Mr. SAMPSON. It is not prepared in the manner we would insist it be prepared under GAAP.

Mr. DINGELL. Now we have established it is not truthful?

Mr. SAMPSON. I would like to use my word, sir, and you may use yours.

Mr. DINGELL. Remember that I am asking the question and let's try and remember that.

Mr. SAMPSON. I am doing my best.

Mr. DINGELL. Is it truthful?

Mr. SAMPSON. If it was issued today, it would not be truthful in your definition.

Mr. DINGELL. OK.

So, it is then not truthful today. It was truthful upon issue. Events change, and a person who looked at this would then have in effect a statement which did not reflect the facts at the time. Is that right?

Mr. SAMPSON. At this time, yes.

Mr. DINGELL. Now, question: Should it be changed?

Mr. SAMPSON. Yes; it should.

Mr. DINGELL. An investor or depositor might have more truthful information in his hand?

Mr. SAMPSON. Yes; it should.

Mr. DINGELL. Does this constitute fraud?

Mr. LYNCH. If these financial statements were used in another offering, it would constitute fraud at this point. I don't know if they sold out this offering. If they have sold the offering, and no sales efforts being made now using this, then I don't think there is a fraud underway at the present time.

Mr. DINGELL. Is it publicly traded stock?

Mr. LYNCH. I don't know.

Mr. SAMPSON. The Bank Board has said this must be revised also, and the next time they file with the Bank Board they will have to change it.

Mr. DINGELL. It is taking us a long time to get to this point.

Mr. SHAD. The decision was on March 28.

Mr. DINGELL. And this is April 24. So, 30 days ago.

Mr. SHAD. The reference to Ponzi scheme; was not quite right. Mr. DINGELL. Well, Ponzi moved faster.

Mr. SHAD. Here you have extensive footnotes to the balance sheet which explained the transaction, so that anybody that reads it I don't think would be misled as to how the accountants got to the conclusion.

Mr. DINGELL. It says total net worth is $44,149,000.

Mr. SHAD. Tagged to the $15 million is footnote 2, which says how they got to the conclusion that this was equity. Mr. DINGELL. But the FASB says it is not?

Mr. SHAD. Subsequently. Knowledge is cumulative.

At the time that the auditor certified this, they were acting at the state of the judgment and knowledge at that time. There was a subsequent action by the FASB which was cumulative, changed the rules.

Mr. DINGELL. Mr. Shad, this is the FASB:

"We have, however, consistently objected to this being done by representations in general purpose financial statements issued to the public that might be construed as

misleading and are not in accordance with generally accepted accounting principles."

That is a very simple statement. It doesn't indicate any newfound objection on the part of FASB to this matter.

Mr. SAMPSON. You can ask them later, but I believe they are saying there have been a series of instruments created for the purpose of creating equity, and they have found each instrument did not meet the test. Now they are addressing this instrument.

Mr. DINGELL. The proposed PICC is the most recent development in the evolution of regulatory assistance programs used by regulatory authorities. It is just one of a progression of events that they later say, as I have quoted, are in fact misleading.

Mr. SAMPSON. They do agree if FSLIC had paid cash for the certificate, it would be equity.

Mr. DINGELL. But they did not pay cash?

Mr. SAMPSON. No, sir. But it indicates there is a point at which you can create equity with the certificate.

Mr. DINGELL. That is not at issue.

They said you can't, by trading paper nor promises, create equity?

Mr. SAMPSON. Yes, sir.

Mr. DINGELL. ESM did that?

Mr. SAMPSON. In a much different way.

Mr. DINGELL. Well, not really all that different. It is just they got caught at it quicker.

Mr. SAMPSON. ESM took the cash out. There is no cash involved here.

Mr. DINGELL. Well, but, you won't tell me that there are not a lot of quotes here that you can take cash out on the basis of this, and FSLIC says there is no equity to pull out?

Mr. SAMPSON. That balance shows the assets of the corporation, and they are existing assets, unlike ESM or Ponzi.

Mr. DINGELL. It requires rather careful attention.

Can you distinguish between this practice and fraud?

