Mr. WYDEN. Nobody else has done what Peat Marwick and Deloitte Haskins have done, which is to put their name on a specific opinion for which they can be held liable?

Mr. KIRK. I do not believe Deloitte Haskins & Sells-they had written a letter, but I don't believe financial statements had been issued with that.

Mr. WYDEN. I think you are correct, and I appreciate that.
How could these two firms have arrived at where they are?

Mr. KIRK. Analyzing the problem differently than we did; looking at the note received from FSLIC, in and of itself, believing that it was negotiable and, therefore, a good asset; looking at the income certificate issued by the savings and loan, and looking upon it as either a good liability-but the desire was as equity-and in this case, convincing themselves that it was close enough to an equity instrument and should so be recorded.

Mr. WYDEN. Well, they――

Mr. KIRK. They can speak better for themselves on it. But knowing what we had heard, and representations in our consideration of it, I believe that is probably how they approached it.

Mr. WYDEN. They certainly analyzed it clearly on the basis of even this interchange differently than all other accountants that we know of-—

Mr. KIRK. All the ones you have spoken to so far.

Mr. WYDEN. Do you think they were unreasonable in their behavior?

Mr. KIRK. No, I don't think they are unreasonable. I certainly disagree upon looking at the facts and circumstances, but that is a regular occurrence with the FASB. We only take on subjects where there is a wide diversity of opinion, and we seldom come out with a pronouncement that is supported by or had been agreed with by all those who petitioned us.

That is true of the accounting firms. They are often in disagreement with our proposals and even after we issue it they are not always happy with the pronouncements.

So it is not an unusual occurrence for us.

Mr. WYDEN. I think you make it out as if this is a modest difference of opinion. What you have heard this morning is many of us, certainly the chairman and I, have been talking about fraud here. Nobody has defined it but it sure looks pretty close. We are talking about $22.5 million. I think this is more than a modest difference of opinion.

Mr. KIRK. It has significant effect. I don't mean to indicate it doesn't. But every one of our pronouncements can have significant impact on financial statements. They can cause people to restate, correct, or modify prior financial statements as a result of the change in rules.

Now I believe the SEC rules indicate that it is presumed that financial statements are misleading if they are not in conformity with generally accepted accounting principles or pronouncements of the FASB, but even statements that follow our standards can with hindsight be viewed as misleading.

The code of ethics of the American Institute of CPA's requires that they not follow our standards if they believe the results would be misleading in particular circumstances. I think what is mislead

ing is in effect the result of often hindsight and court actions and fact judgments on a particular case. I think the rules are just a beginning point and I think they are just a presumption, as they say, that not following them results in misleading statements and is not the end judgment as to whether the statements are misleading.

Mr. WYDEN. Mr. Kirk, another area of inquiry, in your prepared statement you said that FAS-15 requires lenders involved in troubled debt restructuring to disclose information about the concessions that are granted to the borrowers.

According to the General Accounting Office, however, FAS-15 doesn't always require the lender to record an accounting loss where such concessions result in an economic loss. In fact, if I might just read you from Mr. Wolf's statement of April 10,

Too often, an institution's management, examiners and auditors act as if a troubled debt restructuring is akin to a religious experience the lame begin to walk and the blind to see. In reality, however, troubled debtors continue to limp and stumble along. Restructuring a bad loan does not a good loan make.

How can the generally accepted accounting principles permit the existence of an accounting rule that doesn't report the real economic losses?

Mr. KIRK. There is a good bit in accounting that does not recognize what people think are the real economics in a situation, whether they be losses or gains. The accounting that is required in FAS-15 is one that says if your future profit is reduced, don't recognize a loss. That is, as stated on I think page 9 of the SEC submission, basically the concept which governs other entities when they report in accordance with generally accepted accounting principles. So I think it is debatable as to whether there is a loss that needs to be recognized for accounting purposes. Without question, there are diminishments in the value of a loan when many things happen, when interest rates go up, when the credit standing of the one you lent the money to goes down. All of those have impact in an economic sense that make you worse off than you might have been the day before.

