FASB Chairman Lessons from Credit Crisis

The Financial Accounting Standards Board Chairman Bob Herz offers Lessons Learned, Relearned, and learned again from the credit crisis in this article. It's long and technical, but an interesting read. He addresses some of the accounting and reporting issues involved. He has an interesting take on "Mark to Market" or "fair value" accounting.


Quote that caught my attention:

"As I said, at the heart of this chain of events was the explosion of novel mortgages and other loans. While lax and fraudulent lending practices were seemingly the prime culprit, there are two sides in a lending transaction and many consumers eagerly snatched-up "too good to be true" loans, without understanding the consequences. At its height, the frenzy was reminiscent of the investment craze in dot.com stocks. In both cases, misplaced investor enthusiasm was, in my view, due at least in part to widespread financial illeteracy in our country, along with a belief that somehow this time the situation was different and prices would rise forever."



Takeaways for me:

• Average American Financial illiteracy is a major problem. That's why I love what Dave is doing and what GCC is doing through Financial Peace University
• Just because the sweetheart loans were offered didn't mean they had to be accepted
• If it sounds too good to be true, it probably is
• "Perverse incentives often lead to perverse outcomes"
• Remember the risks - In our financial markets potential gains come with potential losses
• You can't assume investment prices will rise forever. Investment prices go up and down.
• Individuals are responsible for the transactions they enter - "No matter how promising the markets may currently seem, even the most sophisticated investor needs to consider all opportunities from a perspective of "caveat emptor" or "buyer beware""

"Accounting has consequences-but can we handle the truth? Accounting has consequences, its meant to, otherwise why do it? External financial reporting is not merely a compliance exercise, nor is it an opportunity for spin. Rather the primary intent is to inform investors and the capital markets [readers/users]. What you measure matters! And, accountability requires honest accounting and informative disclosure, even when the news is bad."