GETTING THE ACCOUNTING RIGHT ACCOUNTING AND THE SAVINGS AND LOAN CRISIS

Description
In contrast to previous e xamlnations, this paper considers the ways in which accounting was deployed in
and altered by the savings and loan crisis. Several theoretical concepts (accounting as an element of
governmental&y and discipline produced within a particular regulatory space) arc used to lllumme the role
of accounting in the savings and loan crisis. The story unfolds as a prologue and three acts. During the
prologue, accounting was supposed to “reveal” the ftnanclal condition of lmilvidual savings and loan
organhadons and the industry and to provide “facts” usetitl in regulatory declslon making

Pergamon
Accounting ~unizariom and Socfery, Vol. 20, No. 1, pp. 55-B0, 1995
CopyrQht 0 1994 Elsevier Science Ltd
Printed in Grea& Britaiu. All rights reserved
0361-36B2/95 S9.M+0.00
GETTING THE ACCOUNTING “RIGHT”: ACCOUNTING AND THE SAVINGS
AND LOAN CRISIS*
JON1 J. YOUNG
Uni versi ty of New Mexi co
Abstract
In contrast to previous e xamlnations, this paper considers the ways in which accounting was deployed in
and altered by the savings and loan crisis. Several theoretical concepts (accounting as an element of
governmental&y and discipline produced within a particular regulatory space) arc used to lllumme the role
of accounting in the savings and loan crisis. The story unfolds as a prologue and three acts. During the
prologue, accounting was supposed to “reveal” the ftnanclal condition of lmilvidual savings and loan
organhadons and the industry and to provide “facts” usetitl in regulatory declslon making In Act 1, a “tight”
accounting becomes one that justiiies regulatory inaction and “conceals” the financial condltlon of these
organizations. During Act 2, a “right” accounting shifts again and is now to reveal wganizational lnsohency.
Finally, in Act 3, a ‘right” accounting continues as one that should “reveal” the organlzatlon but also begins
to assume a role ln disclpllnlng the regulator. In each act, various actors in regulatory space exhibit a concern
for getting the accounting “right*. Dllerent sets of accounting practices are promoted as these conceptions
of a “tight” accounting change. Despite shifts ln these conceptions, the actors in regulatory space do not
question whether accounting can be made “right”. Accounting emerges fromthe savlnp and loan crisis with
its status as a regulatory tool intact and with the potential for an expansion of its domain to include disciplining
the regulator.
The savings and loan story is a complicated web
of fraud, abuse, incompetence, and laxity and
has been recounted by many authors. Some have
focussed upon its criminal aspects (e.g. Waldman,
1990; Pizza et al ., 1991; Adams, 1990) and
others have searched for ways to prevent the
recurrence of a similar debacle (e.g. Report of
a Task Force, 1989; Kormendi et al ., 1989;
Brumbaugh, 1988; White, 1991). In contrast,
this paper examines the ways in which account-
ing was deployed in and altered by the crisis.
The savings and loan industry is highly
regulated. Through the highly political process
of financial regulation, the state intervenes
directly in the operating and financial policies
of banks and savings and loan organizations. For
example, regulations specify the assets (e.g.
mortgages; acquisition, development, and con-
struction loans; junk bonds). and liabilities (e.g.
savings accounts, NOW accounts) that 6nancial
institutions may possess.
Financial regulation, however, is not limited
to intervention into the operating practices of
individual institutions. Instead, financial regula-
tion often interweaves procedures for represent-
ing the organization and intervening into its
operations. Representations of organizations are
one among many elements of governmentality
(Foucault, 1991; Miller & Rose, 1990). To
facilitate regulation, savings and loan organiza-
l My thanks to Allstalr Preston, Ted O’Leary, Michael Power, Teresa Hammond, J esse Dlllard, TomMouck and the participants
of the Accounting Workshop at University College Cork, and particular thanks to two anonymous reviewers for their
helpful comments on earlier drafts.
55
56 J. J. YOUNG
tions and the industry must be represented and
depicted in ways that permit them to enter the
sphere of conscious political calculation (Rose
& Miller, 1992). These representations make an
organization visible to and governable by
physically distant centers of regulation and
permit the regulator to “know” the entity
(Latour, 1987; Rose & Miller, 1992; Miller,
1991).