When a loan stops performing that is in a sense when you have an economic loss. The question then is do you recognize the market value of that loan, or do you settle for carrying forward your investment in that loan if you are going to recover the cost?

Now, accounting says you can go either way. They are both realities. The realities are you have got an investment that you can recover the cost of and you have got an investment that has a market value. Accounting says if you are going to dispose of the item, sell it, you shouldn't carry it at more than what you can get for selling it. On the other hand, if you are going to hold it and carry it, you ought to make sure you can recover its cost. So it depends what your intentions are.

Statement 15 took the approach that when you modify the terms-sure, you have had an economic loss when the loan stopped performing-you are restructuring it to enhance its value to try to improve what you have got over what you had the day before. So in a sense it is not the restructuring that creates any economic loss; it is the fact that the borrower has stopped performing that creates the economic loss. You restructure to improve it. If you can recover it FAS-15 says you don't need to recognize a loss.

But if you cannot collect what you restructured, you have got to provide for that loss.

Mr. WYDEN. Let me say this, Mr. Kirk. I think you know I have been one of the most active members of this subcommittee on accounting hearings. I have been here virtually throughout from the very beginning. Now that you have told me that there is much in accounting that doesn't really reflect real economic losses, I am perhaps even more concerned than I was when we started this.

Mr. KIRK. Maybe you should be in a sense, but you have to recognize that take savings and loan where you have been concentrating on for months. No one has talked about the fact that their loans were underwater for years-the fact that the market value of their loans when interest rates skyrocketed and they had fixed lowrate mortgages outstanding, that the market value of those mortgages was significantly less than the carrying amount.

Now, sophisticated people that knew the industry knew that, and the regulators knew that, but it all depends on how you view the economics of it. If you are going to hold it and collect it, maybe all you should be concerned about is that and the future cash-flows. If you think you have got to sell the mortgages, then that economic reality says you ought to reflect the market value loss.

So I think it depends on your perspective of which of those realities is more relevant.

Mr. WYDEN. No one disputes that, but as I said at the beginning of this hearing, for example, we are going to be looking at a proposal dealing with oil and gas, that deals with the very serious problems that some of our own small energy concerns are having.

I want to make darn sure we don't adopt an accounting rule that suddenly makes the price of oil different than what it really is, because I think we are going to have even more problems. I know in the hearings ahead you will give us more insight into that point. I just have a couple of other questions.

Do the same factors which cause the need to restructure a loan under FAS-15, such as reduced principal and interest or increased risks associated with a longer loan payback period, do they also result in real economic loss?

Mr. KIRK. Well, I think they are reflective of economic losses that are inherent in the loan.

Again, you are basically trying to make the best out of a bad situation. You have already suffered. I don't mean to be repetitive here, but you have already suffered an economic loss. You are just trying to salvage what you have.

There is no question that you have fewer rights when you restructure or you are going to postpone collection from what your original rights were, but your original rights weren't worth very much because the borrower couldn't perform in accordance with those rights.

Mr. WYDEN. You were for the adoption of FAS-15?

Mr. KIRK. No, I was not.

Mr. WYDEN. Why not?

Mr. KIRK. Two reasons: One reason related to an exchange transaction which was on the minds of everybody at the time of Statement No. 15, and that was the New York City notes that were in

trouble and were exchanged for notes of a State agency, the Municipal Assistance Corporation.

It was my view that that was an exchange that those who had lent money to New York City and ended up having notes from the Municipal Assistance Corporation should recognize as an event, at which time the fair value of the notes should have been recorded, the fair value of the Big MAC notes rather than the New York City notes.

So I felt that was a circumstance in which the market value, the fair value of the notes should have been recorded.

However, let me use that as an example of what the implication is. We have tried to demonstrate in our submission that if the banks had recorded the Big MAC notes at the then-market value and as an example, let's say it was 60 cents on the dollar, was their market value at the time-I don't recall exactly what it was-and those notes have proved to be good. Many people felt they were good at that time.

