Tom Jones, a British chartered accountant, has worked as a preparer for 40 years, including 20 years in executive roles at Citibank and Citicorp in New York. He has served as vice chairman of the International Accounting Standards Board (IASB) since its inception in 2001. He was previously a member of the Financial Accounting Foundation (FAF), which oversees the Financial Accounting Standards Board (FASB), and a member of that organization's Emerging Issues Task Force. He was interviewed at the Pace Univeisity Lubin Forum on Contemporary Accounting Issues on April 30, 2009, by Alan Murray, deputy managing editor of the Wall Street Journal and executive editor for the Journal online.
Banks and Fair Value
Alan Murray: Let's jump into the news of April, which was FASB deciding to ease up on mark-to-market rules. You were quoted a couple of weeks later saying that move was crazy. Why?
Tom Jones: The "crazy" reference was the idea of clowning up the financial reporting by changing rules unnecessarily. It's a lot deeper than just that The truth is there's a fair amount of judgment permitted anyway. We don't think that the changes that finally were made have such a huge impact.
Murray: But the U.S. stock market took off after that, and there was a sort of "hallelujah" that mark-to-market standards had been eased for banks.
Jones: We went through something like this six months ago when we reacted to pressure from the European Commission to allow people to move between buckets. The excuse was that the U.S. permitted it and we didn't. It's true that bank stocks went up - then they came down again.
The problem is we are not going to improve the situation by misleading investors over time. Investors have demonstrated some real skepticism about bank accounting. I don't think mat playing around with the rules - on the basis of individual changes forced by politicians - is going to improve credibility with investors.
Murray: These are extraordinary times. This no longer feels like a recession, it feels like a depression. There are smart people who think that accounting has contributed to cyclicality because banks get into a situation where their market disappears, they have to mark down their assets, they're unable to lend more, and then the situation gets worse. Why shouldn't accounting correct that cycle?
Jones: Because we've seen in the past that what you are describing amounts to putting away money in good times and letting it out in bad times. Or not recognizing real life in bad times, and then catching up later. The Japanese spent 10 years recovering from the 1989-1990 crisis in real estate prices, and it cost Japan 10 years of growth. You cannot use accounting standards or reporting standards to adjust for events. Banks are in trouble because they lent in a very dumb way. Every 10 years, they go through the cycle.
Murray: Does it seem to be getting shorter?
Jones: It is - the turnover's getting quicker and the memory's getting shorter. But you can't use accounting rules to promote financial stability because you defeat the objective of accounting, which is impartial information. I don't think you can use it to protect against bad loans.
There's a lot of talk about these tremendous impacts from having to mark down values. The fact is, huge amounts of bank balance sheets are not on fair value. The percentage of bank assets which are on fair value varies dramatically by me kind of bank. My guess is, on average, it's certainly not 50% and probably not even 30%.
Murray: The bank's argument is there is no market.
Jones: If there's no market, or if there's a transaction which you can show is coerced in some way, then you can ignore that market price. What the FASB has done underlines that. They went to me opposite extreme. They said, "You can assume, in this market, it is always coerced, unless you can prove it isn't" Our rule is very judgmental, but it equally says you can ignore any transaction which is clearly not a market-rate transaction. …