Because accounting reports provide a means
of representing organizations, accounting is
deeply enmeshed in Iinancial regulation. Account-
ing numbers and reports are produced in an
effort tore-present the organization and the real.
Accounting appears to bring knowledge about
entities back to centers of regulation, and
renders these entities susceptible to evaluation,
calculation and intervention by the regulator
(Miller, 1990, 1991; Hacking, 1983; Hines,
1988). Accounting numbers play an important
role in the regulation of Iinancial entities such
as savings and loan organizations. These numbers
are deployed as “facts” in such settings in at least
two ways.
First, accounting numbers facilitate the regu-
lation of specific entities. These numbers enter
into the decision calculus of the regulator in
deciding whether the organization is “normal”
and operates as one expects a Iinancial in-
stitution to operate. Accounting permits the
regulator operating in a location physically
distant from that of the organization to anwer
questions such as: Is the entity financially
healthy? Does the entity meet the financial
criteria established for such entities by the
regulator? Does the entity require more direct
intervention into its operations by the regulator?
In this way, accounting provides regulatory
“facts” used to sort and classify the many savings
and loan organizations and to focus the attention
of the regulator upon those organizations that
accounting “facts” suggest can no longer be
classilied as normal.
Second, regulators, Congresspeople, and
others deploy accounting numbers in the
formation and implementation of national policy
for the financial industry. Accounting numbers
are used to justify particular national financial
policies as well as to prohibit or to block the
employment of other policies. In justifying new
policies, accounting numbers are taken as facts.
Their origins and constructions are neither
closely examined nor debated. Instead, the
numbers are taken for granted and assumed to
represent some truth or underlying reality that
is the focus of the policy process.
In each of these settings, the arts of government
and economic calculation were enmeshed in
Rnancial regulation (Miller, 1990). Regulators and
politicians deploy accounting numbers to support
and just@ regulatory judgments, to prioritize
regulatory problems and to allocate scarce
regulatory resources (Rose, 1991). Accounting
numbers derive their power in Iinancial regulation
irorn the conIiguration of sharp boundaries be-
tween the political and the technical (Rose,
199 1). Through accounting, the regulator demar-
cates a financial domain in which savings and loan
entities are governed and administered according
to the “facts” (Miller & O’Leary, 1993) rather than
according to “opinion” and “prejudice”.
Further, accounting “facts” serve a disciplinary
role in financial regulation.’ Through their use,
the strengths and weaknesses of organizations
can be evaluated, controlled and “known”.
Regulators can study and peer into the savings
and loan organization through accounting reports.
By monitoring accounting ratios and numbers
rather than specific entity decisions, the regulator
can operate at a distance 6rom the entity &tour,
1987; Rose & Miller, 1992; Miller, 1991) and
permit the executives within the entity to
’ Other authors have employed the concept of discipline and the normalization of individual subjects (Foucault, 1979) to
examine particular accounting practices (e.g. MiIIer & O’Leary, 1987; Hoskin & Macve, 1986; Preston, 1989). Here, I
employ the concept of accounting as a disciplinary mechanism on actors defined to include institutions as weII as individuals.
My thanks to an anonymous reviewer for helping me to clarify this usage.
GETTING THE ACCOUNTING “RIGHT” 57
continue to make decisions and to operate the
enterprise in a seemingly unfettered fashion.
The savings and loan entity can be continually
monitored and regulated through accounting.
This importance of accounting “facts” to
regulation is not meant to suggest that they are
the only mechanism used to discipline and
subdue the possible inclinations of the financial
institution to fail, and of the financial manager
to circumvent the law (e.g. Preston, 1989).
Instead, the disciplinary power of accounting in
Iinancial regulation is also aided by the threat
of direct regulatory intervention into the opera-
tions of individual organizations and the con-
duct of periodic regulatory examinations by
federal auditors.
