There were many avoidable causes of the 2008-09 financial meltdown, according to last week’s Financial Crisis Inquiry Commission findings.
The report points the finger at several entities both public and private.
It places heavy blame on the Federal Reserve for failing to properly regulate the overheated housing market and failing to identify risks in the system; it faults Wall Street for using too much leverage that ignored prudent risk management; and it places responsibility on a regulatory framework system weakened by decades of deregulation.
Noticeably absent of blame: the accountants. “The heart of the issue continues to be the same, the accounting firms,” investment banker Howard Davidowitz tells Tech Ticker. “If you don’t have the numbers right, how can you evaluate anything?”
Not only did accounting firms fail to value assets correctly, they also were willing participants in questionable, if not illegal, schemes such as “Repo 105” — accounting window dressing used by Lehman Brothers to misrepresent their risk exposure at the end of the quarter.
The incentive structure for accountants and rating agencies is a central flaw in the system, Davidowitz argues. It’s hard to give objective analysis and advice if the company you’re reviewing is also cutting the check. Until the conflict of interests inherent in the current system are dealt with, the system remains at risk, says Davidowitz. “It’ll never work,” he tells Aaron in the accompanying clip. “If you want to deal with systemic problems, so it won’t happen again, you’ve got to get to the heart of our checks and balances. We didn’t deal with that.”
But if the clients don’t pay the firms, who will?
There are no easy answers to this problem.