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Sunday, November 16, 2008

If you are a chief financial officer... 


...this is the most terrifying paragraph you are likely to read all year:

World leaders holding an emergency meeting to combat the economic crisis agreed yesterday to a far-reaching action plan that, over the next 4 1/2 months, would begin to reshape international financial institutions and reform worldwide regulatory and accounting rules.

Then there is this:
The Europeans got "virtually everything" they sought at the summit, French President Nicholas Sarkozy crowed afterward at a news conference.

I can smell it now, a global "Sarbanes-Oxley" law that neither replaces nor is consistent with American securities regulation or generally accepted accounting principles.

Sure as God made little green apples, new global regulation will not prevent the next bubble and the crash that follows it. As I have written before to the point of tedium, the best and only insurance against that is human memory. There will be no insane bubble and no crash that follows it as long as the generation scarred by this one is running the show, but once it has passed its memories will only be history, and people will again be free to argue that "it is different this time" without being mocked.

Yes, there are all sorts of good reasons for regulation -- I am not arguing for the abolition of regulation and transparent accounting -- but the prevention of financial bubbles is not one of them. Millions of motivated traders are far smarter than any bureaucratic apparatus within the talents of man, and it will always be in their interest to find opportunities that regulation has not foreclosed. Sometimes optimism for the potential of those opportunities gets out of hand and the prices for some class of assets go higher than anybody would have predicted ex ante. When that happens, there will always be a few old guys with long memories who sound the warning, but we can be certain of this: Governments will do nothing. Why? Because crazy bull markets are loads of fun until they end, and no politician wants to stop a good time. Not even leftists.

7 Comments:

By Anonymous Anonymous, at Sun Nov 16, 02:49:00 PM:

TH
It is hard to tell yet whether these "changes" will be terrifying, or merely pretentious. Either they will be substantial (and have some unintended consequence that we both fear), or they will be superficial and will have no impact other than people thinking the leaders have "done something." Hope and change, you know.  

By Blogger JPMcT, at Sun Nov 16, 03:08:00 PM:

Most "world agreements" get huge press...and then each attendee returns to his home government and everybody does what they want.

When one looks at our "home" government, however...that's when I get the chills...

Oh well...at least we will be popular again!!  

By Anonymous Anonymous, at Sun Nov 16, 03:20:00 PM:

Colour me sceptical. Grand meetings usually end with big words, especially if the EU is involved (and yes, I am Dutch). End to global poverty, EU most competitive region by 2010, cut greenhouse emissions yadayada ...  

By Blogger Nomenklatura, at Sun Nov 16, 05:36:00 PM:

(1) It is standard procedure at these gatherings to allow the Europeans to believe they got what they wanted, and even crow about it. When it comes to implementation by other countries they will discover as usual that they have no influence.

(2) EU politicians don't mind because these days this sort of illusory victory is the only kind they ever get to take home with them.

(3) Were it ever even to get that far, it would become apparent inside and outside Europe that they can't even agree on what the new rules should be. The UK, in this instance, has derived a huge competitive advantage from Sarbanes Oxley versus New York which they will go to great lengths to retain.

So Sarkozy is welcome to trumpet his success to anyone who will listen to him.  

By Anonymous JT, at Sun Nov 16, 07:38:00 PM:

Jack ... I don't have to tell you that FASB is going away, and soon. The trouble is, implementation of Sarbanes using Euro standards, which are basically non-standards. The risk of being the guy signing a 404 go up exponentially. For me, there is no dollar amount worth it (since the obscene price I'd put on it is only a theoretical possibility for me).  

By Anonymous Eric the Red, at Mon Nov 17, 12:26:00 AM:

A thought: if free markets are so awesome, and freedom of information is one of the crucial aspects to a free market (as demonstrated by the recent problems with opaque financial instruments,) let's make the market more free. All publicly companies must publish their asset sheets from two quarters ago in their 10-Q, and all companies larger than a certain size, public or not, must publish from last year in a 10-K equivalent. That, or keep the information secret and throw in some systemic risk arbiter.  

By Blogger TigerHawk, at Mon Nov 17, 06:58:00 AM:

JT - I don't know if GAAP is going away as soon as people say. I think it will be pushed off for years, frankly, for many of the reasons you describe.

Eventually, we will go to international accounting standards. That will be the world's worst nightmare, because our litigation culture will drive international standards to GAAP-like rules-based specificity. Why? Because, as you say, in the American system accounting rules are basically a criminal statute, and criminal statutes cannot be vague.  

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