Here’s another one of those stories that will make your blood pressure boil: Instead of moving forward with broad regulatory protections of economics system, we are undoing effective regulations that protect investors.

Floyd Norris has the details. Under the guise of helping small businesses, the accounting requirements of Sarbanes-Oxley are being watered down to near nothing.

So long economic collapse, hello accounting fraud:

“Sarbanes-Oxley was passed, almost unanimously, by a Republican-controlled House and a Democratic-controlled Senate. Now a Democratic Congress is gutting it with the apparent approval of the Obama administration.

The House Financial Services Committee this week approved an amendment to the Investor Protection Act of 2009 — a name George Orwell would appreciate — to allow most companies to never comply with the law, and mandating a study to see whether it would be a good idea to exempt additional ones as well.

Some veterans of past reform efforts were left sputtering with rage. “That the Democratic Party is the vehicle for overturning the most pro-investor legislation in the past 25 years is deeply disturbing,” said Arthur Levitt, a Democrat who was chairman of the Securities and Exchange Commission under President Bill Clinton. “Anyone who votes for this will bear the investors’ mark of Cain.”

Note that many of the problems that led to near systemic collapse involved special exemptions from existing legislation. The 5 banks that were exempted from leverage rules, the giant banks that pushed for exemptions from Glass Steagall. Even the CMFA was essentially a special exemption for an entire class of financial instruments — derivatives — that were to be treated differently than typical financial instruments.

The aggressive lobbyists are pushing for less transparency, less accurate reporting, less accounting oversights. Consider:

“This year, a subcommittee of the House Financial Services Committee held a hearing at which legislators sought no facts but instead threatened dire action if the chairman of the financial accounting board did not promptly make it easier for banks to ignore market values of the toxic securities they owned. The board caved in, which may be one reason why banks are reporting fewer losses these days.

But the board’s retreat was not enough to satisfy the banks. The American Bankers Association is now pushing Congress to give a new systemic risk regulator — either the Federal Reserve or some panel of regulators — the power to override accounting standards. The view of the bankers is that the financial crisis did not stem from the fact that the banks made lots of bad loans and invested in dubious securities; it was caused by accounting rules that required disclosure when the losses began to mount.”

This is a shameless attempt for a freer hand to avoid responsibility and correct marking of assets.

If we really wanted to just help small companies reduce their reporting burdens and maintain acceptable financial controls, how hard is it to exempt an appropriate number of firms with modest revenue.

Instead, this is yet another grab for control by the same groups that helped caused the previosu accounting crisis in the 1990s and 2000s.

The gall is simply unimaginable.

>

Source:
Goodbye to Reforms of 2002
FLOYD NORRIS
NYT: November 5, 2009

http://www.nytimes.com/2009/11/06/business/06norris.html

Category: Bailouts, Regulation

Please use the comments to demonstrate your own ignorance, unfamiliarity with empirical data and lack of respect for scientific knowledge. Be sure to create straw men and argue against things I have neither said nor implied. If you could repeat previously discredited memes or steer the conversation into irrelevant, off topic discussions, it would be appreciated. Lastly, kindly forgo all civility in your discourse . . . you are, after all, anonymous.

41 Responses to “Regulation Going Backwards”

  1. Mike in Nola says:

    The only thing that will save us from this crap is another crash that will spur popular outrage: the thing Uncle Ben is willing to kill our future to avoid.

  2. JohnDoe says:

    This type of stuff is truly sickening. We are supposed to be moving forwards after crises not backwards, absolutely amazing. Very good point about our current collapse being related to exemptions Barry. Also related to this craziness, I saw on the Kudlow Report a couple of days ago they were talking about legalizing insider trading. Some joker was actually saying this would make stock prices MORE efficient. What the…?

  3. rustum says:

    Some apology from Reed for removing glass steagall. Every one sees what should be done except administration. Looks like, it is clueless one.

    http://www.bloomberg.com/apps/news?pid=20601087&sid=a.z4KpD77s80&pos=5

  4. rustum says:

    Hi Barry,
    Can you give your insights into gold. Is it good idea to take some exposure for people sitting in cash.

  5. DSS10 says:

    Another step forward for integrity in business, was the chamber of commerce involved with this one? There is more than enough wiggle room with SOX to pump the books and avoid jail time.