Accounting “facts” are constructed within a
“regulatory space” (Young, 1994; Hancher &
Moran, 1989). Within this space, former account-
ing “facts” may be later designated as accounting
“fictions”. Regulatory space is an abstract
conceptual space constructed by people, organ-
izations and events that act upon accounting and
accounting practices. Within this space, various
actors discuss, analyze and contest accounting
practices and methods. These actors produce
the accounting standards, regulations and con-
ventions that govern accounting measurement
and classification. The shape of regulatory space
and the allocation of power within the space are
affected by its political and legal setting, history,
organization and markets (Hancher & Moran,
1989, p. 271).
In employing the concept of regulatory space,
the researcher must examine closely the activi-
ties of various actors and the ways in which they
promote various accounting practices. The
regulatory space for the savings and loan
industry was crowded at different times by such
actors. Prominent among these actors were the
Federal Home Loan Bank Board (FHLBB) and
the Financial Accounting Standards Board
(FASB ). As the savings and loan crisis began, the
FHLBB had the authority to esqblish regulatory
accounting practices (RAP).’ RAP consisted of
those accounting methods and practices to be
employed by savings institutions in preparing
reports to be filed with the FHLBB. The Financial
Accounting Standards Board (FASB) was respon-
sible for establishing the accounting methods
and practices to be employed in preparing
reports distributed to external entities (gener-
ally accepted accounting principles or GAAP).
During the various acts of the savings and loan
crisis, other actors such as Congress, academics,
accountants, and the business press entered and
exited regulatory space or remained active on
its periphery.
At different times, these actors attempted to
construct or defend their own versions of a
“right” accounting and to criticize the efforts of
others. The conception of a “right” accounting
was altered at various times during the savings
and loan crisis. These alterations occurred as
different demands were placed upon account-
ing. Such linkages between a particular concep-
tion of “right” accounting and specific accounting
practices were often loosely developed. Actors
in regulatory space attempted to strengthen
such linkages by focussing upon the ways in
which other practices failed to achieve a “right”
accounting. In doing so, these actors did not
address how the promoted practices accom-
plished this objective.
In the following sections, I draw upon this
concept of regulatory space as well as upon
the theoretical concepts of accounting as an
element of governmentality and discipline to
construct a story that illumines the role of
accounting in the savings and loan crisis. This
a At the beginning of the 1980s the EHLBB was the primary regulator for savings and loan organizations. See the Appendix
for a brief overview of thrii regulation during this period. In the midst of the continuing crisis in this industry, the FHLBB
was replaced by the Office of Thrift Supervision, an office of the U.S. Treasury department, with the passage of U.S. Public
Law 101-73 in 1989. This law also transferred the insurance responsibilities of the Federal Savings and Loan Insurance
Corporation to the Federal Deposit Insurance Corporation, previously the insurer for banks.
58 J. J. YOUNG
story is structured as a prologue and three acts3
The prologue provides background about the
savings and loan industry and the early days of
the savings and loan crisis and describes how
accounting “facts” were deployed to suggest the
need for action to assist the ailing savings and
loan industry. Here, a “right” accounting was
one that was held to reveal the financial
condition of both individual organizations and
the industry in order to provide “facts” useful
in regulatory decision making.
The first act explores the operation of the
regulatory process upon accounting and the
alteration of accounting practices to buy time
for troubled savings and loan organizations.
Within this act, the FHLBB altered RAF’ in an
effort to “conceal” the financial condition of the
savings and loan industry. These alterations can
be seen as an attempt to avoid closing those
thrifts that would have required regulatory
action under the old rules. Here, a “right”
accounting shifted from an accounting used in
decisions about whether to intervene into the
operations of specific organizations to an account-
ing that provided a j ustaJ i cuti on for regulatory
inaction.
During the second act, the financial problems
within the savings and loan industry continued
despite the earlier efforts to allow the industry
time to work through its problems. As the
necessity for closing many institutions began to
be accepted by Congress and others, the
definition of a “right” accounting was changed.
In this act, a “right” accounting was redefined
as one intended once again to reveal the
organization and to help justify assessments of
organizational insolvency. With this redefini-
tion, GAAR was promoted as a corrective to the
deficiencies of RAP as constructed by the
FHLBB.
During the final act, questions were raised
about the adequacy of GAAP in revealing the
financial condition of savings and loan organiza-
tions. Ahhough a “right” accounting continued
to be defined as one intended to reveal the
organization and to justify assessments of
organizational insolvency, additional demands
were also placed upon accounting practices.
