[Congressional Record Volume 144, Number 20 (Wednesday, March 4, 1998)]
[Senate]
[Pages S1363-S1364]
From the Congressional Record Online through the Government Publishing Office [www.gpo.gov]




                         ADDITIONAL STATEMENTS

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           ACCOUNTING STANDARDS FOR DERIVATIVES AND THE FASB

 Mr. D'AMATO. Mr. President, investors place their trust as 
well as their funds in our capital and financial markets. It is clear 
that one of the reasons for this trust is the knowledge that financial 
statements are reliable, relevant, consistent, comparable and prepared 
according to well-understood and carefully considered standards, known 
as generally accepted accounting standards. These financial reporting 
standards are an essential component of the attraction of our capital 
markets--to borrowers who are looking for the most capital at the 
lowest cost and to suppliers of capital who want to invest with 
confidence and earn a high return.
  This openness and transparency is the result of the useful and highly 
successful mechanism used in the United States for over 60 years to 
develop financial reporting and accounting standards. Although Congress 
empowered the Securities and Exchange Commission (SEC) to set 
accounting standards in 1934, for over sixty years the Commission has 
delegated this responsibility to the private sector. The Financial 
Accounting Standards Board (FASB) has exercised the delegated authority 
to develop accounting standards, subject to SEC review, since 1972. In 
that year, a blue ribbon commission, created by the SEC, recommended 
the creation of the FASB in order to insulate its deliberative process 
from the influence of special interests and politics. The FASB's task 
is to establish and improve financial standards in an inclusive, public 
and deliberative manner.

[[Page S1364]]

  Mr. President, while I have not always agreed with the FASB's 
pronouncements and activities over the years, I believe strongly in an 
independent standard setting body and I believe the FASB has worked 
well. It has earned praise for its evenhanded, principled and well-
reasoned decisions from professionals in the accounting profession, 
from the SEC and the financial media, and investors.
  Mr. President, at times, the FASB's activities have generated 
controversy and opposition from those affected by and opposed to its 
pronouncements. At this particular moment, the FASB is encountering 
stiff criticism as a result of its attempt to require institutions who 
hold derivatives to provide some type of fair market value financial 
reporting.
  As my colleagues are aware, derivatives are highly complex financial 
instruments that can and do perform an important role in effective risk 
management by enabling commercial corporations, governments and 
financial firms and others, in the U.S. and worldwide, to reduce their 
exposure to fluctuations in interest rates, currency exchange rates, 
and the prices of equities and commodities. Derivatives also enable 
users to reduce funding costs and speculate on changes in market rates 
and prices. But Congress is also well aware that the use and misuse of 
derivatives can cause severe financial shocks. Hearings held by the 
Banking Committee in recent years demonstrated that derivatives 
improperly used, and inadequately regulated, can expose an institution 
or company to potential ruin with serious consequences for depositors, 
investors, taxpayers and, potentially, the stability of the financial 
system.
  Mr. President, regulatory agencies and Congress have studied the 
numerous regulatory, policy and disclosure issues raised by 
derivatives. Among the more serious findings is that derivatives 
generally do not need to be accounted for in financial statements. In 
other words, there are billions of dollars worth of derivatives 
outstanding that are not reflected adequately in the financial 
statements of major industrial companies, banks and other large 
derivative users.
  In 1994 a GAO study, (Financial Derivatives: Actions Needed to 
Protect the Financial System), recommended that the FASB:
  Proceed expeditiously to issue its existing exposure draft on 
disclosures of derivatives and fair value of financial instruments.
  Proceed expeditiously to develop and issue an exposure draft that 
provides comprehensive, consistent accounting rules for derivative 
products, including expanded disclosure requirements that provide 
additional needed information about derivatives activities.
  Consider adopting a market value accounting model for all financial 
instruments, including derivative products.
  Mr. President, the FASB is earnestly pursuing this complicated 
objective with the support of the SEC, the accounting profession and 
most investment professionals. The critics and opponents of the 
proposed derivative accounting standards are now taking the 
extraordinary step of asking Congress to intervene in the FASB's 
standard setting procedures. This not only threatens the FASB's ability 
to determine appropriate standards for disclosure of derivatives-
related information, it seriously jeopardizes its independence. This 
course of action is extremely unwise and provides continuing 
justification for having an independent, professional entity to set 
accounting and financial reporting requirements, like the FASB, rather 
than the Congress or a government agency.
  Mr. President, it is obvious that Congress lacks the technical 
expertise and resources to develop accounting standards, as does the 
SEC. In addition, federal bank regulators lack the impartiality to 
administer disclosure standards dedicated to investor protection and 
public disclosure since the banking laws are geared to maintaining 
public confidence in financial institutions rather than requiring the 
full and complete disclosure of a financial institution's real 
financial condition.
  Mr. President, Congress should resist the suggestion of removing 
standard setting from the public sector and transferring it to a 
government agency. If history is any guide, this step would create more 
problems than it would solve. Every recent effort by a government 
agency, including the Congress, to set accounting standards has been a 
total failure. For example, during the early days of the savings and 
loan crisis, the FSLIC (Federal Savings and Loan Corporation--the 
former S&L regulator) created ``supervisory goodwill'' as a mechanism 
by which healthy thrifts could acquire or invest in fledgling ones. 
Regulators permitted supervisory goodwill to qualify as regulatory 
capital. Then, in 1989, Congress enacted stricter capital standards 
under the Financial Institutions Reform, Recovery, and Enforcement Act 
(FIRREA) and mandated that all supervisory goodwill was to be charged-
off over an accelerated period ending in 1994, causing severe capital 
constraints, even pushing some S&Ls to liquidate assets at a severe 
discount. Between the actions of the regulators and the Congress, the 
S&L crisis lasted longer than necessary, the recovery took longer than 
necessary and eventually ended in a $130 billion dollar taxpayer-
financed bailout. In fact, the final costs to the federal government of 
the S&L bailout may increase as a result of the ongoing ``supervisory 
goodwill litigation.''
  Mr. President, the FASB started working on derivatives and hedging in 
1991. It has had an extensive and open process that has involved ample 
opportunity for public comment, debate and participation by all 
constituents. This open and deliberative process is still ongoing and 
will, in the end, produce thoughtful and comprehensive accounting 
standards that will better inform investors and the financial markets 
as a whole and contribute to their effective functioning.
  Mr. President, I do not want to dwell on the S&L crisis or on the 
benefits and risks of derivatives. Instead, I simply want to underscore 
that Congress should not disrupt the FASB's independence and 
professionalism in setting accounting standards, for derivatives or for 
any other project. The SEC has jurisdiction over the FASB and the 
Congress already conducts oversight of the SEC and the FASB. In fact, 
the Subcommittee on Securities has held two hearings on the derivatives 
issue. I would oppose authorizing the SEC, or any other federal agency, 
to set accounting standards. We should leave to the private sector the 
responsibility to develop accounting and financial reporting standards 
that are at the heart of the success of our process of capital 
formation.

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