  6. Mannwich says:

    @rustum: And some ass on Bloomberg Radio just said that Reed should have never made those statements (read: tell the truth) publicly.

    “Going backward” in a lot of ways in this country lately, it seems.

  7. tradeking13 says:

    The capital markets have become uninvestable for reasons such as this, IMHO.

  8. arthur.i says:

    If all this was pitched as fiction I would say that it is not believable…but to think that this is actually happening is just downright frightening.

  9. call me ahab says:

    good idea-

    get rid of all regulations- all that i ask is that they also make violence legal-

    that way i can beat the money out of the bankers w/ impunity

    ~~~

    BR: Frickin hysterical!

    I actually laughed out loud in the airport. They are taking me for the body cavity search now . . .

  10. Mannwich says:

    @tradeking13: You think? Investing is dead. Has been for a while now, but these times are the final nail in that coffin. It’s one giant c@sino now, actually worse. Those places are far better regulated.

  11. Chad says:

    I’m sorry, but we didn’t do any real reforming in 2002. That’s why this thing has pettered on for so long. If we would have done real reforms in 2002, then the economy would have stalled as reality would had to have been recognized.

    Since we didn’t really do meaningful reform, why should I be bothered that it is being scrapped. Our problem is that we haven’t done and aren’t planning on doing meaningful reform that corrects the system. My conclusion is that all that can be done until we get real reform is to buy the safest instrument you can find. To me that’s U.S Treasuries or the like.

    Granted I would rather own a home, but not in this fake market. Ditto stocks, etc.

  12. Jeff,

    these current ‘Markets’ give C@sinos a bad name.

    at least, Steve Wynn leaves us with some useful insights, at the minimum .. “What are you really doing? At the core? My answer is — and this is what I’ve learned — you’re basically getting people to trust you.

    Money doesn’t make people happy. People make people happy.

    I wouldn’t be sitting on this couch if my dad hadn’t died. There never would have been a Mirage. I never would’ve been to Las Vegas except as a visitor. Shows you how a contingent event changes the course of someone’s life — and many other lives.
    Read more: http://www.esquire.com/features/what-ive-learned/stevewynn0108#ixzz0W6EK1Tbh
    ~~
    as opposed to Clowns like Chuck Prince, as long as the music is playing you have to get up and dance..

  13. Lugnut says:

    This makes the validity of the published numbers of public companies all the more opaque and less valuable for investment purposes. The truth is what your CFO wants it to be.

    BR, the question needs be asked:

    When you talk to a client about the diversity of the placement of their investments across different markets and products, do you blush or look them in the eye when you tell someone that they need a higher percentage of stocks in their portfolio?

    The stock market is for suckers or inside traders, or the big IBs only. I can’t see anyone with any wits about them viewing the NYSE or NASDAQ right now as anything other than a speculative semi-rigged playground, akin to playing the Money Wheel at the floor entrance to any casino.

  14. NiNM says:

    It is pretty upsetting that Mr. Hope has turned out to be such a ghastly disappointment on all fronts. Still in pointless Iraq war, yup. Everyone still uninsured and insurance companies making out like bandits, yup. Progress for minorities, zip. And now, with Obama’s apparent blessing, the GS blood funnel sucking away my savings, my children’s savings, my grandkids savings, yup.

    There is still the option of “investing” in GS and the likes but you’ve got to be the kind of person who doesn’t mind investing in tobacco or defense companies. The better they do, the worse off for humanity in general.

  15. Mannwich says:

    @Hoffer: Can’t disagree with any of that.

  16. Mannwich says:

    @Hoffer: At least they give you “free” drinks at the c@sino, and a room and some food if you lose enough money. In the joke that has become of our markets, we get nothing but a swift kick in the nuts, several times over.

  17. rustum says:

    Mannwich , Reid at least come out and agreed the mistake. Instead of learning from fast mistakes, banks become more and more greedy. They are trying to kill the golden goose.

  18. Mannwich says:

    @rustum: “Trying”? The golden goose has been dead for a while now. They’re now merely picking the carcass clean.

  19. torrie-amos says:

    Just when u think they could not pull another rabbit out of the hat, there you go. Bernanke is hell bent on saving home prices, period end of story, without them state and local taxes all them bonds go bust. What becomes obvious is how serious Bernanke’s exit plan is, when homes are back up 10-15% nationwide, or the whole thing implodes. Weird market, if oil wasn’t down good, we’d be up a few hundred, makes you think that’s the plan next week, monday oil will probably start too ramp and the market melt up, re-test them highs.

