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Greenspan Slept as Off-Balance-Sheet Toxic Debt Evaded Scrutiny

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Alan Katz and Ian Katz
Bloomberg
Thursday, Oct 30, 2008

As George Miller welcomed 60 bankers to the chandeliered Charlotte City Club one evening in September, the focus was on more than the recent bankruptcy of Lehman Brothers Holdings Inc. From their 31st-floor perch, members of the American Securitization Forum, which Miller leads, fretted about the future of their $10.7 trillion industry.

The bankers were warned that a Financial Accounting Standards Board plan would force trillions of dollars back onto balance sheets, requiring cash reserves to soar. Their business of pooling and reselling assets had dropped 47 percent in the first six months of the year, and the industry couldn’t afford another setback.

The next day, Miller, 39, the forum’s executive director, took that message from North Carolina to a Senate hearing in Washington examining the buildup of off-balance-sheet assets. “There are great risks to the financial markets and to the economy of moving forward quickly with bad rules,” he said of FASB’s proposal.

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Greenspan Slept as Off Balance Sheet Toxic Debt Evaded Scrutiny  161008pptv2

Miller was trying to preserve an accounting rule for off- the-books assets that helped U.S. banks export toxic debt around the world. It is a loophole that Jack Reed, the Rhode Island Democrat who chairs the Senate securities subcommittee, said had contributed “to the severity of the current crisis.”

The damage to date: more than $680 billion dollars in losses and writedowns, about one-third of that by European banks.

  • A d v e r t i s e m e n t

Unregulated Derivatives

Efforts by lobbyists have delayed FASB decisions and kept key parts of the American financial system beyond the reach of regulators. Their victories included ensuring that over-the- counter derivatives stayed unregulated and persuading the Securities and Exchange Commission to let investment banks reduce capital requirements. That allowed them to increase borrowing and magnify profits. Bank watchdogs also didn’t move to tighten mortgage-industry standards until after the collapse of the subprime market.

Today, a road snakes from the foreclosed homes of California and Ohio to the capital cities of Europe, where politicians and bankers have struggled to contain a widening credit crisis by pumping hundreds of billions of euros into the financial system. The road was paved with decisions like ones by FASB that allowed banks to keep shifting assets into blind spots outside the view of shareholders and industry overseers.

This article was posted: Thursday, October 30, 2008 at 11:41 am





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