[classicman]

Greenspan Slept as Off-Books Debt Escaped Scrutiny

`Magic Trick'

``I've always regarded it as a bit of a magic trick,'' Pauline Wallace, a partner at PriceWaterhouseCoopers LLP and team leader in London for financial instruments, said of off-balance- sheet accounting. ``Magicians come to parties, and they make things seem to disappear. The risk is somewhere, but you never knew where.''

Pushed by taxpayers angry about financing a bailout of Wall Street while their retirement accounts wither, Congress is likely to shake up bank and securities regulation, giving the Federal Reserve more power.

``I wouldn't be surprised if the Fed ends up officially becoming our systemic-risk regulator,'' said Robert Litan, an economist at the Brookings Institution in Washington.

That's ironic to Donald Young, an investor advocate and FASB board member from 2005 until June 30. He testified at the same Senate hearing on Sept. 18 that both the Fed and the SEC joined the banks they oversaw in resisting proposals for more disclosure of off-the-books assets.

``There was an unending lobbying of FASB'' by companies and regulators, Young told the committee.

`Lack of Transparency'

The former FASB board member made a similar point in a June 26 letter to Senator Reed. ``We lacked the ability to overcome the lobbying efforts that effectively argued that if we made substantive changes we would hamper the credit markets and hurt business,'' Young wrote. ``Our inaction did not hamper credit markets -- it helped to destroy them.''

The issue, Young said in an interview, was the ``lack of transparency'' that comes with off-the-books accounting.

``There is a perceived free lunch that they can take on risk and not reflect it, and make things look better than they are,'' he said. ``That encourages them to do it more and more.''

A spokesman for FASB, Neal McGarity, said in an e-mail that Young voted with the majority of the board in a January 2005 decision to expand the use of an off-balance-sheet vehicle.

UBS Writedowns

Regulators outside the U.S. didn't do a good job policing investments in subprime-mortgage assets either. Zurich-based UBS AG, hurt the most in Europe with writedowns and losses totaling $44 billion, told the Swiss Federal Banking Commission early last year that it was ``fully hedged, yes, even overhedged,'' director Daniel Zuberbuehler said at a press conference in April.

``This answer subsequently proved to be wrong, because UBS did not correctly capture its actual risk exposure and seriously overestimated its hedges,'' Zuberbuehler said. The Swiss commission now says it will force the bank to hold more capital in reserve and is negotiating with UBS over new capital requirements.

An International Monetary Fund report in April described how the housing turmoil in the U.S. ``spread quickly to Europe, prompting bank rescues and capital injections.'' It said that as of March, European banks still had $173 billion in subprime mortgage-backed securities and collateralized debt obligations, about the same amount as U.S. banks.

The accounting standards board, housed in a corporate office park in Norwalk, Connecticut, an hour northeast of New York City, operates in an unusual position between the public and private sectors. It was set up in 1973 as an independent rulemaking group, though the SEC gets a say in who is named to the board and can override its rules.

That same year Greenspan, Treasury Secretary Robert Rubin and SEC Chairman Arthur Levitt opposed an attempt by Brooksley Born, head of the Commodity Futures Trading Commission, to study regulating over-the-counter derivatives.
In 2000, Congress passed a law keeping them unregulated.

Levitt said he went along with concerns by Greenspan and Rubin that Born's action might throw derivatives contracts into ``legal uncertainty.'' He said he now regrets that he didn't press a presidential advisory group ``to take a closer look'' at the issue. Rubin said in an interview that ``you could have had chaos'' if Born's plan found existing derivatives contracts invalid because they weren't traded on an exchange. Both Born and Greenspan declined to comment.

A sober and informative read.