands, may be able to help.

“The climate is changing,” he says. “The European Parliament is certainly less negative and more positive than six months ago. At my first meeting the atmosphere was not so good. But that is now changing.

“The European Parliament understands that the IASB is not a European organisation. It is a global organisation and we have to treat everyone alike. It is impossible for every region to propose its own changes.”

His views are echoed elsewhere. “Europe is still their most important customer, but everyone else should have the same advantages,” says Allister Wilson, a senior assurance partner with accounting firm Ernst & Young.

The accelerated reform programme, allied with Mr Zalm’s appointment, may be turning the tide. As one observer puts it: “The parliamentarians are delighted to have a politician to deal with rather than an accountant.”

“The key question now is the next steps,” says Mr Veron. “Will the IASB stay true and go for the highest quality standards, and not go for political compromises?”

And, to an extent, there will always be difficulties. “The dilemma is almost inherent in a standard-setter,” says Mr Watchman. “There will always be a strain between the independence of standard-setters and the sovereignty issues of the jurisdictions that decide to use the standards.”

There needs to be a breathing space in this argument.

“The IASB has been undergoing challenges to its governance for the past two to three years,” says Mr Blewitt, “and it is now much more representative than it was. It is critical the changes have absolute acceptance and the IASB can get on with its job. The real problem is that constant carping about governance is a distraction.”

Comparativo de Remuneração

março 24, 2008
Troops Are Paid Fairly, But Differently, Study Shows
Stephen Barr

The Washington Post – 24/3/2008


It is one of the most politically sensitive questions on Capitol Hill: Are the troops getting paid the right amount?

A new Defense Department study suggests that the answer is yes, when basic pay, cash allowances, free health care, pensions and tax breaks are taken into consideration.

When those elements are combined, military officers and enlisted personnel are compensated as well or better than 80 percent of their counterparts in the private sector of similar ages and educations, the study said.

That runs contrary to popular perceptions, shaped in the late 1970s, when military pay fell behind private-sector wages, and reinforced in the early 1990s by reports that several thousand military families relied on food stamps to make ends meet.

Congress became concerned about such perceptions and realized that pay comparable with the private sector is critical to maintaining an all-volunteer force, so it began pumping up military salaries.

Over the past decade, Congress usually has set military pay raises at one-half of a percentage point above the average annual private-sector wage increase. Since 2001, the Pentagon calculates, average basic pay has grown by 32 percent.

But there is more to military compensation than pay, and the Pentagon’s study, released this month, emphasizes the importance of benefits — a departure from previous pay studies, known as quadrennial reviews of military compensation.

The study was headed by Jan D. “Denny” Eakle, a retired brigadier general who served for 29 years in the Air Force. When she retired, she was deputy director of the Defense Finance and Accounting Service, which is responsible for paying more than 5 million people.

One of the study’s goals is to help educate military personnel about compensation so that they better understand what kind of income they will need to maintain their standard of living if they leave the armed forces, Eakle said in an interview.

The study begins with regular military compensation — basic pay, housing and food allowances and an estimate of the federal income tax advantage gained by receiving tax-free allowances. It then adds an estimated value for the free health care received by the military, the value of retirement benefits and additional savings for being able to avoid state and Social Security taxes.

“Military members who focus solely on cash compensation will tend to systematically undervalue the compensation package they receive,” the study said.

For example, an officer who is a college graduate with four years of service and who decides to leave the military will need to carefully review job offers, Eakle said.

In 2006, that officer would have had an income of $66,000 in pay and non-taxable cash allowances. The officer would need to earn at least $72,000 in the private sector “in order to have the same take-home pay,” she said.

“Virtually every private-sector company, if it offers benefits, makes sure people understand what the benefits are worth,” Eakle said. “In the Department of Defense, we have not done that very well, if at all.”

The study recommends that the Pentagon adopt the more comprehensive approach to measuring military compensation. But the troops may be skeptical of the idea.

Cindy Williams, a research scientist in the security studies program at the Massachusetts Institute of Technology, said the department already provides members of the armed forces with an annual explanation of their compensation. But, she noted, “I have heard military families refer to that as the ‘lie sheet.’ ”

“The fact is that the structure of military pay is so different from the structure of pay in the private sector, that it is very difficult for people serving in the military to understand just what their pay is,” Williams said.

Steven P. Strobridge, director of government relations at the Military Officers Association of America, agreed that the annual compensation statement “upsets military people,” especially those who are repeatedly deployed overseas and feel they are making sacrifices, financially and emotionally.

