First, Kill All the Accountants

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“The first thing we do is kill all the lawyers”, Shakespeare, Henry VI. 

“The first thing we do is kill all the lawyers”, Shakespeare, Henry VI. 

16 September, 2009. Here at, we take special pride in promoting a global perspective, focusing as much on what’s happening in the crucial BRIC nations – Brazil / Russia / India / and, of course, China – as on conventional topics like America, the Persian Gulf and other oil countries as well as, in a slightly different way, the Euro-zone. But this week does mark the one-year anniversary of the series of events that made clear to the whole world that something was truly rotten on Wall Street. So if we seem a bit Yanqui-centric for the next few weeks, it’s only because, well, it’s appropriate, especially given that the world economy is – in a mantra with which our readers will soon become familiar – quite literally, US-centered.[br]


That is, put bluntly, countries either sell to the US – or they sell to countries that sell to the US.

Which is precisely why the eruption of serious problems in all aspects of American economy and society have had, and will have, such a resounding echo elsewhere – and why political / business / media leaders the world over are constantly trying to glean exactly what the hell is going on in the US these days.

Unfortunately, they’re wasting their time if they rely on pronouncements from high-level US corporate and government officials – the latest being the absurd announcement by Federal Reserve chief Ben Bernanke that the US recession is “very likely over.”

To be sure, the New York Times did its part by featuring the “news” on its home page for the requisite number of hours, but then it quickly dropped completely off the page, indicating the folks there knew what a joke it was, albeit a deeply unfunny one –

especially since Bernanke himself admitted unemployment was likely to continue rising for several more months, which is really scary, considering how totally boiled / sautéed / refried, ie cooked, official jobless figures are, understating overall rates by a good 50%, and selected areas like minority youth by closer to 75%. But if people dig a little deeper, they can come up with some genuinely illuminating material that helps make sense of the disaster Wall Street caused – and in a future posting, we’ll point to an especially fruitful Op-Ed / “Room for Debate” piece, series that usually feature bloviating morons addressing useless questions, but occasionally produce a gold mine of insight and reflection.

In the interim, a piece last week by Floyd Norris – former Times Economics Correspondent, successor to the legendary Leonard Silk, and followed by the “definitely getting there” David Leonhardt – raises some questions that not just Americans, but thought leaders [ is that an oxy-moron? ] everywhere might consider about how the current mess got out of control.


The accountants let us down.

That is one of the clear lessons of the financial crisis that drove the world into a deep recession. We now know the major banks were hiding dubious assets off their balance sheets and stretching rules if not breaking them. We know that their capital was woefully inadequate for the risks they were taking.

Efforts are now being made to improve the rules, with some success. But banks have persuaded politicians on both sides of the Atlantic that the real problem came not when their financial inadequacies were obscured by bad accounting, but when they were revealed as the losses mounted.

So the problem is not what the banks were doing – it’s letting everyone KNOW what they were doing.


“There were important aspects of our entire financial system that were operating like a Wild West show, huge unregulated opaque markets,” said the man whose job was to write the accounting rules, Robert H. Herz, chair of the Financial Accounting Standards Board.

“The crisis highlighted how important better transparency around that system is,” Mr. Herz added in an interview this week. “I would hope that would be a major lesson learned or relearned.”

Unfortunately, some seem to have learned exactly the opposite lesson.

Accounting rule makers at FASB and its international equivalent, the International Accounting Standards Board, have been lambasted for efforts to improve transparency by forcing banks to disclose what their dodgy assets are actually worth, as opposed to what the banks think they should be worth.

Both boards have tried to resist, but have been forced by political pressure to back down on some specifics.

What a surprise – and people wonder why we insist on talking about “political economy”???


In the case of FASB, the retreat took a few weeks after Mr. Herz was ordered to act at an extraordinary Congressional hearing.

The international board was given a long weekend to retreat, with the European Commission threatening to impose its own rules if the board did not cave in.

Both boards tried to reduce the damage by forcing more disclosures, but it is unclear how much good that will do.

Neither was willing to defy the politicians.

Another shock. And check this out:


The banks have argued that market values can be misleading, and that their own estimates of the eventual cash flow from assets are more realistic than what they – or others – will now pay for those assets.

I seem to remember hearing something about a “free market”? Oh, never mind.


The rules already allowed them to ignore so called “distress sales” in assessing fair value, but the banks pushed to broaden that exemption in the United States, while in Europe they got the regulators to allow them to retroactively stop calculating market value for assets they said they did not intend to sell.

It would be hilarious if the consequences weren’t so disastrous for everyone – EXCEPT, of course, the banks.


Some of the biggest and worst surprises of the financial crisis came when banks suffered large losses from assets that they had not even reported they owned. “With the benefit of hindsight, we know that standards were not complied with,” said Mr. Herz, regarding the rules on which assets could be left off balance sheets.

Those rules hinged largely on something called “qualified special-purpose entities,” or Q’s for short.

Gee, sounds just like the way the Obama administration intends to “regulate” derivatives: creating an exchange for “standard” contracts, but letting anything custom – and they’re ALL custom-made – continue under the cover of darkness.


If a bank set up a Q so that it would operate automatically, with others owning the securities it issued, the bank could get the assets off its own balance sheet.

As the Securities and Exchange Commission pointed out in a report to Congress, banks were able to greatly expand the scope of Q’s, “beyond the simple pass-through entities envisioned by the FASB” …

FASB now is moving to get rid of Q’s, a category that the international board never accepted to begin with …

But that move comes years too late. The S.E.C. report quoted above was issued in 2005, but nothing happened as a result.

“If they had gone after that at the S.E.C., it might have taken a couple of quarts of gasoline away from the fire,” said Jack T. Ciesielski, whose newsletter, The Analyst’s Accounting Observer, repeatedly warned of off-balance-sheet problems.

Maybe. Apparently during both Clinton and Cheney / Bush years the SEC was too busy attending lavish dinners held by those they were supposedly regulating to pay much attention to what their banking / hedge fund and other finance sector hosts were actually doing.

“Isn’t this goat cheese delicious?”

“Absolutely … goes beautifully with this New Zealand red.”

“Oooh, save some space for the pheasant. Looks mouth-watering, doesn’t it?”

David Caploe PhD
Chief Political Economist,
President, Minerva School / ACALAHA



About David Caploe PRO INVESTOR

Honors AB in Social Theory from Harvard and a PhD in International Political Economy from Princeton.