Mr. SAMPSON. At the time that this was conceived and issued, it was not clearly inappropriate to do it the way they have done it. Mr. DINGELL. Let us not quarrel on that point, simply in the interest of time, and let us now inquire: Can you tell us today that this is not fraudulently accounted for?

Mr. SAMPSON. Today, this is bad accounting. You call it fraudulent accounting.

Mr. DINGELL. Thank you.

Thank you, Mr. Chairman.

Mr. WYDEN. Well, thank you, Mr. Chairman. I found that very enlightening.

And Mr. Shad said investors should have been able to pick this up out of footnotes. We have Mr. Stearns here who is an investor banker just like yourself, and he said with respect to being able to sort this out, even as an expert-he is an expert, not just an investor

I find it almost impossible to ferret out the real numbers for these institutions. It is very confusing. It is impossible. There is no breakout in most cases of regulatory accounting from GAAP. There are no footnotes to the balance sheets. There is no

way of knowing what is real in there, and it becomes a very difficult analysis problem.

You said that investors would be able to pick it up. Mr. Stearns is an investment banker, and he is saying that this is virtually impossible to pick it up.

Mr. SHAD. This has been an evolutionary process. They started with the idea of net worth certificates. It was passed, enacted as a law in the Garn-St Germain Act.

The accounting profession said "no," that we won't give you credit for equity on the net worth certificate. And they came along with an income capital certificate, and the accounting profession said "no," and they then came along with a permanent income capital certificate-they kept tightening up and refining a term.

Now, the latest pronouncement of the FASB has been again "no," but at the time honest men could reach the conclusion that this was equity. That is what Peat, Marwick did. But they provided an explanation of how they treated the substance of the transaction, in footnote 2. So, I don't know what he was referring to, because there is a disclosure here as to how they got there.

Mr. WYDEN. I bring it up by saying you gave the impression that investors, for example, people at Columbia, should have been able to figure out what was going on. And I just brought up Mr. Stearns.

Mr. SHAD. He wasn't referring to this.

Mr. WYDEN. He is making the point that he is trying to understand the financial underpinnings.

Mr. SHAD. He said there were no footnotes. There was a footnote here.

Mr. WYDEN. Let us see if we have any additional questions.
Do our witnesses have any further comments?

I just want to repeat, particularly to you, Mr. Sampson, what has bothered me most is this attitude that I have heard really in the last 3, 4 hours, somehow this all magically fell out of the air on March 28, of 1986.

It seems to me that everybody else seemed to be saying that this is a serious problem; that this was not a process that should go forward. And yet, you didn't seem to see it that way; and that you were somehow waiting for other things. And that has been what has concerned me the most about this process.

And I share the chairman's view that this seems very, very close to fraud. Perhaps that will be decided by others than myself, but it sure seems close.

Does minority counsel have any questions?

Mr. WILSON. Thank you, Mr. Chairman.

Mr. Sampson, you answered a number of questions today concerning the presence of an income capital certificate in the financial statements of Columbia First Federal Savings & Loan Association. Let me ask you, if I may, a few questions to clarify the SEC position on income capital certificates and permanent income capital certificates.

Does the SEC permit an institution that reports to it to include an income capital certificate or a permanent income capital certificate in its net worth?

Mr. SAMPSON. No, sir.

Mr. WILSON. Does the SEC intend at this time ever to permit reporting institutions to include ICC's or PICC's in its net worth?

Mr. SAMPSON. There are some circumstances under which we might. If the institution received cash in exchange for the certificate, it might then be shown as net worth.

Mr. WILSON. If there was an actual infusion of cash and they gave an income capital certificate in exchange or a permanent income capital certificate for the cash it might be included as equity?

Mr. SAMPSON. If it had no maturity date.

Mr. WILSON. If an institution started filing financial statements including ICC's or PICC's, and if it gave that information to investors; if for example, Columbia First Federal Savings & Loan Association, began using these consolidated balance sheets and selling securities to investors, would the Securities and Exchange Commission consider enforcement actions against that institution?

Mr. LYNCH. I don't want to refer to the specific institution, but generally we would certainly consider taking action.