“When anyone says we need to educate people on what a good deal they have, you have to be careful,” he said.

The association prefers that Congress stick with its practice of providing annual raises that slowly but steadily narrow the difference in military and private-sector average wages, rather than “fuzz the issues” by assigning values to military benefits, Strobridge said.

Based on the Labor Department’s employment cost index for measuring wage growth, he said that military personnel would need a 6.8 percent pay raise next year to catch up with the private sector.

The White House has proposed a 3.4 percent military pay raise in 2009, but Rep. Gus Bilirakis (R-Fla.) has introduced a bill calling for 3.9 percent. Key House leaders have signaled that they want to provide more than what the White House requested but have not said how much more.

Eakle said the study shows, however, that any debate should not be about a pay gap and whether it exists. “That is really not looking at the big picture,” she said. “It’s not about pay comparability as much as being able to do a true comparison to the private sector.”


março 24, 2008
Regulatory Underkill
By Arthur Levitt Jr. – 21/3/2008

The Wall Street Journal –A13A little more than a year ago, some of the most eminent voices in the business community and leading policy makers — including the senior senator from New York, New York City’s mayor, the head of the New York Stock Exchange, the leadership of the U.S. Chamber of Commerce and the secretary of the Treasury — warned that Wall Street’s predominance in the world economy was in danger of being eclipsed.

Their concern was not with diminishing transparency, lax accounting standards, or the growing inability to measure the risk of new financial instruments and opaque trading mechanisms. No, their concern was regulatory overkill — that the NYSE was losing listings to overseas markets. How ironic that this group was fixated on a questionable measure of market health, while the seeds of today’s market turmoil were being nourished not by regulatory excess, but by fundamental failures in oversight at almost every level.

With this week’s downfall of Bear Stearns, and the worsening of the credit crunch, it is clear that there was a breakdown in how Main Street and Wall Street interacted with each other and the global capital markets. Wall Street’s new financial products created incentives for Main Street mortgage lenders to offer loans to previously unqualified borrowers.

With easy credit, millions of people bought homes, propping up the market for securities built from these mortgages. Meanwhile, key standard-setters were asleep at the wheel; federal regulators turned from impartial referees to industry enablers; and important gatekeepers became knotted in conflicts of interest. As a result of these regulatory failures, investors have been left with opacity instead of transparency, fueling their mistrust and the current panic roiling the markets.

How did this happen?

First of all, the combination of structured financial products and subprime mortgages fundamentally changed the lending business. No longer did those doing the lending have to expose themselves to the credit risks of the borrowers. Instead, they packaged their loans for sale to the investing public. With no exposure, loan originators offered mortgages to just about anyone they could find. Unlike the state regulators who sounded alarms, almost all federal banking regulators (except Ned Gramlich, the late Fed governor) stood by cheering securitization as underwriting standards deteriorated.

Accordingly, state and federal banking regulators, under the oversight of Congress, need to act now — together — to create enhanced underwriting standards for loans, ensuring that lending practices are commensurate with the risks, and that the lender and borrower are fully informed of these risks.

We must strengthen the licensing standards and oversight of mortgage brokers and originators, as proposed by the President’s Working Group on Financial Markets. And we must increase the capital requirements for monoline insurers, as well as greatly enhancing their disclosures of actual and potential ranges of losses from different product lines.

The second factor behind today’s market turmoil was the strong ratings bestowed upon the new securitized debt instruments by credit rating agencies. What investors relying upon these ratings didn’t know was that the agencies’ objectivity was severely compromised — as they were helping issuers construct the very financial instruments they eventually judged. Meanwhile, the Securities and Exchange Commission (SEC) lacked sufficient power and resources to inspect and take corrective supervisory or enforcement actions. As a result, this conflict of interest persisted.

Credit rating agencies need to adopt, as they have proposed, systems that more accurately reflect the risks of differing types of debt. But Congress should give the SEC greater authority to examine the reasonableness of the ratings issued, to take enforcement actions if necessary, and to be able to set independence standards for the rating agencies as the SEC now does for auditors.

The third factor responsible for today’s troubles is that, once structured financial products were purchased, investors had little ability to discover how exposed banks were to these products’ risks. Failing to recognize and understand the changing risks and accompanying lack of transparency for investors, the Financial Accounting Standards Board (FASB), and the SEC that oversees it, allowed Structured Investment Vehicles (SIV) and conduits to be kept off bank balance sheets.

