How do we get rid of the conflict? Should we go back to fixed brokerage commissions?
Hill: I don’t know if fixed rates are the ultimate solution, but that’s the problem: How does a brokerage firm get paid for research? In the old days, you got paid by doing good fundamental research. If you did something for the investment-banking side of the house, there might be a little sweetener there, but it was the frosting on the cake. Today it’s the cake.
Nusbaum: I think the majority of people involved in this — from the analysts to the accounting firms to the regulators — all have the same goals in mind. What you’re talking about is getting back to some of the fundamentals: the research done, the disclosures done so you can get the research, what kinds of disclosures are really needed to do the right research.
Willens: To do better research — that’s so intangible. I think the public is going to demand some concrete steps.
Nusbaum: The worst thing, as Ed [Jenkins] pointed out, would be to have the government take over the setting of accounting standards, the setting of auditor standards, the setting of standards for analysts.
Certainly there will be a demand for new rules on off-balance-sheet accounting, as with SPEs.
Jenkins: Remember, it was only a year or two ago that our process was being criticized because we were moving too fast [on pooling-of-interests accounting]. Now we’re being criticized for being too slow — for not having properly addressed special-purpose entities in particular, and some other things as well. So it depends on which side of the bed you wake up on, so to speak, and I think there are some lessons to be learned: that we absolutely have to have a full due process for our standards, but there are ways that we can respond to legitimate concerns about financial reporting more quickly.
One thing we can do is take things in smaller chunks. And that is exactly what we are doing on the SPE side. We’ve decided to focus on just some of the issues on SPEs, the ones where we think we can make the most progress the fastest. It’s important that we come up with quality management reporting that has good transparency for analysts and investors to use.
Some people wonder whether there should be any off-balance-sheet activities — that is, if you’re giving up control of assets, then what economic purpose does it serve?
Willens: As an investment banker, I have found through the years that the principal objective a company and client will have with respect to any transaction or project is to quote-unquote keep the debt off the balance sheet. Which is fine with us; that seems to be a legitimate goal. And I would ask S&P, is that effective? If a company is properly not consolidating an SPE, will you take that at face value? Or will you make adjustments to that based on your analysis, and therefore the objective the company had of keeping the debt off the balance sheet is thwarted?