What you would have done is taken a note at 100, written it down to 60, and then over its remaining life recognized a greater yield to the extent of that write down that you had taken.

So when people talk about the solution in Statement No. 15, being a liberal accounting principle, you have to recognize what you do under 15 versus what I was advocating for the New York City Big MAC swap that is, to write something down to its value but then increase its yield afterward. I think you have to decide, and the Board disagreed with me in that case. They disagreed that it should be marked to market, and agreed that it should be reflected strictly as a continuation of the old debt.

I had a second reason as well. In part, I believed certain losses that had been recognized prior to the issuance of 15 should continue to be recognized.

However, that related to circumstances which are probably fairly infrequent. It is when lenders forgive principal and they are often very reluctant to forgive principal. That is their claim in bankruptcy, but I disagreed on that point as well.

Mr. WYDEN. What do you think we need to do to eliminate the problems associated with restructured debt accounting at this point?

Mr. KIRK. Your last comment?

Mr. WYDEN. What do you think we need to do to turn the situation around?

You have talked about some of the problems. We have talked about some of the problems. We would be interested in your thoughts about how to eliminate some of the problems with restructured debt accounting.

Mr. KIRK. I am not sure there are problems. There certainly were problems in my mind when we adopted 15, but I was in the minority then. I do think there is probably a fair number of people that feel that accounting is as appropriate now as it was then.

I did mention that we have a project which we are giving serious consideration to which is looking at all of the new kinds of instruments that are being developed as well as existing instruments and loans, and seeing if a new fundamental approach to first disclosure and then accounting might be undertaken. So I believe in the scope

of that project, the whole issue of accounting for loans will be considered again.

Mr. WYDEN. Let me recognize minority counsel.

Mr. WILSON. Thank you, Mr. Chairman.

Mr. Kirk, do you believe it is a good idea for a bank regulator to encourage the use of FAS-15 by banks with loans in the energy and agricultural sectors of the economy?

Mr. KIRK. It all depends on what is between the lines. Needless to say, I wouldn't argue with stating that they should follow generally accepted accounting principles.

But if it is couched in terms that it is in some way a means of postponing bad news that should be faced up to now, I would be opposed to that.

So again, following generally accepted accounting principles, I certainly don't quarrel with, but if it is described in a way which implies you can avoid something that you shouldn't be able to avoid, I would oppose it.

Mr. WILSON. If bank regulators do encourage the regulated institution to use financial accounting standard 15, should they also be pointing out the necessity of abiding by standard 5 in accounting for restructured loans?

Mr. KIRK. Yes, they should.

Mr. WILSON. My question to Mr. Kirk and Mr. Leisenring; would you describe the process the Financial Accounting Standards Board follows in promulgating and adopting financial accounting standards?

Mr. LEISENRING. I can describe it in some amount of detail, but I will be very brief.

First, of course you need to go through the identification of the problem you are trying to address and that seems simpler sometimes, I think, to a layman than it is in fact. We spend a lot of time with issue identification and deciding what the scope of the project should be.

There is a formal agenda decision process that the Board undertakes to place an item on their agenda. After that point in time for a majority of our projects there is a neutral discussion document prepared which is supposed to exhaust alternatives and be suitably comprehensive to focus people on several different potential solu

tions.

There is a comment period for that document, sometimes with a public hearing, depending a little bit on the demand for the hearing. At the conclusion of the hearing and the comment process the Board goes back and deliberates the same issues and then the potentials for a conclusion.

That results in an exposure draft where once again in the exposure period comments are requested but also there may well be a public hearing. Again, the process sort of repeats itself and ultimately there is a final statement.

That is for specifically what you asked which is a statement of the Board. There are other alternatives that have less due process associated with them, slightly less with respect to an interpretation which is still exposed.

That is a Board document. There are also staff technical bulletins which have a very limited due process, sometimes as short as a