Because this loophole was not closed when it was first recognized more than five years ago, we are today still trying to figure out the depth and severity of the current crisis. If the FASB is to maintain its credibility with investors, it will need to bring the off-balance sheet risks and losses associated with both SIV’s and other securitizations onto companies’ financial statements, with full disclosure, within the next 12 months.

Finally, the management and boards of directors of these financial services firms, such as Bear Stearns and probably others, failed to put in place adequate risk-management systems. Moreover, the Fed, SEC, and the Office of the Comptroller of the Currency did not take any meaningful, proactive regulatory action to require needed improvements in risk management and public disclosure, ignoring the recommendations of their own Working Group on Public Disclosure made seven years ago.

At the very least, the board of every public company should adopt best practices in risk management and disclose those practices to investors, along with significant accompanying risks, and how they are managed.

Beyond these immediate fixes, what’s needed to restore public confidence is a more wholesale reconsideration of how we can inject greater transparency into the markets and bring about a change in attitude on the part of business leaders and policy makers that puts the interests of investors first. This may require a more fundamental restructuring of how we regulate the markets — for instance, merging the SEC and the Commodities Futures Trading Commission to create a single securities regulator — and giving that regulator the resources and the authority to do its job, something the SEC currently lacks.

Ultimately, those who were so concerned with Wall Street’s competitiveness need to realize that the true competitive advantage of America’s capital markets has long been their high quality. With that quality in doubt, leaders and policy makers need to put their ideological fixations aside and commit themselves to giving investors the levels of transparency and accountability they deserve and expect from the world’s strongest markets.

Only then will trust be restored, our markets’ health revived, and a deep economic crisis averted.

Mr. Levitt was chairman of the SEC from 1993 to 2001.

Valor Justo 5

março 24, 2008
Act now to stop the markets’ vicious circle.

Financial Times – 20/3/2008 –Asia Ed1 -Page 11 –
T he credit crisis has produced an avalanche of problems and also of explanations. Some observers have stressed that it is mainly a solvency crisis; others that it is mainly a liquidity crisis.

It is increasingly clear that it is both. Liquidity and solvency problems are so intertwined that trying to decide whether it is one or the other is counterproductive. When a hedge fund today is hit by a withdrawal (a liquidity problem) and is forced to sell assets, the price of its assets declines and a solvency problem is created. The liquidity and solvency problems of that hedge fund in turn are likely to lead other investors to withdraw (again a liquidity problem) leading to further price declines (solvency).

This interconnection between liquidity and solvency problems is em-bedded in the activities of banks and financial institutions that fund long-term investments with short-term loans. Withdrawals trigger solvency problems, which in turn become signals for further withdrawals, creating liquidity problems.

There is a clear market failure here. Markets are fantastic instruments to co-ordinate economic activities without the need of a planner. Under normal circumstances markets co-ordinate these activities towards a “good” equilibrium that increases welfare. Once in a while they can also co-ordinate activities towards a “bad” equilibrium that reduces welfare.

Banks, hedge funds and other financial institutions that borrow short and lend long contribute to welfare when withdrawals are random and independent from each other. The economy is then in a good equilibrium. Occasionally, as a result of bad news or foolish behaviour of some of these institutions, lenders withdraw their funds, thereby creating (or aggravating) solvency problems, which in turn lead to further withdrawals. The market then starts to co-ordinate lenders into massive withdrawals, leading to massive solvency problems at financial institutions that, without the withdrawals, would have been perfectly all right.

This perverse co-ordination by the market (some will call it a vicious circle) is made worse by “marking to market” (valuing assets at market rates). The practice forces banks to take a loss on their balance sheets on assets that are caught by the liquidity-solvency spiral. They are forced to do so even if these assets are sound. Thus marking to market today accelerates the downward spiral. Marking to market, which was generalised as an accounting procedure in the 1990s, was influenced by the idea that financial markets are efficient. In this view markets provide the best method to put a correct value on financial assets. Markets are wiser than the judgment of individual bankers or accountants, it was said. That is right under normal circumstances, but not today, when markets are clearly driving towards a bad equilibrium. Markets are not always right.

