Magazine article American Banker

Goldman CEO Hits Bank Accounting

Magazine article American Banker

Goldman CEO Hits Bank Accounting

Article excerpt

Goldman Sachs Group Inc.'s chairman and chief executive officer singled out banks as one industry in need of reform if public trust in financial markets, shaken by the Enron scandal, is to be restored.

Speaking to the National Press Club on Wednesday, Henry M. Paulson Jr. said, "In my lifetime, American business has never been under such scrutiny. And to be blunt, much of it is deserved."

Though Mr. Paulson's speech called for a broad array of financial reforms, he targeted the bookkeeping of commercial banks, renewing ongoing complaints by securities companies that commercial banks use cheap loans to lure the lucrative underwriting business of borrowers.

"In today's world, a corporation's creditworthiness can deteriorate rapidly -- witness Enron, where some of the nation's largest banks were forced to fulfill billion-dollar commitments just weeks before it collapsed," he said. "Yet banks are not required to recognize the fair market value of loan commitments or outstanding loans in their financial statements, even when there has been a major erosion of economic value. Consequently the economic cost of these outstanding liabilities is unknown to investors, regulators, or the media."

Mr. Paulson said that any serious effort to restore investor confidence in U.S. markets should include a change in accounting standards to require companies to carry their assets at fair market value. Current practice allows many firms, including banks, to hold assets on their balance sheets at cost, ignoring any actual change in their market value. …

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