The GAO report and the FASB’s reaction to it were simply wrong. As Chairman of the FDIC during the S&L debacle, I know that historical cost accounting did not mask or prolong the S&L problems. Resolution of the S&L problems was delayed by the substitution of “regulatory accounting principles (RAP)” for “generally accepted accounting principles (GAAP).”
The former Federal Home Loan Bank Board’s official policy, supported by the Reagan Administration and Congress, was to allow the S&L industry time to grow out of its problems by adding new higher yielding assets. This policy required overriding GAAP accounting.
The FDIC coped with problems of the same type and magnitude in the FDIC-insured savings bank industry. The FDIC rejected calls to implement RAP and allow savings banks to pursue rapid growth. This is a major reason why the savings bank problems cost the FDIC only $2 billion vs. nearly $150 billion of taxpayer losses in the S&Ls.
Overriding GAAP accounting, sanctioning rapid growth by poorly capitalized and managed S&Ls, and failing to properly supervise S&Ls were villains in the S&L crisis, not historical cost accounting.
The FASB’s ignorance of this simple truth is evidenced by the major recommendation in Herz’ speech in which he urges that bank regulation be “decoupled from U.S. GAAP reporting requirements.” Herz would have us return to the separation between RAP and GAAP that cost taxpayers $150 billion in the S&L debacle!
It is highly inappropriate for the FASB – five anonymous accountants selected by trade groups – to take it upon itself to determine what caused the S&L crisis and endeavor to correct it through accounting policy. In its effort to “fix” an accounting system that was not broken, the FASB wreaked havoc on the banking industry and the economy, costing millions of people their jobs, homes and life savings and costing taxpayers hundreds of billions of dollars to help repair the devastation.
The FASB’s blunders cry out for establishing formal government review of the potential systemic effects of accounting policies. Financial reform legislation that fails to address this critical issue invites the next crisis.
Bill Isaac is chairman of LECG Global Financial Services.
He headed the Federal Deposit Insurance Corporation during the banking crisis of the 1980s.