Obama: agent of change

The victory of Barack Obama and the expansion of the Democratic Party’s control over Congress are likely to dampen calls to end the use of fair value accounting in America.

With Democrats now firmly in charge of the country’s economic agenda, supporters of fair value accounting can probably breathe a sigh of relief this side of the Atlantic. It was mostly Republicans ­ including several whom voters have just sent packing ­ who have fuelled the row in Washington DC.

Fair’s fair

A number of influential Republican legislators, including failed presidential candidate John McCain, had questioned whether fair value accounting rules had worsened the financial meltdown by forcing huge write-downs on assets that firms actually had no intention of selling.

Now some of those Republican critics of fair value have been ousted from office. Chief among them perhaps is Senator Elizabeth Dole of North Carolina who sat on the powerful Senate Committee on Banking, Housing, and Urban Affairs. Also voted out were two Republican congressman who had recently co-sponsored a bill that would have directed the US Securities and Exchange Commission (SEC) to suspend mark-to-market accounting. They are Rep. Tom Feeney of Florida and Rep. Marilyn Musgrave of Colorado.

Democrats have been far quieter than Republicans have been on the issue of fair value accounting. There is one clue however, (beyond the silence of leading Democrats), that suggests an Obama administration might be inclined to defend fair value accounting principles.

One Obama adviser and a candidate for Treasury Secretary, Harvard Professor Lawrence Summers, gave a defence of fair value accounting principles in an opinion piece published in August in the Financial Times.

There, Summers, who served a short stint as Treasury Secretary under Bill Clinton, faulted banks in some instances for forgoing fair value accounting in exchange for ‘assumptions considerably more optimistic than those embodied in market prices’.

The question of fair value accounting won’t disappear without additional debate. The SEC will submit a written report to Congress at the beginning of next year to advise whether fair value accounting requirements ought to be amended. The report, which is required under the terms of the recent $700bn bailout plan, will also examine what role fair value may have played in bank failures.

In addition to quelling the debate over fair value, the historic victory by the Democratics could also slow down plans to converge US GAAP and international accounting standards. Under an SEC proposal, the largest US companies will be allowed to use IFRS in their financial statements in 2009. The proposal also paves the way for the SEC to eventually require US companies to use IFRS.

Criticism about the convergence plan, if it develops, is anticipated to come from Democrats, who may prove wary of plans that seem to outsource regulation of the accountancy profession to an international body. The post-election influx of Democrats in both the Senate and House of Representatives could cause this convergence plan to stumble as a result.

To date, the main critic of the SEC’s convergence plan has been Senator Jack Reed of Rhode Island, a Democrat on the banking committee.

Situation vacant

The profession will feel an Obama presidency most strongly in his pick of an SEC chairman. The next SEC chief will inherit both the convergence and fair value issues. Names that have been bandied about as possible candidates include New York Attorney General Andrew Cuomo and SEC commissioner Elisse Walter.

The next SEC chairman could also come from the partner ranks of one of the white-shoe Manhattan law firms, who were a significant fund-raising resource for the Obama campaign.

With a whole cabinet to fill, the picking of an SEC chairman ranks as a relatively minor appointment. It probably won’t happen until the summer of 2009. Against the backdrop of a severe economic downturn, it will be the new president’s choice of a Treasury Secretary that will be among Obama’s more significant appointments.

With polling showing that many voters see the economy as the US’s most serious challenge, Obama has advertised his economic brain trust. In a Wall Street Journal opinion piece published the day before the election, Obama only bothered to mention one of his endorsements: the one from spectacularly successful investor Warren Buffett.

Those currently being discussed as likely candidates for the Treasury Secretary job are Summers; Governor Jon Corzine of New Jersey, who previously headed Goldman Sachs; the president of the Federal Reserve Bank of New York, Timothy Geithner; and Paul Volcker, the former chairman of the Federal Reserve who is now 81 years of age.