Congressman Turns Up Heat Against FASB On Derivatives

A key lawmaker urged the Financial Accounting Standards Board Wednesday to delay implementation of its controversial derivatives rule.

Rep. Richard Baker, chairman of the House Banking Committee's capital markets subcommittee, said he may introduce legislation that would require FASB to back off. He spoke to a reporter during a break in a hearing on the derivatives rule.

For now, however, the Louisiana Republican said he would ask the accounting board to push back the effective date voluntarily. Aides said after the hearing that Rep. Baker would settle for a one-year delay.

It appeared unlikely that FASB would budge.

"Nothing came up today that we haven't considered before," FASB Chairman Edmund L. Jenkins said Wednesday. "No solution will please everyone, but we have found a workable solution, and the time for action is now."

Securities and Exchange Commission Chairman Arthur Levitt, who oversees FASB, told lawmakers not to interfere, saying it would be "very inappropriate for Congress to suggest any additional delay."

Starting Jan. 1, 1999, the rule would require companies to report derivatives at fair market value on quarterly income statements. The rule has generated fierce opposition from banks and other companies that use derivatives. Bankers have insisted the rule would distort earnings.

At the hearing, Citicorp controller Roger W. Trupin argued that the rule is "hopelessly complex and often unintelligible, even to skilled technicians."

Mr. Jenkins countered that, without changes, "investors don't know how to measure the risk involved with making a capital investment." He also argued that the rule would not affect the competitiveness of firms that use derivatives, but lawmakers, regulators, and bankers disagreed.

Rep. Paul E. Kanjorski, D-Pa., said the plan would require companies to expose sensitive financial data to competitors. For example, Hershey Foods Corp.'s competitors could "easily know Hershey's future expectations if they know how Hershey is hedging the market.

"Today this data is as closely guarded as its recipe for candy bars," Rep. Kanjorski said. "Under the proposed standard, it would be available to the world." He added that banks could face the same problem.

Rep. Spencer Bachus, R-Ala., asked Mr. Jenkins how FASB can be sure it understands what derivatives users need. "Are you comfortable trumping (Hershey's) own objections about how this will affect its business?" Rep. Bachus asked.

The heat in Congress is expected to build, with Sen. Phil Gramm, R-Tex., scheduling a second hearing on the rule Oct. 9.

Comptroller of the Currency Eugene A. Ludwig, weighing in on the issue for the first time, said large banks that use derivatives extensively would find it difficult to meet the rule's effective date.

"The systems changes required to implement the FASB proposal are substantial," Mr. Ludwig told Rep. Baker in a Sept. 30 letter released at the hearing. u

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