Us election special: educated guess work

One can expect that the next United States administration, whether John McCain or Barack Obama, will address as a high priority the overall US financial regulatory structure

Two specific issues that will require immediate attention are fair value and whether to adopt international financial reporting standards.

Although all predictions are hazardous, preliminary statements by the candidates provide some clues as to their inclinations. Obama will be studious, listen to Paul Volcker and others and seek a way to balance investor interests with those of business. McCain will likely seek to salvage the besieged deregulation ideology and will be influenced by treasury secretary Hank Paulson.

Obama alone has presented a specific vision of regulatory change. In his Cooper Union address on 27 March, Obama refers to Paulson’s blueprint and the criticism of the current patchwork regulatory apparatus and insufficient oversight. Supporting international cooperation and comprehensive oversight, Obama commended the current efforts of the IASB and FASB to pursue accounting convergence.

He would likely support the current SEC, FASB, and IASB efforts to preserve fair value accounting. In the face of frozen markets, Obama would weigh the proper use of multiple fair valuation inputs, including expected cash flows and use of outside pricing services. Given Paulson’s views, McCain might be sympathetic to providing outright relief to bankers from fair value accounting.

Progress on IFRS in America is essentially held hostage by the current financial crisis. Both candidates would likely urge the SEC to defer further action until IFRS’s impact on the financial crisis and the economy is more clear.

Another area where Obama and McCain may differ is the fate of the SEC under a regulatory restructure. In his blueprint, Paulson favoured the SEC becoming part of a large consumer protection agency in combination with the Commodity Futures Trading Commission. Given the financial crisis and regulatory gaps that have been revealed, many investors and commentators, including this author, will urge a larger role for the SEC, to include oversight of swaps and other derivatives and to have the agency be self funded like the Fed and other major regulators across the world.

Although Obama would need to be convinced, he might be more open to an enhanced SEC than McCain. Delivering an effective restructuring of US regulation, without curbing innovation and productivity, that will also work well with the global markets and international regulators, would be a valuable legacy of the next president.

Roel Campos, former US Securities and Exchange commissioner