How the Fed Told FASB to Allow Bank Balance Sheets to Go Enron

Not to point fingers or anything but...

I am not making up that headline, nor am I exaggerating.

(h/t Caleb for sending me the CFOzone article The Fed knew banks were like Enron in 2004)

The article above references a 2004 article called "Playing Favorites" and let's just say the Fed may have some 'splainin to do. Add this one to the long list of sins the Fed will have to fall to its knees to atone for at some point should it come time for redemption.

When the Financial Accounting Standards Board released its exposure draft of new accounting rules for special-purpose entities (SPEs), in late 2002, the nation's financial regulators sent FASB chairman Robert H. Herz decidedly mixed signals.

On the one hand, the Securities and Exchange Commission wanted Herz to make the rules effective as soon as possible. SPEs were the prime vehicle for the fraud that brought Enron down, and were widely used by other companies to take liabilities off their balance sheets, obscure their financial condition, and obtain lower-cost financing than they deserved. Not surprisingly, the SEC was anxious to head off other financial fiascos resulting from such abuse.

At the same time, however, the Federal Reserve Board pressed Herz to slow down. That's because the new rules threatened to complicate the lives of the Fed's most important charges: large, multibusiness bank holding companies that happen to earn sizable fees by arranging deals involving SPEs. Stuck between this regulatory rock and hard place, Herz told the Fed and the SEC to get together and work out a timetable that satisfied both constituencies.

And they did. But the rules, known as FIN 46 (FASB Interpretation No. 46), have only recently taken effect in some cases, and have yet to do so in others. While the delay in the rules' effective date may reflect the complexity of the transactions covered by FIN 46 as much as the controversy generated by the rules themselves, the conflict between the Fed and the SEC over the matter stems from a deeper problem: the Fed and the SEC have very different regulatory missions that can sometimes come into serious conflict.

Well no shit, Sherlock, we know Alan Greenspan was the primary wizard of deregulation during his tenure at the Fed and stood by cackling as Glass-Steagall went bye-bye and derivatives ran wild. He claims now that he simply did not understand the consequences but I refuse to believe AG was so terribly daft that he couldn't understand complex securitization would later wreak havoc on a deregulated environment. Nice try, asshat, we all saw what you did there.

It seems so obvious in hindsight but should have been fairly clear the time, especially to those who were doing all of the unraveling.

So, AG, what do you have to say for yourself?


That's what I thought.

If I recall, Jeff Skilling was initially sentenced to 24 years. Even if he manages to negotiate his way down to 15, what do you think the appropriate punishment should be for an engineer like Greenspan? I'll take life for $500, Alex.

Jr Deputy Accountant

Some say he’s half man half fish, others say he’s more of a seventy/thirty split. Either way he’s a fishy bastard.


W.C. Varones said...

There's not much life left in that wrinkled old bubble-blower.

Any sentence that doesn't include prison rape would be a gross miscarriage of justice.