Occam's Razor

The tenet of Occam's Razor states that the simplest solution is always the best solution.  We are now mired in a world full of financial complexity that threatens to bring us all down.  As an example, please read and try to understand what happened to MF Global that caused it to go belly-up recently, see  Corzine's Monumental Flub and Another Take.  So, what is the simplest solution?  I believe we need to return to the basic accounting rules that have been established over the millennia where an asset really is an asset and a credit really is a credit. 

For a number of years the MBA geniuses in the financial community have been standing these accounting rules on their heads with a lot of hugger mugger that conceals and distorts the financial well-being of institutions.  Jon Corzine, when he was at Goldman Sachs, himself helped Enron turn liabilities into assets and consequently bring down this erstwhile staid firm. And even our own Federal Reserve Bank is now playing in this sullied sand box, see: Finger on the Scale.

How did this happen?  I blame the Financial Accounting Standards Board (FASB), the big accounting firms, and the accounting community in general ... who have earned their Street creds by dreaming up new ways of subverting our tried and true accounting principles.  And they have created financial instruments of greater and greater complexity (see the MF Global reference above) whereby even their creators don't fully understand all the possible consequences of a rapidly changing environment.

We need to return to accounting basics and strip out all the FASB rules that permit these financial shenanigans by creating reporting exceptions to reporting exceptions to reporting exceptions ... and permit multitudinous off-balance sheet transactions and fiscal slight-of-hand.  And Congress needs to pass stringent laws that disallow any financial instrument to be created and traded for which Joe Biden cannot comprehend and explain in one sentence.

Balancing Act

What do Enron and all of the companies currently taking huge write-offs in the sub-prime mortgage fiasco have in common? They all kept non-performing assets hidden off of their balance sheets. And what has the FASB (Financial Accounting Standards Board) done to remedy this fundamental flaw in accounting standards? Nothing … I repeat, nothing. Congress has held hundreds of days of hearings pontificating on these issues. Other than that notoriously poor piece of legislation called Sarbanes-Oxley, nothing has changed. Op Ed writers have written furlongs of column inches of suggestions on what to do to stop such fraud. And still nothing has changed. This practice of financial legerdemain continues, each year finding newer and cleverer ways to obscure the true financial health of corporations. (After all, balance sheets were created to indicate the well being of a company at a point in time.)

I have a suggestion … not mentioned anywhere in the Congressional hearings, in the Op-Eds, or at the FASB. Congress and the FASB should decree that the holding of any assets or liabilities off of the balance of a publicly-held corporation is verboten. Simple as that. All reserves, all contingency accounts, all the assets and liabilities of a corporation’s subsidiaries (or those created in non-arm’s-length transactions), anything and everything that relates to the financial health of a company should be disclosed on its balance sheet … not in an obscure footnote, not in the accompanying text, not anywhere else by implication … but ON THE BALANCE SHEET. Simple as that.