Printer Friendly

A bad accounting rule.

I think Curt Verschoor's January article ("Does the Fraud Triangle Apply to the Credit Crisis?") misses a key cause. Citi used FAS 140 to move $1.2 trillion in CDOs backed by mortgage securities off their balance sheet. Ironically, the FAS 140 rule was the product of a new standard-setting process under SOX.

As the saying goes, everything changes and everything stays the same. An earlier version of this standard had a 3% rule that was exploited to create Enron's Special Purpose Entities. The current FAS 140 has the Section 9(c) loophole, or 10% rule, that was aggressively exploited by Citi and other key players in the subprime crisis to move mortgage-backed securities off balance sheets after selling just 10% to outsiders. Citi did this right under the nose of their regulator, the Federal Reserve, and thereby avoided banking reserve requirements on this debt.

I suggest this is not ethics, but bad accounting policy. FYI, this lousy policy was the result of heavy lobbying by the financial industry, which said that a higher (say 51% is common sense) rule would inhibit capital formation. Guess we know the truth now. This was not bad ethics but a bad accounting standard.

--Gordie Brenne, CMA
COPYRIGHT 2009 Institute of Management Accountants
No portion of this article can be reproduced without the express written permission from the copyright holder.
Copyright 2009 Gale, Cengage Learning. All rights reserved.

Article Details
Printer friendly Cite/link Email Feedback
Author:Brenne, Gordie
Publication:Strategic Finance
Article Type:Letter to the editor
Date:Apr 1, 2009
Previous Article:CDS bill moves forward.
Next Article:No more cheap shots.

Related Articles
IFRS in the U.S. raises questions: 'convergence' or 'conversion?'.
Highlights of Board of Directors' January meeting.
Q&A available on FASB/IASB Revenue recognition project.
CPAs can help employers, clients navigate worldwide economic crisis.

Terms of use | Privacy policy | Copyright © 2020 Farlex, Inc. | Feedback | For webmasters