Now, some actors in regulatory space demanded
that accounting become more “accurate” in its
representations of the financial condition of an
entity. These actors also suggested a more
expansive disciplinary role for accounting. A
“right” accounting would now discipline the
regulator as well as the regulated entity.
Taken together, the changing use of account-
ing in these three acts suggests its resiliency,
adaptability and durability and the multiple
definitions of a “right” accounting. During this
study, a “right” accounting was defined and
actions undertaken in its name within a particular
regulatory space. Within this space, a “right”
accounting was defined at different times as one
that could conceal an organization, as one that
should render an organization visible, and as one
that should render both organizations and
regulators visible. Despite these shifting defini-
tions of a “right” accounting, the potential for
the facticity of accounting remained unques-
tioned. Although specific accounting practices
were discussed and criticized, the actors in
regulatory space questioned neither whether
accounting could represent the real nor, more
fundamentally, whether accounting helps to
create the real. Instead, the failures of account-
ing, as with the failures of other policies, were
seen as opportunities for devising “better”
accountings or policies (Miller, 1991; Rose &
Miller, 1992).
Changes in the accounting practices employed
by savings and loan organizations cannot be
understood only in terms of the needs and
requirements of these organizations or of the
regulators (Burchell et al ., 1980). Instead,
accounting practices changed as the demands
placed upon accounting changed and as the
perceptions of a “right” accounting changed.
Assessments by actors in regulatory space of
3 The breaking of the story into a prologue aod three acts is a rhetorical device that is not meant to imply that these acts
occurred in continuous sequence, as chronological events do overlap between the various acts.
failure and crisis in accounting do not appear accounts into higher paying money market
to have touched the idealization of accounting accounts offered by other financial institutions.
as a representational possibility. Faced with such During 1979 and the early 1980s the net flow
failures, these actors rallied around other of funds into savings and loan organizations
accountings to re-promote and maintain the slowed and, in at least some months, with-
ideals of accounting. Thus, accounting is a drawals exceeded deposits. For example, in
congenitally failing operation (Miller & Rose, 1981, the savings and loan industry suffered a
1990) in which crisis leads to the promotion of net outflow of deposit funds of $25.5 billion
new sets of accounting practices as the actors (testimony of Richard Pratt, U.S. Senate, 1982a,
in regulatory space search for ways to maintain p. 77).
claims that accounting represents the “real”. As Second, even after Congress expanded the
suggested by this case, accounting failures do liability powers of savings and loan associations
not preclude an expansion of the demands and permitted them to offer higher interest
placed upon accounting. paying accounts, the primary assets of savings
and loan associations remained invested in long-
term fixed-rate mortgages, many of which had
PROLOGUE: THE BEGINNING OF A CRISIS been originated when interest rates were low.*
The interest rate ditferentials between the cost
During the 1980s and into the current decade, of funds and the rate of return on investments
Congress and the press have focussed consider- (i.e. mortgages) severely diminished the profit-
able attention on the savings and loan industry. ability of savings and loan associations and were
This industry had the original purpose of seen to threaten the economic viability of these
providing mortgage financing to facilitate the organizations (e.g. U.S. Senate, 1982a).
purchase of family homes. For several decades, Caught in this interest rate squeeze, savings
savings and loan associations continued to and loan associations were said to be floating in
originate only fixed-rate mortgage loans. By a sea of red ink. Concerns about the profitability
taking in short-term funds from small depositors and viability of savings institutions continued
and later lending these funds as long-term throughout the early years of the 1980s. In 1980,
mortgages, the business was seen as simple and the Wall Street Journal reported that savings
easy. Insiders refer to those days as the 3-6-3 and loan profits were expected to be the worst
days: ‘when thrift executives paid 3% for since World War II ( 17 September 1980) and
deposits, loaned the money to home buyers at that the steep rise in interest rates would
6% and were in a golf cart by 3 p.m.” (Pizza continue to undermine the earnings prospects
et al., 1991, p. 23). for thrifts ( 12 November 1980). These pessimistic
The complexity of operating within this profit forecasts continued and, by 1982, the
industry began to increase as interest rates FHLBB chairman declared that 80% of savings
climbed, slowly at first, then dramatically. These and loan organizations were unprofitable (U.S.
