As we noted in our last post, Paulson's "bailout bill", which was passed by the House yesterday evening (our time), included in its provisions formal approval for the suspension of the "mark to market" rules.The treatment of this vital issue, between the US and Britain as part of the EU, offers perhaps the best illustration we have yet encountered of the disparity between the systems – the one which is a democratic sovereign nation and the other, a province of the surpranational European Union with its supreme government based in Brussels.
Introduced in the Paulson "bailout" bill in the US last week, we now see - according to Forbes - the provision giving the chairman of the Securities and Exchange Commission "the authority to suspend mark-to-market accounting and requires the agency to complete a study on the effectiveness of this accounting method."
Many experts will attest that this highly controversial move will have greater effect on the long-term stability than the $700 billion on offer and some even hold that, with adjustment to the rules, the cash bailout is not necessary.
That notwithstanding, the move is indeed highly controversial and around the progress of the Paulson bill we have seen a massive debate in the US media, a taste of which can be seen most recently in this piece from the LA Times.
The same debate is to be seen in thousands of US blog posts, spilling out into Canada, Australia and elsewhere – but, as we noted earlier, hardly at all in the UK. Instead of debate, we get confusion and (mainly) indifference.
An example of the treatment the issue get in the UK comes from the The Daily Telegraph, building on its piece yesterday - which we noted in this post.
This piece does touch upon the the controversy, but only in the context of the United States. There is no recognition that the problem results from a harmonised global system which applies equally over here as it does to the US.
The nearest we get to a recognition that the same system is blighting the UK is in The Economist. It does report on the problems "mark to market" is having on the financial system on both sides of the Atlantic and notes the SEC move in issuing new guidance on fair value. As regards Europe, though, it observes:
The situation is more complex in Europe and other territories governed by the International Accounting Standards Board (IASB). The SEC is answerable to Congress, but there is no easy legal mechanism by which to turn up the heat on IASB, which is a private body.On the one hand, this comment is helpful in that it tells us that we – as part of "Europe" – do not have the degree of direct control which the Americans enjoy. But, in referring to the IASB, the magazine is being highly disingenuous.
Firstly, we have to remind ourselves that "mark to market" is not actually the problem – nor "fair value accounting" – as we pointed out in our earlier piece. These terms are being used as a shorthand for the overarching related system of risk assessment which is used in order to determine asset values. And this system, based on the Basel II agreement, was quite definitely imposed by Directive 2006/49/EC (look at the Annexes) – as we originally asserted.
What the IASB does is issue very technical guidance on specific accountancy measures, but it is not a regulatory body. Even if The Economist was right in asserting that this body was directly involved in developing the standards – which it is not – the fact that it is a "private body" and that "there is no easy legal mechanism by which to turn up the heat on IASB", is entirely irrelevant.
For the standards to have any legal standing in EU member states, they must be transposed into law. As it turns out, is done by the EU commission. Are we surprised?
Under the aegis of Regulation (EC) No 1606/2002 of the European Parliament and of the Council of 19 July 2002 on the application of international accounting standards, the Commission is authorised to promulgate its own regulations, which it has done eighteen times.
Through this means we get such delights as Commission Regulation (EC) No 610/2007 of 1 June 2007 amending Regulation (EC) No 1725/2003 adopting certain international accounting standards in accordance with Regulation (EC) No 1606/2002 of the European Parliament and of the Council as regards International Financial Reporting Interpretations Committee’s (IFRIC) Interpretation 10.
And, for this and all the others – see for instance this - we see the legend, "This Regulation shall be binding in its entirety and directly applicable in all Member States." We are back full circle. The "elephant" looms, whichever way you look, not that The Economist wants to tell us that.
Oddly enough, The Financial Times perpetuates the myth that the IASB is the key authority, stating that its chairman, Sir David Tweedie, "faces increasing pressure to suspend the rules, which require companies to mark their financial assets at market prices." This is not true and cannot be true. The Board has no power whatsoever in this respect.
We need instead to rely on Accountancy Age, therefore, which tells us the real situation with a direct quote from Tweedie saying: "The IASB is committed to doing its part in responding to the credit crisis and recognises the need to provide additional and needed guidance on determining the fair value of financial instruments in illiquid markets."
What The Economist does do, though, is identify yet another body in the already huge list of obscure bodies intervening in some way or another in financial services regulation.
But, if that is confusing enough, Roland Rudd, the founding chairman of the europhile Business for New Europe, adds to it in an article in The Daily Telegraph. He writes that the proposal to loosen the mark-to-market accounting rules is not the right course, telling us that: "The EU is not a federal system and the onus must be on national governments to take appropriate specific action, whilst informing the EU of their intentions." In other words, the EU is not involved at all?
However, the "proposal" to which Rudd refers is one which is to be made by Sarkozy this weekend. His minister for European affairs, Jean-Pierre Jouyet, has told the financial daily Les Echos that European governments "must revisit accounting rules including the mark-to-market procedure …". This is clear enough an indicator of where the power lies, the context being the EU council of ministers.
That much is sort of recognised in the one specialist blog we see covering the issue in detail, and that is all we get of any substance.
Thus, in the US, where there is a clear line of authority and accountability, we get recognition of the problem, a vibrant debate, action by legislators and delegated powers given to the regulator - all within the space of two weeks.
In the UK, by contrast, we get a fleeting mention of the problem from the leader of the opposition – never to be repeated - but not from the government. There is no indication given as to the source of the problem, no follow-up in the media worth talking about, no debate and none of the main political blogs touch the subject. Unaccountably, even the eurosceptics are silent.
Where the media does mention the issue, it is largely in the context of the US, with little exploration of its application here. Those media sources that do mention the UK link confuse the issue and mislead as to where the responsibility lies. And, while the US has already acted, the issue here remains unresolved. It is merely to be discussed by national leaders at a meeting led by Sarkozy, as president of the EU, this weekend. There is no indication when or even if any action is to be taken, and no means of knowing.
That really does point up the contrast between a democracy and what can be described as an undemocratic technocracy. And the most noticeable difference – apart from the speed of action – is that this vital issue is not even on the UK agenda. There is no point in discussing it. Any decisions will be made by the European Union. What we think – what our parliament thinks – is irrelevant.
That is what our membership of the EU has done to us. It has sucked the life out of British politics.
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