Financial Accounting Standards Research Initiative

Well, finger-pointing is going to be a popular sport for a long time. But I wonder … do you really disagree with the basic points? In particular:

“There were important aspects of our entire financial system that were operating like a Wild West show, huge unregulated opaque markets,” said the man whose job was to write the accounting rules, Robert H. Herz, the chairman of the Financial Accounting Standards Board.
“The crisis highlighted how important better transparency around that system is,” Mr. Herz added in an interview this week. “I would hope that would be a major lesson learned or relearned.”

…

The accounting rules on financial assets were, and are, a confusing mess, with the same loan getting very different accounting based on whether or not it had been packaged as part of a security. In some cases, banks could not take loan losses as early as they should have, even if they wished to do so. As financial complexity increased, rule makers struggled to keep up, and were not always successful.

I think this is a far, far better explanation that what I am seeing from those in economics and finance. They start by complaining about overly formal and simple economic/finance models, and then magically state that everything would have been different if only academics had embraced behavioral perspectives earlier. (See this summary of arguments from the left, center and right, by Brad DeLong.)

I am a big fan of behavioral finance and economics, but does it really take a behavioral perspective to say that firms use structured finance to keep liabilities off of the balance sheet, leading to real leverage far exceeding what was reported in financial statements, and in many cases far exceeding what even the most sophisticated investors could have divined.