Mr. WILSON. Mr. Lynch, what is the attitude of the FDIC, the Office of the Comptroller of the Currency, and the Federal Reserve Board concerning enforcement actions brought by the SEC against banks?

Mr. LYNCH. Their attitude is they recognize we have to fulfill our responsibilities, and we do have a very good working relationship with those banking agencies.

Mr. WILSON. Mr. Chairman, I have no further questions. Thank you very much.

Mr. WYDEN. We thank you very much.

Unless our witnesses would like to add anything else, we will excuse you, and we thank you for your cooperation.

The next witness will be the Financial Accounting Standards Board, Mr. Donald J. Kirk, Chairman, accompanied by Mr. James J. Leisenring, Director, Research and Technical Activities.

Gentlemen, I think you know it is the practice of our committee to swear all witnesses.

I assume, Mr. Kirk, you are accompanied by counsel today?
Mr. KIRK. No, sir, we are not.

Mr. Leisenring is on my left; and Mr. Mark Sever is on my right.
None of us wants to be represented by counsel.

Mr. WYDEN. Will all of you be witnesses today?

Mr. KIRK. We will all be witnesses.

Mr. WYDEN. Let the record show Mr. Kirk, Mr. Leisenring, and Mr. Sever (Mark Sever) are here before the Oversight and Investigations Subcommittee as witnesses.

Gentlemen, if you all will please rise and raise your right hand. [Witnesses sworn.]

Mr. WYDEN. It has been a long hearing, and we appreciate your cooperation. We will make a copy of any prepared remarks that you may have a part of our record, in its entirety; and if you could summarize your principal concerns for us in the interest of time, it will be helpful.

TESTIMONY OF DONALD J. KIRK, CHAIRMAN, FINANCIAL ACCOUNTING STANDARDS BOARD, ACCOMPANIED BY JAMES J. LEISENRING, DIRECTOR, RESEARCH AND TECHNICAL ACTIVITIES; AND MARK SEVER, PRACTICE FELLOW

Mr. KIRK. My summary of our written submission will be brief, and we have submitted it for the record.

We have previously submitted statements describing accounting issues relating to financial institutions in July and November 1985. Our most recent submission is dated April 24, and addresses accounting for certain regulatory assistance programs and troubled debt restructurings. We are prepared to respond to your questions on those issues and other matters outlined in Chairman Dingell's April 17 letter.

At various points in its history, the FASB has addressed accounting issues of particular concern to financial institutions. For example, the FASB now has on its agenda a project on loan fees. An exposure draft of an accounting standard on that subject was issued in the fourth quarter of 1985. The Board is aware that there is diversity in the timing of recognition of loan fee income among different types of financial institutions. The Board's project addresses that diversity and provides accounting guidance that can be applied to all lending activities.

As we indicated in appendix B to our written submission of today's date, the FASB is actively considering adding to its agenda a major new project dealing broadly with accounting for financial instruments, including loans. That project would have significant implications for financial institutions as well as for other enterprises.

Accounting for permanent income capital certificates is the most recent financial institution issue to come before the Board. The FASB addressed the accounting by the issuer of a permanent income capital certificate or an income capital certificate, and concluded that a savings and loan association should not report an increase in liabilities or equity as a result of issuing that certificate and receiving a promissory note from the Federal Savings and Loan Insurance Corporation until such time as the promissory note is sold. Rather, the savings and loan should present the income certificate in the liability or equity section of the balance sheet as appropriate, depending on its characteristics, and should present the promissory note as a deduction from the income certificate and not as an asset of the association. Letters to the chief accountant of the Securities and Exchange Commission that explain our views are included in our written submission.

Recent testimony of banking regulators and others before the committees of this Congress have focused attention on a past project of the Board, our Statement No. 15, Accounting by Debtors and Creditors, for Troubled Debt Restructurings. Statement 15 was issued in June 1977, and to the best of our knowledge has been used by banks and other parties to troubled debt restructurings in preparing financial statements in accordance with generally accepted accounting principles and, in all but a few circumstances, in accordance with regulatory requirements. Recent public discussion of the potential use of statement 15 has appeared to overlook the