  20. TDL says:

    “insurance companies making out like bandits…”

    I think some perspective is needed on a statement like this. The profit margins on health insurance & health related industries (excluding pharmas) are below 10%. If you look at health insurance companies they have margins less than 4%. The health insurance industry might be a hodgepodge of oligopolies & monopolies, but they aren’t “making out like bandits.” Reform is necessary, but there is no right or entitlement to someone else’s service.

    By the by, I don’t see how doing away with SOX is a bad thing. It clearly prevented numerous frauds that occurred in the mortgage industry, oh wait it didn’t. Guaranteed income streams for the accounting profession does not equal reform.

    Regards,
    TDL

  21. howard0339 says:

    Responsibilities? We don’t need no stinking responsibilities. Just spend it, baby.

  22. TDL says:

    A quick link to Yahoo Finance’s Industry Browser for more financial info related to my post above.

    http://biz.yahoo.com/p/sum_qpmd.html

    Regards,
    TDL

  23. Jeff,

    I hear ya, esp. w/this: “..drinks at the c@sino, and a room and some food if you lose enough money..”

    here We have ~20 Million unoccupied Houses, peep living on the Streets, and going Hungry, while this http://www.bearmarketinvestments.com/congressman-watt-guts-bill-to-audit-the-fed
    http://clusty.com/search?input-form=clusty-simple&v%3Asources=webplus&query=H.R.+1207
    goes un-/under-reported..

    If we want to close the C@sino that these ‘Markets’ have become, We have to Close their Bank.

    differently, through the FedRes, we’ve ‘lost’ enough ‘money, but We’ve received little, to nothing, in return..

    “Lenin is said to have declared that the best way to destroy the Capitalistic System was to debauch the currency… Lenin was certainly right. There is no subtler, no surer means of overturning the existing basis of society than to debauch the currency. The process engages all the hidden forces of economic law on the side of destruction, and does it in a manner which not one man in a million can diagnose.”
    http://quotes.liberty-tree.ca/quote_blog/John.Maynard.Keynes.Quote.2BCF

  24. jeff in indy says:

    i guess with “no” regulation then transparency isn’t much of an issue, is it, for this, the most transparent Administration of all time…

  25. impermanence says:

    What’s really amazing is the level of delusion that most people that post here continue to display. Are you people so attached to the notion that, “The Golden Rule,” applies to business/politics? Go to the library and read about how business used to be if you think it is corrupt now. It is only the tiny post- WWII window (1950-70) where the US dominated the world economy, that it was any different. Remember outright slavery?

    Look at the American professional class and how they have sold out the population. This is what humans do, and have done throughout history. You ever read any of the attorneys, doctors, accountants, politicians, etc. [that post here] tell about all the things they do in shaking-down the public?

    Americans are pathetically weak, willing to sell out their souls for a German car, or any of the other hallow trappings of upper middle class life. In my own profession, there are those willing to open you up stem to stern for a couple of bucks.

    If you people want to improve life in this country, you’re going to have to wake up and be willing to do what needs to be done, like the people who founded this county over 250 years ago. In any case, please stop your incessant whining.

  26. David Merkel says:

    This is misunderstood. This exempts small companies from SOX — the costs exceed the benefits.

    And, I would favor exempting foreign companies from SOX — we have lost a lot of good companies previously listed on US exchanges.

    Do we have any evidence that SOX has done anything to help prevent fraud aside from sending more money to accountants? We pass these laws after major scandals, thinking that it will prevent future scandals, but not asking if it is the best way to fight all imaginable problems, not just the most recent scandal.

  27. FrancoisT says:

    Barry,

    With all these backassward shenanigans taking place now in the US, how long will it take for a country like, say Brazil or India to realize the obvious: Say THEY reform their financial markets so the transparency and TRUE investor-friendly policies are put in place.

    How long would it take for big money to move there? I mean, there ought to be a tipping point where the US will pay the price of this systematic abuse on investors.

    Or is this yet another example of American Exceptionalism at work?

  28. cewing says:

    It’s appalling and sickening. But it’s not the least bit surprising.

    Financial interests, led by Goldman Sachs, are so firmly entrenched in national government that they don’t even try to hide their naked greed.

