Only Yourselves To Blame For Crisis, Banks Told

Sydney Morning Herald

Tuesday May 27, 2008

Leon Gettler

BANKS have created the credit crunch and they should stop blaming it on complicated accounting standards, one of the world's top accounting rule-makers says.

Bob Garnett, a member of the International Accounting Standards Board, said banks had only themselves to blame for their big losses in the subprime crisis and the ensuing credit crunch. The world's biggest banks and securities firms have reported about $US379 billion ($394 billion) in asset write-downs and credit losses since the beginning of 2007.

Mr Garnett, a former executive vice-president of the mining giant Anglo American, said these losses were the result of "greed, short-termism and this focus on trying to develop complex instruments".

Despite that, the world's bankers were now asking to be bailed out, he said. "With all these things that are going on, ultimately it's the banks that are looking for some relief and some bail-out but it's the investors who are stuck with the investments who are the ones suffering the most.

"They are the ones who are offering [financial products]; they are the ones who take the commissions out of the investors, pension funds, widows and orphans who happen to be at the end of the line and who don't necessarily understand the details of the products but believe in them.

"It seems odd to me that someone can lend money to somebody whose property is perhaps not worth the value of the mortgage being offered; that the interest rate being charged on the mortgage is below the normal rate, and that the individual doesn't have the income to repay the loan.

"To repackage that in a form that some people find to be an AAA investment seems very strange."

Mr Barnett, in Australia this week as a guest of the National Institute of Accountants, warned banks faced new meltdowns, even after the credit crisis was sorted out. "We don't know what the next crisis is going to be, but it's going to be a new product that banks have developed that will create an incentive for people to invest and get returns that are higher than they could get leaving their money in a savings account," he said.

Bankers have blamed the credit crisis on complicated accounting rules and some want those relaxed so they can soften the impact of asset write-downs.

Earlier this year, the chief executive of ANZ, Michael Smith, said a $220 million provision related to the bank's exposure to a monoline insurer was "driven by the accounting standards".

Mr Garnett said accounting rules had nothing to do with any bank's decision to try to make more money by increasing its exposures. "What the accounting [rule] says is that if you are developing instruments where you rely on market prices to see how they should be valued and how to compensate people for it, then you need to use market prices in accounting as well."

© 2008 Sydney Morning Herald

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