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“Over many decades we have built a highly fragmented, balkanized regulatory structure over our financial services and capital markets”, FASB chairman Herz said. “And there are black holes of little or no regulation”, he added pointing to the
“Balkanized regulatory systems, both in the
In a relatively short period of time there was a rapid and explosive growth of unregulated, opaque markets that lacked a proper infrastructure, such as the transparent pricing and clearing mechanisms, he explained.
“To some observers, it was a “Wild West” version of financial markets in which the unchecked growth of products such as credit default swaps could suddenly swell to over $60 trillion in notional value, prompting the question: ‘Where were the regulators?’,” said Herz.
Herz draw an a series of lessens to be learned from the crises. Sound markets require a proper infrastructure, he said, and fundamental changes may be needed in our capital markets and financial services industry. He also addressed the misleading and damaging payment incentives of managers. “Perverse incentives lead to perverse outcomes”, he said.
Touching upon fair value accounting, Herz underlined that implementing fair value in illiquid markets can be challenging and difficult. “There are important questions to be asked”, he said. “Does it lead, reflect, or lag reality? Are there genuine concerns over procyclicality ? These are important questions and issues; but I would ask, what is the alternative?”
“The harsh reality is that we can’t just suspend or modify the financial reporting when there is bad news”, he said.