high interest rates were seen to threaten the House, 1982a, pp. 201-213).
viability of savings and loan orgnaizations for at The heavy losses experienced by savings and
least two reasons. First, under existing law, these loan associations began to diminish severely
organizations had limited sources of funds: their capital levels. Savings and loan association
primarily low interest rate savings-type accounts. capital played a significant role in the regulation
With increased interest rates and the advent of of these organizations by federal regulators. The
money market accounts, depositors began shift- FHLBB employed solvency and capital require-
ing funds from savings and loan association ments to assist in “monitoring the health” of
GEl-lING THE ACCOUNTING “RIGHT” 59
’ Until 1981, savings and loan orgnaizations were prevented by kdw from offering adjustable-rate mortgages.
60 J. J. YOUNG
financial institutions. In this way, accounting
served a diciplinary role. Because institutions
that failed to meet the solvency and capital
requirements calculated from accounting num-
bers could be closed by the regulator,5 account-
ing numbers served as a basis and justification
for regulatory intervention into the operations
of regulated institutions.
As the capital levels of savings and loan
associations continued to decline, the regulators
began to decrease the net worth requirements
of savings and loan associations (Wal l Street
J ournul , 22 February 1980; 7 November 1980;
15 January 1982). Eventually these net worth
requirements decreased from 5% of insured
accounts to 3% of liabilities. The FHLBB also
amended the net worth requirements, altering
the items included in and excluded from these
calculations. However, even with decreased
capital requirements and changes in the com-
position of net worth requirements, many
entities continued to fail the regulatory standards
of the FHLBB. In the first half of 1981, the FHIBB’s
list of troubled savings and loan associations had
tripled (Wal l Street J ournal , 20 November
1981).6 As these entities recorded additional
accounting losses, their capital levels were
eroded even further (Wal l Street J ournal , 26
March 1981; 27 May 1981; 1 December 1981;
24 June 1982). By 1982, the FHLBB chairman
predicted that 900 savings and loan associations
would exhaust their capital funds ifinterest rates
remained at record highs (Wal l Street J ournal ,
25 March 1982).
From 1980 until the passage of the Garn-St.
Germain bill in 1982,’ the profitability and
competitiveness of the savings and loan industry
as well as other depository institutions were the
focus of thirteen hearings in the House of
Representatives and ten Senate hearings. During
these hearings, various witnesses appeared
before both the Senate and House committees
to discuss and analyze the decreased profitability
and eroding capital levels of savings and loan
associations and banks.
Throughout these hearings, accounting num-
bers were taken as “facts” to be used in the
policy process and to reveal the poor financial
condition of thrifts. These numbers were used
as background facts to obtain Congressional
support and assistance for the industry. The
hearings referred repeatedly to “negative eam-
ings” (U.S. Senate, 1981a, p. 447), “severe”
earnings problems (U.S. Senate, 1981a, p. 481,
1981b, pp. 501, 520, 523, 1982a, pp. 72, 106,
113) and projections of “poor” earnings and
declining capital (U.S. Senate, 1980, p. 626; US.
House, 1982b, pp. 1486, 1499). Testimony
claimed that savings and loans were experienc-
ing a “severe” financial crisis which was eroding
capital (U.S. Senate, 198lb, p. 1730, 1982b, p.
4, 1982a, p. 73, U.S. House, 1982b, p. 1493).
Savings and loan organizations were claimed to
be increasingly unable to meet the capital
requirements of the FHLBB (U.S. Senate, 1982b,
p. 4). The average savings and loan was alleged
to be “living off” its prior net worth (U.S. Senate,
1981b). Based on various interest rate assump-
tions, large numbers of organizations were
expected by the FHLBB to “deplete their capital
by 1986” (U.S. Senate, 1982a, p. 81).
During these hearings, accounting numbers
were regarded as neutral policy inputs that
provided information about the savings and
loan institution to the regulatory center and
Congress. These numbers were employed to
highlight the savings and loan crisis, to focus
attention upon the industry and to demonstrate
’ The FHLBB had the power to seize savings and loan institutions and appoint a receiver. The FHLBB rarely used this
power, and Marvell(l969) noted that the FHLBB seized only two institutions after 1966.