Today the accounting rule of marking to market is driving us at high speed into the abyss. A speed limit must be imposed. It can be achieved only by temporarily allowing financial institutions not to mark to market. This will make it possible to keep the assets on their books for a while at their previous values (or historic costs). If this is done, the spiral will be slowed down. Prices of many financial assets will recover because they are fundamentally sound. Their value is artificially pulled down by the liquidity-solvency spiral.

Slowing the spiral will prevent more innocent bystanders from being caught by the whirlwind. It will, of course, not solve all financial problems. Confidence in the financial system must be restored so that the market can start co-ordinating again towards a good equilibrium. This is not happening today. As a result, financial institutions desperately try to borrow long and to lend short, thereby squeezing liquidity and credit.

The US Federal Reserve was right when it recently injected massive amounts of liquidity. It has no option but to buy distressed assets in an attempt to put a floor on the downward asset valuation spiral, which risks getting out of control. But that will not be enough. A massive overhaul of supervision and regulation of the financial system will be necessary, especially in the US, where a religious belief in the infallibility of markets has led regulatory authorities, especially the Fed while Alan Greenspan was chairman, to abdicate their responsibility of supervising and regulating markets.

The writer is professor of economics at the University of Leuven

Valor Justo 4

março 24, 2008
Solutions now sought to add transparency.

Financial Times – 20/3/2008 –Asia Ed1 -Page 18If ever there was an idea whose time has come, it has to be that of increasing transparency and reducing complexity in accounting for financial instruments.

There are many factors that have contributed to the credit crunch, not least a poor understanding of the risks involved in complex financial instruments.

Unnecessarily complex accounting does not help the situation. IAS 39, the current standard for financial instruments, was inherited from our predecessor organisation and has become a by-word for being well-nigh incomprehensible.

Yesterday we published a discussion paper* that outlines the issues and possible changes. The goal is to develop a principles-based standard that reflects economic realities and increases transparency for all users of accounts. Everyone talks about wanting to do that. Now it is a question of deciding how we actually manage it. But it is at this point that we encounter what you could call the ‘elephant in the room’ – fair value.

Although fair value has its problems, it does, through the market, have a disciplining effect on an institution’s lending and investing decisions. Using historical cost can delude investors that all is well (as was seen with Japanese banks in the 1990s). Much of the pain allegedly caused by fair value in recent months would still have been reported under historic cost because of our impairment principles. Furthermore, in the case of derivatives, the initial cost of instruments is often zero, making cost-based accounting irrelevant.

We have proposed some options in the discussion paper but we are open to all ideas and possibilities. We want to know whether a solution perhaps using a single measurement method is both feasible and what people want.

The discussion paper deliberately keeps this issue open. We want to know if there are any other solutions that would significantly improve the reporting and remove unnecessary complexity.

If a single measurement method is too big a step to take should we do something else, such as maintaining a mixture of fair value and cost-based measurement? We could simplify reporting by cutting the number of categories of financial assets. Or we could replace the existing categories with a single fair value measurement principle but with some optional exceptions. There are other options too.

This discussion paper is a starting point. It will be open for comment for six months, after which further proposals will be presented for public scrutiny. But the aims are simple – to reduce complexity by basing a future standard firmly on principles and to increase understanding and transparency. I urge all interested parties to express their views at this early stage of the consultation process.

*Reducing Complexity in Reporting Financial Instruments, []

Sir David Tweedie is chairman of the International Accounting Standards Board

Valor Justo 3

março 24, 2008
The Fair-Value Blame Game
Fallout from the credit crisis has put mark-to-market accounting to the test.
Sarah Johnson | US
March 19, 2008

Despite the beating fair-value accounting has taken from financial-services firms that have absorbed huge write-downs, the concept of mark-to-market valuations is here to stay, according to David Tweedie, chairman of the International Accounting Standards Board.

Tweedie predicts that fair value will be applied to all financial instruments some day — long after he has left the IASB, he told To the fair-value dissenters who claim recent valuations are creating unfair, negative pictures of the value of their assets, he asks whether they offer any alternative solutions. Going back to the traditional method of historical cost is not going to work, he says.

Under fair value rules, companies measure their assets and liabilities based on an existing market or — in the case of assets that are traded thinly, or not at all — on unobservable estimates based about what value they believe a hypothetical third party would place on those assets. “Fair value in a time of crisis can in effect exacerbate the concerns about a situation. But on balance, fair value keeps the situation honest,” Tweedie says. In fact, without fair-value accounting, investors would not now be realizing the true worth of the mortgage-backed securities that have led to the write-downs at various firms, he confirms. The use of fair value forces the true downsides of a company’s investment — such as securities tied to bad lending practices — to come to fruition.

