Business and government: learning from past experiences.

• Author: Abel, James J.
• Position: President's page

There's no doubt that today's financial executives are facing unprecedented change. This is all the more evident in the events in U.S. financial history that we witnessed during September and October.

First, the U.S. Treasury Department took over Fannie Mae and Freddie Mac. Less than two weeks later, stalwart investment banking firm Lehman Brothers Holdings filed for bankruptcy, followed by the $85-plus billion Federal Reserve loan to American International Group. Then, Goldman Sachs Group and Morgan Stanley, the last big independent investment banks on Wall Street, changed their structures to become bank-holding companies--and thus, subject to far greater regulation. By early October this culminated with the U.S. government financial institution rescue package that, at press time, was estimated to cost $700 billion.

There has been a litany of analyses as to why this all happened and clearly, the unanimous culprits are unconventional mortgages and loans. Many also blame short selling, in particular, naked short selling, that had allowed brokers to sell stocks they didn't own. Indeed, soon after the latest round of events, the U.S. Securities and Exchange Commission took steps to suspend short selling, which it subsequently later rescinded.

Then there's fair value accounting--an issue much closer to home for financial executives. Proponents say that marking balance sheet financial instruments to market is necessary. Disclosures of such instruments, they say, provide the information needed by investors to make proper investing decisions. Opponents say frequent adjustments based on hypothetical markets lead to "fire-sale" values and encourage broad market sell-offs--such as the ones that have been occurring over the past year.

This delicate balance between business and government brings to mind the savings and loan crisis. The inability of savings and loan institutions to compete with money market funds in the 1970s led to statutory and regulatory changes in the 1980s. These changes gave the S&L industry the ability to enter new areas of business in hopes they would return to profitability. By 1983, lower market interest rates returned many S&Ls to health, 35 percent of institutions still sustained losses with 9 percent of all S&Ls insolvent by U.S. GAAP standards.

After a series of S&L failures during the 1980s, the Financial Institutions Reform Recovery and Enforcement Act (FIRREA) switched S&L regulation to the newly created Office of...