Opening Statement
CHAIRMAN RICHARD H. BAKER
Subcommittee on
Capital Markets, Securities, and Government Sponsored Enterprises
Hearing on Financial Accounting Standards Board’s (FASB)
Proposed Standard on Derivatives Accounting

Good morning. I convene the Subcommittee on Capital Markets, Securities, and Government Sponsored Enterprises to review FASB’s proposed accounting standards for derivatives. I want to thank Ranking Member Kanjorski and other members of the Subcommittee for their participation in this hearing, and I want to thank the witnesses for their willingness to discuss this important issue.

I think it important to speak about what this hearing is NOT. It is not about the U.S. Congress proscribing accounting standards for reporting by financial institutions or any other business in this country. It is not about political interference in a regulatory process. And it is most certainly not about attempting to hide important information from investors or bank customers as to the financial stability of the institution with which they may do business.

This hearing is about consequences. It is about the consequences of a quasi-independent group proscribing rules that will change the manner in which financial institutions report the true picture of their financial condition. It is to ensure that the public, that investors, and that customers of banking organizations have the best information possible with which to make informed decisions. I intend to promote, as best as current technology will permit, total transparency in the disclosure of financial condition. Unfortunately, I am worried that the current proposal will actually cloud the view for an interested third party. I became most concerned when I read Chairman Greenspan’s letter to FASB stating that "the proposal may discourage prudent risk management activities and in some cases could present misleading financial information." If Mr. Greenspan’s concerns are real, it is indeed regrettable, since all parties appear to be in pursuit of a common goal of full disclosure.

This is not merely a simplistic, casual, political exploit into the serious business of regulating risk taking of financial institutions, but rather a careful analysis based on the concerns of other federal financial regulators. In the course of this hearing we will not only hear from FASB and the SEC, we will also hear from the Federal Reserve as to their concerns with the implementation of the proposed regulations. We will also hear from affected industry participants.

It is clear to me that proponents of the new regulations have made rather unusual efforts to influence participants in the market to accept the new rules, even before the final rules have been promulgated. For whatever reason, this issue has taken on rather dramatic elements, with advocates claiming precarious consequences if the plan is not implemented due to Congressional interference. I find that interesting, in light of my belief that this whole process quite possibly has its origin in Congressional prompting.

Never mind the real and serious difference of opinion as to the consequences of implementing the proposed regulations among international professionals in the business of accounting. In fact, David Tweedle, Chairman of the United Kingdom’s Accounting Standards Board, referred to FASB’s derivatives accounting standard in an interview, "We don’t like it, we don’t accept secondhand standards." He added: "We in the U.K. are certainly not going to pick up this one. No way." Mr. Tweedle is not the only international accounting regulator to express such concerns.

I make this observation to clear up the misunderstanding that my intervention is the result of some political complaint from a disgruntled market participant. There is clear division of opinion as to the need and the consequences of these proposals. For example, Kenneth Lehn, the former Chief Economist of the SEC, has previously stated before Congress that "the FASB proposal would impose real, potentially large costs, while the benefits are elusive."

How is it logical that in the disclosure of the risk associated with a particular derivative instrument, that any reasonable person would not also look to the asset or liability against which the derivative is intended to hedge? Stated another way, if I were going to sit on a raised see-saw, wouldn’t I want to see if someone were sitting on the other side before I jumped on?

At first glance, it looks to me with both eyes open that the rule is looking at part of the balance sheet with one eye closed. The proposal centers on one bank product, to the exclusion of all other assets or liabilities held at book value. If we are to move to this new and improved standard, shouldn’t we do so with all bank products.

Let me make it clear. I support accounting to fair market value and honest disclosure. And I understand that this may be viewed as an incremental step toward the ultimate standard. However, my concerns are best conveyed by Fed Governor Susan Phillips when she says, "The application of market value accounting to business strategies where it is not appropriate, and particularly when applied on a piecemeal basis, may lead to increased volatility or fluctuation in reported results and actually obscure underlying trends or developments affecting a firm’s condition and performance." My concern, after all, is that we are jumping off the cliff as the first step toward bridging this chasm.

Again, the United Kingdom Accounting Standards Board’s efforts may prove instructive. Apparently, they are carefully designing their own standards for financial instruments, which embrace fair value-based measurement more comprehensively than FASB’s pending derivatives statement. Is it that the SEC has more immediate concerns that the accounting profession in London fails to consider?

My views have cemented a bit over the past twenty four hours, as the machinery of the regulators has been turned on. I want this to be clear, especially to regulators who hold themselves out as the standard of arms length professional conduct... calling constituents of mine in the accounting profession and asking them to call Congressman Baker is not a good idea. If you indeed wish to pursue a professional review, without political interference, you should at least refrain from political activism for your own benefit.

As to the results of today’s hearing, it should be noted that no determination has been made as yet. The subcommittee will be most interested to hear the testimony of the regulators, and the concerns of those affected by the rule. At the conclusion of this process, a decision will be made as to what additional steps, if any, may be taken by this subcommittee. I am hopeful that the concerns that will be raised will be appropriately answered and that no further action will be warranted.

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