In recent weeks, financial services firms have blamed their financial troubles on the use of fair value. Perhaps the most vocal has been Martin Sullivan, CEO of American International Group. The insurer recently reported $11 billion in write-downs, and has called for changes in the accounting rules.

“We are trying, as are many others, to value very complex instruments,” Sullivan told investors during a conference call in February. “These valuations are not mechanical. They involve difficult estimates and judgments. I can tell you that we have, at all times, brought our best judgment to bear in making these valuations.”

To be sure, critics of fair value say that it can distort market realities by giving management too much discretion and room for abuse. But the proponents say it actually creates transparency by reflecting the up-to-date reality of an asset’s or liability’s worth.

Corporations that have made poor decisions lately are using fair value as a “scapegoat,” according to the CFA Institute Centre for Financial Market Integrity, a research and policy organization. “Fair value accounting and disclosures, which provide investors with information about market conditions as well as forward-looking analyses, does not create losses but rather reflects a firm’s present condition,” says Georgene Palacky, director of the CFA’s financial reporting group.

Indeed, Tweedie deflects the current fair-value criticisms as ignoring the true roots of the current problems in the financial marketplace. “The real problem in the current crisis is a lack of trust and lack of transparency,” he says.

The IASB further defends the use of fair value in a discussion paper about reducing complexity in reporting financial instruments, released on Wednesday. The 98-page document was in the works long before the credit crisis hit; however it comes at an opportune time for the supporters of mark-to-market accounting.

In it, the IASB says fair value “seems to be the only measure that is appropriate for all types of financial instruments.” Still, the board acknowledges that “there are issues and concerns that have to be addressed before [rule-makers] can require general fair value measurement.”

Custo da Guerra 2

março 20, 2008
Custo da Guerra no Iraque supera US$ 1 tri

Gazeta Mercantil – 20/3/2008Washington, 20 de Março de 2008 – No início da guerra do Iraque, o governo do presidente George W. Bush previu um gasto de US$ 50 bilhões a US$ 60 bilhões para expulsar Saddam Hussein, restaurar a ordem e instalar um novo governo.

Cinco anos se passaram, e agora o Pentágono avalia o custo com a guerra, a grosso modo, em US$ 600 bilhões ou mais. Joseph E. Stiglitz, economista Prêmio Nobel e crítico da guerra, considera os gastos no longo prazo em mais de US$ 4 trilhões. O Departamento de Orçamento do Congresso dos EUA e outros analistas dizem que uma visão mais realista é de US$ 1 trilhão a US$ 2 trilhões, dependendo do nível das tropas e por quanto tempo mais continuará a ocupação norte-americana.

Entre economistas e legisladores, a questão de como calcular o custo da guerra é motivo de acirrada disputa. E os custos continuam a subir.

Os congressistas democratas criticam ferozmente a Casa Branca a respeito das despesas com a guerra. Mas é virtualmente certo que os democratas providenciarão centenas de bilhões de dólares a mais em um projeto de lei para gastos militares no próximo mês. Alguns deles até são contra um prazo para retirada de dinheiro, alegando que a tática não terá sucesso como aconteceu no passado.

Todos os cálculos sobre os custos com a guerra incluem operações na zona de guerra, tropas de apoio, equipamentos de reparos ou de substituição, salários de reservistas, pagamentos especiais de combate para as forças regulares, e alguns cuidados com veteranos feridos – despesas que em geral ficam fora dos orçamentos do Departimento de Defesa ou dos assuntos ligados aos veteranos.

As estimativas maiores freqüentemente incluem projeções para operações futuras, custos com cuidados médicos de longo prazo e invalidez de veteranos feridos, uma porção do orçamento anual de defesa e, em alguns casos, efeitos econômicos mais amplos, incluindo um percentual de preços mais elevados do petróleo, e o impacto com o aumento da dívida nacional para cobrir os gastos crescentes com a guerra.

O debate alcança o Capitólio, as campanhas presidenciais, institutos de pesquisa e academias, e aborda fatores bastante esotéricos, como o alto índice inflacionário para as despesas de saúde dos veteranos, o valor monetário de quase 4 mil baixas com soldados mortos, e qual o papel que a guerra desempenhou, se de fato desempenhou, em relação aos preços mais altos do petróleo.

