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 (OP ED piece Submitted to the Wall Street Journal, April 4, 2009)

If we ever get out of this huge economic crisis we are in, then when the next bubble explosion happens some years hence today’s incredulous questions will be echoed again then: How did we ever get into this mess?

And part of the answer then will be: because on April 2, 2009 the Congress of the United States essentially forced the Financial Accounting Standards Board (called the “FASB” and which had been independent up until now) to loosen greatly its accounting rules in such a way as to permit banks -- in difficult economic times -- to represent to regulators and investors that the value of the securities the banks own is NOT what their current market value is but rather what the banks think the securities will be worth in more “normal” and better times. That is like the banks allowing you and me -- in calculating our personal net worth when applying for a loan -- to value our stock portfolios not at the current depressed levels at which we can sell them in the today’s market, but at what we think they will be worth in future “more normal” times.

The independent FASB most certainly did not want to make these changes. So why would Congress rake the FASB over the coals by holding public hearings to bring enormous political pressure to bear on the FASB to do such a foolish thing? It’s probably unnecessary to ask this question since everyone already knows why Congress is held in such very low regard by the vast majority of citizens. And anyway the answer is obvious. The banks across the country are currently infuriated about having to value their securities at market value in this crisis. And the banks across the country are very important to all representatives and senators of both parties (now why would THAT be?). So when the banks across the country and the American Bankers Association said to Congress “Do this!”, well, voila ! This should sound very familiar since it is what happened repeatedly in the inflation of the present bubble which exploded last year. I say this as a former Wall Street banker for thirty years.

Thus going forward this could be the substance behind bank accounting for the value of the securities they own:

As for the FASB, they should have stood their ground. As one of the five members said: the accounting rules already allowed the “fiction that all banks are well capitalized” and making these changes would simply “make them seem better capitalized.” Nevertheless, all five members of the FASB sadly caved in and gave up rather than telling the ABA and the Congress that independent accounting rules are just that -- independent accounting rules -- and are not to be conveniently changed whenever they have impact and should never ever be politicized. Would that the FASB had resigned en masse, in protest at such a gutting of investor interests. Incidentally, whatever happened to the idea of resigning over a matter of real principle and importance? Does it ever happen any more? Has the worship of money and power and prestige become so almighty?)

Two of the best and most respected chairmen of the SEC in recent decades were William H. Donaldson who served under George W. Bush and Arthur Levitt, Jr. who served under Bill Clinton. One was a Republican and the other was a Democrat. Both were and are men of independence and principle. Most recently, Bill Donaldson left the SEC in June 2005 because SEC oversight was being diluted so much by the Bush administration that he could not tolerate it any more and so he left. You all remember his successor -- Christopher Cox — who was apparently instructed to do nothing and let the Wall Street financial institutions do whatever they wanted to do. Those chickens of course came home to roost on him — and on us — three years later in the summer of 2008.

Together Bill Donaldson and Arthur Levitt have just issued the following statement about the unwarranted interference of Congress and the ABA into FASB rule making and the gross politicization of the process that has just occurred:

“In order to create high-quality ac counting standards, it is critical that the process be independent and free from political pressure. This will ensure that these new FASB proposals reduce the free flow of transparent and reliable information, they undermine investor interests and weaken their ability to make sound investment decisions.”

So do not ask for whom the bell tolls in alarm of the next financial bubble, because it tolls for thee. It will be like having a serious growing cancer within your bank’s body, and only the management of the bank and the bank’s own CAT scan operators will know. Until, of course, it is too late for you or for anyone else.

But that is the coming chapter.....the next time.

Plus ça change, plus c'est la même chose.

Kenneth E. MacWilliams President, Woodrow Wilson Associates Portland, Maine

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