    I say this in all seriousness – other than for gambling purposes, any American who does not work for one of these finanical firms should take their money out of the stock market. The information presented by publically traded companies CANNOT be trusted.

  29. TaurenHunter says:

    Here is what SOX has NOT done:

    - it has NOT prevented another bubble
    - it has NOT prevented another major scandal
    - it has NOT prevented frauds
    - it has NOT protected investors (and yet SOX’s official name is “Company Accounting Reform and INVESTOR PROTECTION Act”)

    ~~~
    BR: Your rhetorical argument is sly, but foolish. You seem to have a fundamental misunderstanding of what the legislation was aimed at — preventing corporate accounting & reporting fraud. It seems to have been effective at doing that.

    What SOX has done?

    - created a reserve market for accountant firms (SOX = “FULL CPA EMPLOYMENT ACT”), greatly increasing revenues and fees of those firms
    - created useless bureaucracy, forcing American companies to function with increasingly similarity to a government agency
    - caused good foreign companies to delist from US exchanges due to the costs of red tape
    - caused smaller international companies to list in stock exchanges in the UK rather than US
    - caused American companies to deregister from US exchanges
    - added costs of more than $ 5.1 mi to Fortune 500 companies in compliance expenses

    If SOX is ever repealed, I would say GOOD RIDDANCE!

    ~~~
    BR: How about some data showing the mass increase in accoutnants?
    How many foreign companies have had to delist from US exchanges?
    How significant is the disaprity between US and UK listings?
    How many American companies deregistered from US exchanges?

    Data free comments such as yours are rhetorical garbage. I smell idealogue here…

    A massive fraud perpetrated on investors by corporate america was the cause of this new bureaucracy. CRIMINAL CEOs/CFOs are who created it. That you defend these cretins does not speak very highly of you.

  30. [...] Sarbanes-Oxley is about to get “gutted.”  (Floyd Norris also Big Picture) [...]

  31. I agree that regulation is going backwards. I wrote yesterday that Fannie’s decision to take a deed-in-lieu of foreclosure and lease the property back pushed Fannie into the business of operating real estate. This is totally on the opposite end of the spectrum of their original purpose to pool mortgage loans.

    The best part is that I predict that regulations will be loosened up so that regular banks are permitted to hold and operate real estate too.

  32. kfunck1 says:

    As an accountant, I can tell you that pretty much every CPA I know thinks SOX is a complete waste of time and a terrible law. Sure, the auditors will take the money because they have to do it (and they aren’t complaining about that, don’t get me wrong), but SOX is next to useless in preventing fraud. It’s especially useless when a company like GE violates it, and all that happens is a measely 500M company fine, disclosed 2 years ex-post. This, of course, is what happens when you have politicians making accounting regulations.

  33. DSS10 says:

    kfunck1, SOX is very weak and the procedures are burdensome but it is designed to incent a company to have some sort of internal controls. Unfortunately criminal and civil law dose not appropriately address the issue of fraud and negligence for corporate malfeasance.

  34. davver1 says:

    I spend about 10-12 weeks a year dealing with SOX. All of the work I do as an actuary has to be SOX documented now.

    SOX is probably one of the bigger wastes of time I’ve ever seen. I’ve never seen a SOX regulation that I thought would prevent fraud. SOX merely requires us to document that we are doing what we say, it doesn’t do jack shit to validate if any of our methods are sound. For me I have to use my judgment to pick an appropriate pricing or reserving model as an actuary. SOX documentation merely makes me tie out every number I use to a few different sources. If the model I’ve chosen is completely inappropriate it does jack shit to prevent that.

    I don’t know if AIG FP was SOX compliant, but I’m pretty damn sure they could have been anyway and still done what they did. The only thing SOX really seems to prevent, at least from my POV, is mid level managers embezzling. It does absolutely nothing to stop top level executives from committing “legal fraud” by simply picking a favorable model or accounting method, following it to a T, and then feigning ignorance when it blows up.

    We are a giant company and have dozens of people employed to do SOX documentation along with an army of support personal. I can’t imagine the burden on a small business.

    Sarbanes is the representative in my district and I vote against him every chance I get. Waste weeks of your live on this worthless stuff and you would too.

  35. crosey says:

    Here’s a REALLY naive thought:

    We would not need 80% of the regulations if people just did the moral and ethical thing. The other 20% of the regulations would be needed to help us keep from making serious, but honest, mistakes.

