When Congress passed the financial bailout bill in October, it ordered the Securities and Exchange Commission to study whether market value accounting's pro-cyclicality has exacerbated the economic crisis.

It's clear the SEC is approaching the study with something other than detached objectivity.

It would be refreshing, even confidence-building, for the commission to admit its policies have failed. But SEC Chairman Chris Cox signaled in a recent speech that the "study" will do no such thing. The speech was devoted to justifying existing policies, including the process for setting accounting standards under a mysterious five-member board of accountants called the Financial Accounting Standards Board, which moves at glacial speed when it moves at all.

The chairman's remarks were tone deaf, at best, in view of the SEC's considerable contribution to today's huge financial mess: "Accounting standards should not be viewed as a fiscal policy tool to stimulate or moderate economic growth, but rather as a means of producing objective measurements of the financial performance of public companies. Accounting standards aren't just another financial rudder to be pulled when the economic ship drifts in the wrong direction. … Effective standards require a dispassionate arbiter. … A standard-setter must be independent … from the political process."

These are nice words, but they are utterly divorced from history and economic reality. The FASB moved to market value accounting in the early 1990s because of enormous pressure from the SEC, which now claims the standard-setter must be "independent from the political process."

The SEC's leaders in the 1990s theorized that the savings and loan crisis would not have gotten out of hand had S&Ls been required to mark their assets to market values. The SEC crammed market value accounting down the board's throat, despite strenuous objections from the Treasury secretary, the chairman of the Federal Reserve, the chairman of the Federal Deposit Insurance Corp., and leading accounting firms.

Opponents of market value accounting felt that marking to market only a portion of the asset side of bank balance sheets would not capture the totality of the business and would produce misleading accounting. They also believed it would inhibit banks in performing their critical function of converting short-term deposits into long-term loans.

Critics also complained that market value accounting would be highly pro-cyclical, would produce extreme volatility in bank earnings and capital, and would lead to severe credit contractions — each of which has come to pass.

Finally, opponents noted that bank regulators abandoned market value accounting in 1938 because they found it was discouraging bank lending and preventing recovery from the Great Depression.

Chairman Cox went on: "Most investors … agree that fair value is a meaningful and transparent measure of an investment for financial reporting purposes. Financial reporting is intended to meet the needs of investors. While financial reporting may serve as a starting point for other users, such as prudential regulators, the information content provided to investors should not be compromised to meet other needs."

Speaking of protecting investors, recall that in 1999 the SEC inhibited banks from creating adequate loan-loss reserves, because it might lead to "earnings management." The agency allowed investment banks to massively increase their leverage in 2004, leading to the collapse or near-collapse of the industry's leading firms. It eliminated restrictions on short-sellers that had been in place since the Great Depression, and it failed to notice the largest Ponzi scheme in history.

I doubt the SEC's concerns about investors have led it to speak to the millions of people whose investments in conservative financial stocks have been wiped out by accounting rules that mark bank investments to severely and temporarily depressed prices (or indexes) without regard to other aspects of a bank's business that might be performing quite well.

I also doubt the SEC has spoken to the millions of people who are losing their jobs and homes because its accounting rules have senselessly destroyed trillions of dollars of bank lending capacity.

Congress needs to establish a much better system for setting accounting standards. If the FASB remains the standard-setter, it should be overseen by the Fed and the FDIC, the two agencies whose primary function is to maintain stability in our economy and financial system. Accounting rules are much too important to be left to an anonymous board of accountants and an SEC that does not understand prudential regulation.

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