A major reason the U.S. will have major difficulty implementing the IFRS "principles-based" accounting standards is that American business today seems to have no principles.
Of course, there are exceptions, but doesn’t it seem as if, right now, there are way too few Ethical Leaders in positions of power and responsibility at American corporations and way too many Bernie Madoffs?
Citigroup CFO Gary Crittendon was quoted in the Wall Street Journal as saying that his bank "was forced" to put "hard-hit collateralized debt obligations" back onto its books in 2007. What is he saying?
There were lousy mortgage loans out there in the marketplace: sub-prime, Alt-A, Interest Only, Principle-Only, Option Adjustable Rate Mortgages, just to name a few. His company’s leadership bundled thousands of these loans together and created credit derivative obligations (CDOs) -- securities backed by the loans. The leadership sliced and diced the CDOs to create the impression of higher risk-higher returns, for which they could charge higher fees. They created special purpose entities (SPEs or special investment vehicles, SIVs) that essentially were limited liability partnership which they moved off of Citigroups’ books, even though they were really Citigroup's investments. Citigroup reaped the benefits of investment in those SIVs by speculators who were convinced by Citibank financial managers that the company had perfectly modeled the risks such that the value of the secruties would grow infinitely and forever. Citigroup sold the CDOs into the naïve pension fund investment market, the even more naïve charitable investment marketplace, and the even more naïve international investment marketplace. Executives like CFO Crittendon took in major bonuses for many months.
Life for Citigroup was good as long as Alan Greenspan kept interest rates at 1% after Wall Street went into a catatonic state following September 11, 2001. Ultimately, interest rates adjusted: adjustable interest rates on mortgages, by definition, adjust up when the Fed ups the Fed rate. Duh! Home speculators (flippers) and owners could no longer support higher mortgage payments, so many defaulted on the loans.
The securities (CDOs) which had been backed by weak real estate mortgages were no longer delivering the streams of expected interest and principle payments. The foreclosed properties reverted to bank owned real estate (REO), and the CDOs secured by those properties now had to be re-valued. Now Citigroup et al. had these overvalued SPEs or SIVs off their books. The choice was walk away from them, as Lehman Brothers did, and let the bankruptcy courts battle it all out at fractions of pennies on the dollar OR bring them back on the books and try to figure out how to re-value them while staying in business.
That’s what’s called "being forced" to meet the obligations you created in the first place.
Citigroup, Wachovia, Merrill Lynch, Washington Mutual didn’t ever ask "What is the principle, here?" Maybe they asked, "How long can we play this game before the interest rates change?" or maybe they asked, "How long before we get caught?"
After awhile, don’t all of these operations begin to sound the same:
Doesn’t it all begin to look a lot like a Barnum & Bailey Circus Side Show, a Snake Oil Salesman’s Convention, or a PTL Revival Tent? Where are the "principles?" Where are the ethics in this church? Maybe that’s the problem: we’ve become so enamored of the financial side-show that we’ve lost sight of the message. We’ve gone back to caveat emptor -- the buyer better look out for him or herself because Shylock is out to scam them.
The principle, today, is fraud. What is in this deal for me, now, rather than what are the consequences, the externalities, of my actions over the long term? Who cared what was the larger impact of these speculative SIVs on the marketplace and on other people?
How do we undo this mess? It’s like asking: How do we get steroids out of professional sports? How do we get drugs out of the entertainment industry? How do we get fraud out of our financial markets?
The freshness which followed from the Yellowstone fires of some years ago offers us some insight into the opportunities that could be gained from today’s financial tragedies. In medicine, if one valve is blocked sometimes letting that path stay as it is, while opening up a fresh new route, can create new and healthier circulation. The same happens in the brain as dead neurotransmitter paths are replaced by alternative mental circuitry.
Proposals to seed 20 to 50 new banks nationwide offer us the opportunity to find principled-leaders and re-build a healthier financial economy. Other proposals suggest that firing the chief executive officers and presidents of our top 200 firms might be another sound idea.
The principle being embraced here is that we have to stop protecting the idiots and the status quo that got us to where we are today. It’s like trying to save the dinosaurs. It goes against the natural order of things. We really need to purge a lot of the sick members of our financial community.
Looking across our financial landscape, our banking entities have become behemoths that are too big to endure in a society that increasingly demands personalized attention and fine-tuned products and services.
In a principles-based economy, I would expect to see a lot more people in leadership who actually cared about the consequences of their actions on their firms, their industry and their society. Maybe that explains why "principles-based accounting" is having such a difficult time finding traction in these here United States of America.