Alguns economistas que rastreiam as despesas com a guerra dizem temer que os políticos estejam cometendo erros similares aos de 2002, por não avaliarem plenamente os custos financeiros de curto e longo prazo que ainda se encontram à frente.

O que fazer agora?

“A pergunta importante no momento é: o que faremos daqui em diante? Porque nada podemos fazer com as despesas já ocorridas”, disse Scott Wallsten, economista e vice-presidente do iGrowthGlobal, instituto de pesquisa de Washington. “Ainda não ouvimos ninguém falar sobre isso.”

Os congressistas democratas, liderados pelo senador Charles E. Schumer de Nova York, chairman da Comissão Conjunta Econômica, tentaram chamar a atenção para as despesas crescentes e limitado progresso político no Iraque.

“O atual governo ainda não tem uma estratégia definida sobre a saída das tropas, nenhum caminho traçado para a reconciliação política, e nenhuma contabilidade sobre os custos para nosso orçamento ou economia”, disse Schumer.

A assessora de imprensa da Casa Branca, Dana M. Perino, reconheceu que os custos subiram mais do que o previsto, mas acrescentou que o governo estava empenhado em dar aos militares tudo que fosse necessário para o sucesso.

“Nenhum desses cálculos leva em consideração o custo do fracasso no Iraque”, disse Perino. “Caso a al-Qaida tivesse livre trânsito no Iraque, possivelmente seríamos atacados de novo em nosso país. E sabemos o custo que é isso.”

Os candidatos democratas, Barack Obama e Hillary Rodham Clinton, sempre dizem que o dinheiro para a guerra seria melhor empregado em casa. Clinton, na terça-feira, disse calcular a guerra em “muito acima de US$ 1 trilhão.”

“Isso é o suficiente”, continuou, “para fornecer cuidados com a saúde para todos os 47 milhões de norte-americanos não-segurados, além de maternal para todas as crianças do país, solucionar a crise do setor imobiliário residencial de uma vez por todas, tornar a universidade acessível para todos os estudantes, e fornecer benefícios fiscais a milhões de famílias da classe média.”

Entretanto o que os candidatos com freqüência não notam quando apontam essas coisas é que o custo total da guerra foi acrescentado à dívida nacional, e que o dinheiro gasto no Iraque não estará necessariamente disponível para outros programas. E, é claro, qualquer coisa que provoque retiradas imediatas acarretará novos bilhões de dólares para novas despesas.

Deixando de lado os debates, existe um consenso geral de que o Congresso irá destinar um pouco mais do que US$ 600 bilhões para as operações no Iraque até o encerramento do ano fiscal de 2008. E alguns analista dizem que isso será apenas metade do preços final.

“Segundo cenários razoáveis, assumindo que não saiamos depressa do Iraque, poderemos estar apenas na metade do caminho”, disse Steven M. Koziak, do Center for Strategic and Budgetary Asssessment, grupo de pesquisa não afiliado a nenhum patido. “Mesmo em despesas orçamentárias diretas é bem fácil calcular US$ 1 trilhao só para o Iraque.”

Além disso, os cinco anos de aniversário da guerra puseram em relevo os custos incorridos até o momento e as projeções futuras. Em um novo livro intitulado “The US$3 Trillion War” (A Geurra de US$ 3 trilhões), Stiglitz e a co-autora, Linda J. Bilmes, professora de Harvard, dizem que o impacto total na economia poderá ser de alarmantes US$ 4 trilhões ou mais. Até alguns economistas que se intitulam fãs de Stiglitz dizem que essa cifra é exagerada.

Lawrence B. Lindsey, que deixou o posto de principal consultor econômico do presidente Bush em parte por ter previsto que a guerra poderia custar US$ 100 bilhões a US$ 200 bilhões, também publicou um novo livro, que serve como lembrete do tipo “eu avisei.”

O ex-consultor insiste que seus prognósticos estavam em parte certos. “Minha estimativa hipotética s aproximou muito do custo anual”, escreveu. “Mas interpretei mal um fato importante: por quanto tempo ficaríamos envolvidos na guerra.”

Não foi o único a se enganar. Virtualmente todas as estimativas falharam, pois as operações no Iraque e Afeganistão se prolongaram mais e foram mais caras do que sugeriram as previsões inicias”, disse Peter R. Orszag, diretor do Departamento de Orçamento do Congresso, em entrevista.

(Gazeta Mercantil/Caderno A – Pág. 14)(The New York Times)