“We’ve Got to Find the Middle Ground”

In his new book, Too Big to Save?, Robert Pozen proposes fixes for the biggest financial crisis of our lifetimes.

You have six or seven thousand publicly listed companies. Of those 6,000 companies, how many of them are already doing IFRS? Almost none. How many of them are likely to do IFRS? None. It’s only if we force them to. What will be the cost of their doing it? A lot. What will be the benefit of their doing it? Minimal.

So why would we want to do this? We should concentrate on that tier of companies that are global companies where it makes sense. Now you can argue that will lead to a two-tiered system, but my view is that we have a two-tiered system now.

If you took a survey of the companies that were between say, [number] 300 and 500 on the S&P 500, I bet you none of those companies would want to go to IFRS. I’m serious.

How about the reverse? Would you prohibit smaller companies from choosing IFRS?
I don’t like to give companies optionality. I think we need a hard-and-fast rule. Because if you give companies optionality, accounting firms will spend a lot of time and money telling them where they can increase their earnings. There are a lot of substantive differences between GAAP and IFRS, especially in the high-tech area.

True, but doesn’t that raise a possible objection to your proposal? Take revenue recognition for software. Under IFRS, Microsoft might have an advantage over a smaller up-and-coming challenger using GAAP.
You could always choose to have the up-and-comers present it both ways. You can always have additional disclosure.

Suppose that your proposal were adopted. Would you still argue that substantive reconciliation should continue with the ultimate goal of eliminating all differences between GAAP and IFRS — however long that would take?
Yes, I would. I think it’s a worthwhile goal to try to have a global standard. I think we all gain from that. The closer these standards are, the less difference there would be between IFRS and GAAP [results], though I still maintain that interpretation and audit will make a big difference.

One of the issues that seems to really concern you is the independence of the Fed. In fact, you’ve said that Treasury is treating the Fed like a hedge fund.
The Fed has done a good job with short-term liquidity, but it has taken on roughly $500 billion of guarantees of truly troubled assets where it could lose several hundred billion.

The Fed has let the Treasury use it as a hedge fund, leveraging it up. The Treasury has only $700 billion [in congressionally approved bailout funds], so they lend the Fed $100 billion and the Fed lends out $1 trillion for these toxic assets programs.

When the government guaranteed $300 billion of Citigroup’s worst assets, the Fed took $220 billion of that guarantee. That’s a mistake. The Fed ought not to be holding those sorts of assets. Traditionally, treasuries have been more than 90% of the Fed’s balance sheet. That’s why it used to be very easy for the Fed to drain money for the system — it sold treasuries. Now, treasuries are less than 30% of the Fed’s balance sheet. Is it going to sell toxic assets now?

Ultimately, the most important thing is that the Fed needs to be independent so it has the will and the ability to raise interest rates and drain the cash from the system when we need it.

We’ve been through a pretty frightening financial trauma, but we at least seem to have stabilized things for the time being. Which issues covered in your book do you consider the greatest cause for ongoing concern?
One is that we haven’t brought back loan securitization. That’s key. Second, we’ve basically set up, either implicitly or explicitly, an incredible safety net among an incredible number of financial institutions, which is much too broad. We need to bring the bondholders back into play. We need to stop creating the impression that we’re bailing out everybody. That’s a really big problem and we need to deal with that.

A third big problem is that we really need much more effective boards [at financial institutions]. We don’t want to have the regulators micromanaging. And the fourth problem is that we need to make sure that the Fed is independent.

 

 

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