There undoubtedly was a problem with the valuations. Part of that was the drying up of the markets [that banks used to get values]. The big banks had a plan B–they switched to modeling. The smaller banks were starting from scratch, and they were really struggling. And that wasn’t surprising, because this hadn’t happened before. And there was a panic.
So what we’ve discovered is that we need to lay out the process of how you go about doing a valuation in that situation.
We’ve heard all the flack about pro-cyclicality. I think it was very telling that the Japanese finance minister said that the one lesson from the Japanese banking crisis in the 1990s was that further transparency would have allowed the problem to be dealt with earlier. Fair value has forced this crisis right out, whereas in Japan it bubbled along for 10 years and stagnated the economy.
As far as [FAS 157's valuation hierarchy], that has proved very popular in the financial statements. We’ve noticed even some of our IFRS companies have used it. I think the markets like it. I think we will bring that in even before we bring in an equivalent of FAS 157.
You’ve also accelerated the leasing project. Will you still be able to address what you’ve often said are serious problems there?
That project was going to address lessor and lessee accounting, but most of the problems are in the lessee accounting, so we decided that is the priority. In 2006, the leasing industry was a $634 billion industry–that’s excluding property leases. And most of that is off balance sheet.
Yet, what is a lease? It’s people committing to pay so much for so many years to get the use of an asset. Well, we think that is a liability. As does FASB. And we should bring that on balance sheet.
So what we’re really talking about is, maybe we should get rid of the distinction between operating and finance leases. We could probably do that in three years. It will be tough, and some people might not like it so much. But nonetheless, that will make a massive difference.
The SEC will be part of a new monitoring group overseeing IASB. Will that heighten European fears about American influence over accounting standards?
It’s quite interesting, but when I come to the States, there’s a fear that international standards are going to be influenced by the Europeans. So it depends where you are coming from.
We are trying to make it crystal clear that that is not going to be the case. When IASB was set up, there were six North Americans on the board, and they were setting standards for Europe. There should be a board of 16–four from Europe, four from North America, four from Asia/Oceana, one from Latin America, one from Africa, and two from anywhere.
The monitoring group is [also] quite cleverly constructed. I think it is pretty well scattered to make sure there is no region going to dominate. Have a fair say? Yes. Dominate? No.