Former SEC Member Absolves Fair Value from Role in Financial Crisis
In an interview with EuroFinance, Harvey Goldschmid, former commissioner of the Securities and Exchange Commission (SEC), has claimed that the financial crisis unfolded in part because large sections of the industry were unregulated, while other parts were simply badly regulated, typically by overlapping agencies. But he insists that one scapegoat – fair value (or ‘mark-to-market’) accounting, was not to blame for the financial crisis.
Goldschmid is co-chair of the Financial Crisis Advisory Group (FCAG) and Dwight Professor of Law at Columbia Law School, New York. He was a commissioner of the SEC between 2002 and 2005. Expanding on his viewpoint, he added: “Hedge funds, private equity and derivative products – all were not being covered in the US by any realistic oversight, and that’s unwise.” Moreover, “the way we were overseeing the private sector left a lot to be desired: the Office of Thrift Supervision (OTS) was a very weak agency, and yet it had some key banks that went under – Washington Mutual, among others.” Goldschmid predicts further consolidation of bank regulators in the wake of the Obama administration’s proposals to merge OTS with the Office of the Comptroller of the Currency (OCC).
But while many people have blamed fair value accounting for the financial implosion because it forced banks to record huge losses on toxic assets and crippling damage to their balancer sheets, Goldschmid believes that the much-criticised accounting requirement actually provided needed transparency. “It clearly helped to expose the [banks’] vulnerabilities at an earlier point than might have been the case otherwise,” he added. “So that was very healthy. ‘Fair value’ was helpful overall and not at all the cause of what went wrong.”