Regulation Going Backwards

Here’s another one of those stories that will make your blood pressure boil: Instead of moving forward with broad regulatory protections of economics system, we are undoing effective regulations that protect investors.

Floyd Norris has the details. Under the guise of helping small businesses, the accounting requirements of Sarbanes-Oxley are being watered down to near nothing.

So long economic collapse, hello accounting fraud:

“Sarbanes-Oxley was passed, almost unanimously, by a Republican-controlled House and a Democratic-controlled Senate. Now a Democratic Congress is gutting it with the apparent approval of the Obama administration.

The House Financial Services Committee this week approved an amendment to the Investor Protection Act of 2009 — a name George Orwell would appreciate — to allow most companies to never comply with the law, and mandating a study to see whether it would be a good idea to exempt additional ones as well.

Some veterans of past reform efforts were left sputtering with rage. “That the Democratic Party is the vehicle for overturning the most pro-investor legislation in the past 25 years is deeply disturbing,” said Arthur Levitt, a Democrat who was chairman of the Securities and Exchange Commission under President Bill Clinton. “Anyone who votes for this will bear the investors’ mark of Cain.”

Note that many of the problems that led to near systemic collapse involved special exemptions from existing legislation. The 5 banks that were exempted from leverage rules, the giant banks that pushed for exemptions from Glass Steagall. Even the CMFA was essentially a special exemption for an entire class of financial instruments — derivatives — that were to be treated differently than typical financial instruments.

The aggressive lobbyists are pushing for less transparency, less accurate reporting, less accounting oversights. Consider:

“This year, a subcommittee of the House Financial Services Committee held a hearing at which legislators sought no facts but instead threatened dire action if the chairman of the financial accounting board did not promptly make it easier for banks to ignore market values of the toxic securities they owned. The board caved in, which may be one reason why banks are reporting fewer losses these days.

But the board’s retreat was not enough to satisfy the banks. The American Bankers Association is now pushing Congress to give a new systemic risk regulator — either the Federal Reserve or some panel of regulators — the power to override accounting standards. The view of the bankers is that the financial crisis did not stem from the fact that the banks made lots of bad loans and invested in dubious securities; it was caused by accounting rules that required disclosure when the losses began to mount.”

This is a shameless attempt for a freer hand to avoid responsibility and correct marking of assets.

If we really wanted to just help small companies reduce their reporting burdens and maintain acceptable financial controls, how hard is it to exempt an appropriate number of firms with modest revenue.

Instead, this is yet another grab for control by the same groups that helped caused the previosu accounting crisis in the 1990s and 2000s.

The gall is simply unimaginable.


Goodbye to Reforms of 2002
NYT: November 5, 2009

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