    Nope, not smoking anything. Just dreaming.

  36. CitizenWhy says:

    Your article has an inaccuracy. You use the term Obama administration. The proper term is Obama/Goldman Sachs administration.

  37. thales says:

    The big problem with government regulation is that it is enacted by politicians and administered by bureaucrats. Both of these coteries seek to maximize their authority, income, job security and bailout plan while simultaneously minimizing their responsibility and accountability. Oh yeah, they are susceptible to bribes, too. It should be quite clear to nearly everyone that they are accustomed to and very skilled at lying very cleverly.

    So is anybody really surprised that the combination of bankers, financiers, lobbyists, politicians and bureaucrats has become a cabal that is accomplished at sacrificing the wealth, prosperity, and security of the American public and the health of the American economy in favor of their own self interest? (I couldn’t be talking about your favorite politician here, could I? I mean, even Obama?)

    I might revisit the aphorism to the effect that; “Politics is the art of robbing Peter to pay Paul, and then convincing everybody that they’re Paul.”

    The government and all of its regulatory agencies are simply and inevitably incapable of outthinking individual self interest, economic and social complexity, and the law of supply and demand, as has been thoroughly demonstrated in every single centrally planned economy that has ever existed. This is true even if you presuppose regulators who are unrealistically intelligent, responsible, and moral. This simple fact does not stop the politicians from proclaiming that THEY can save you from those evil, clever, manipulative miscreants in the financial industry.

    If you have some intellectual difficulty with those propositions, then I have sympathy with you and I hope you get better soon.

    So if you are looking to government to save you from adept economic manipulators ( OK, let’s call them thieves), then you are looking to the wolves to save you from the sheep.

  38. BG says:

    This Country has returned again to human exploitation (slavery). We are captured tax-payers (many of us who still have jobs) who pay a portion of our earnings to an entity who has never cared less about our welfare or the welfare of this Country. Everyone knows what is now occurring is not sustainable; but, as usual no one with the power to change it gives a damn. So, here we are hurling through space badly off-course completely ignoring the consequences. This will end very badly for the United States and it will come at the hands of our own leaders not some foreign power. What a sad testament. These are the questions I am trying to get answered now before the ultimate storm hits:

    1)What can we do? (A 3rd Party for the rest of us.)

    2)If unsuccessful, where can we go? (What Countries offer what we use to have here?)

    3)When does the day of reckoning come? (2012 does sound about right. A little over 2 years.)

    I am very disappointed with what has already happened and the cavalier attitude of the very ones who got us into this mess in the first place. It is surreal. The next thing you know murder will no longer be a crime; of course, that would actually be a very good thing now that I think about it.

    Lastly, I am amazed at how Obama has done a complete 180. Who would have ever thought the Dems would have picked up and endorsed the idealoge of the Republicans? They are all in fact the same – greedy, crooked politicians. That’s all you really need to know.

  39. photosports says:

    Is it any wonder that the administration is doing away with what little regulation there is. Larry Summers was one of the main characters that fought against the regulation of derivatives by the CFTC. And we still have anti-regulation Greenspan/Rand disciples all over the place in Treasury and the Fed. They even named a Greenspan disciple, economist of all things, to head up the regulation of banks. What the hell does an economist know about regulating banks.

  40. [...] dei mercati, un’esigenza tanto sottolineata da tutti, sembra in realtà lontana. Anzi, The Big Picture sottolinea come in realtà in USA sia in corso una “deregolamentazione occulta”, che [...]

  41. “Who would have ever thought the Dems would have picked up and endorsed the idealoge of the Republicans?”
    http://clusty.com/search?input-form=clusty-simple&v%3Asources=webplus&query=The+Obama+Deception
    and, “Fall Of The Republic (2009) – AKA: The Presidency of Barack H. Obama Alex Jones has revealed how the existing Obama regime intoxicating people with their misleading propaganda and consequently brainwashing them to accept oppression. He has revealed many of such tactics in his much-awaited documentary “Fall of the republic: the presidency of Barack Obama”
    http://www.freemoviestheatre.com/free_movie/6577-Fall_Of_The_Republic_2009.html
    http://astore.amazon.com/bookstore-elections-20/detail/0930852885

    BG,

    if your Q: wasn’t a rhetorical one, there are, above, some answers..