While overly-willing lenders and risky borrowers have received the majority of the blame for the credit market crisis, according to one of the top private equity leaders, the accountants are partially at fault. In The New York Times article published in yesterday’s Business section titled Are Bean Counters to Blame?, Stephen A. Schwarzman, the co-founder of the Blackstone Group, believes that FAS 157 may be forcing the nation’s largest banks to overstate their financial problems.
According to Schwarzman, “the rule is accentuating and amplifying potential losses. It’s a significant contributing factor.” He thinks the reality of the current Wall Street situation is much brighter than the accounting measures suggest. Hamilton E. James, the president of Blackstone, holds an even stronger opinion commenting on FAS 157—“it’s dangerous” because, in the case of collateralized debt obligations, which often contain subprime mortgages, the market is very scarce, if non-existent. Without a market, a bank is forced to decrease the investment value, often down to zero, thus creating “misleading balance sheets.”
In BVWire’s experience, it’s never the auditors or business appraisers (or FASB rules) who “force” management to overstate assets, so we have a hard time buying this argument. In fact, we venture to say that, without their involvement, those same mortgage assets would have been even more overstated than they already were, and the current crisis would be significantly worse than it is already.
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