6 The FHLBB abruptly halted publication of this list after the first half of 1981 (Wal l StreetJ ouml , 20 November 1981).
’ Among its many provisions, this bill provided the FHLBB, FSLIC and Federal Deposit Insurance Corporation with temporary
flexibility to assist financially distressed banks and thrifts, established a capital assistance program, and increased the
investment powers of thrifts.
GE’lTlNG THE ACCOUNTING “RIGHT” 61
the problems facing the industry such as interest
rate mismatches. Accounting numbers were
used to justify action and policy changes for
the industry such as those contained in the Garn-
St. Germain bill. Accounting numbers were
employed to assist in governing savings and
loans, to represent the organization and the
industry and to serve as a partial justification for
intervention into the operations of the industry.
Accounting numbers were used to focus
attention. The numbers themselves were un-
questioned as to their construction and repre-
sentational possibilities. The numbers were
called upon to “represent” and illumine. Impli-
citly, a “right” accounting was defined as one
that met these demands. In the following act,
the definition of a “right” accounting would be
interrogated and efforts made to alter this
definition.
ACT 1: ACCOUNTING AS REGULATORY
FORBEARANCE
Backgmund
During the prologue, accounting numbers
(particularly decreasing profitability and erod-
ing capital levels) were used to suggest the
urgency of perceived problems within the
savings and loan industry and to establish
the need for new regulatory policies. While
accounting numbers were being used as regula-
tory policy inputs, these numbers became the
object of a regulatory process that altered their
construction.
In this section, I discuss how accounting was
changed from a disciplinary technique to
regulate and act upon the entity from a distance
into an avoidance technique to evade action
upon the entity. In this section, getting the
accounting “right” appears to be defined as
concealing the financial condition of the entity
and the industry. Accounting numbers can be
seen as malleable and easily changed to present
a healthier picture of the savings and loan
industry. In this act, a “right” accounting from
the perspective of the FHLBB shifts from one
that reveals the “truth” about the organization
to one that presents a picture of healthy thrifts
and a healthy savings and loan industry. A “right”
accounting comes to be seen as one that buys
time for the thril? industry to work through its
financial problems. The focus of attention by the
regulator was not upon the economic structure
of the financial markets but upon the account-
ings employed by savings and loan entities.
After passage of the Gain-St. Germain bill, it
was believed that savings and loan associations
required time to work out their difliculties and
to return to profitability. This bill had been
designed to buy time for the ailing savings and
loan industry and to provide federally chartered
savings associations and savings banks with new
investment powers, such as expanded capacity
for commercial and consumer lending, and
contained provisions allowing institutions to
improve their net worth. These provisions were
considered to “provide a breath of life” to many
ailing institutions (S&L News, November 1982,
p. 42).
A number of actors were involved in the
regulatory space out of which accounting
changes emerged. These included the Reagan
White House and the Office of Management and
Budget, actors on the borders of the regulatory
space of accounting. Reagan officials promoted
the rhetoric of a balanced federal budget and
argued for the need to downsize the govern-
ment. In order to achieve these ends, they
reduced the number of federal auditors examin-
ing the records and practices of savings and loan
organizations even though these organizations
had been granted increased asset powers and
perhaps needed additional supervision and
oversight. Reagan officials also opposed actions
that would increase budgeted government
expenditures, such as recapitalization of the
insurance fund. The position of these actors
limited the number of options available for
savings and loan regulators to cope with
insolvent institutions. For example, without a
recapitalization, the EHLBB and Federal Savings
and Loan Insurance Corporation (ESLIC) could
not cIose down those thrift Institutions that
failed to meet the established solvency tests.
With implied reference to this situation,
62 J . J . YOUNG
TABLE 1. DItTerences between RAP and GAAP
Iteflransaction RAP treatment GAAP treatment
Loan fees
Losses on sales of mortgage assets
Financial Instruments
Income capital certIfIcates
Net worth certitkates
Appraised values of assets
Could recognize income equal to 2.5% Immediate recognition limited to
of loan amount, plus 5400, upon loan extent of costs incurred in originating
origination loan (FASB, 1986)
Loss recognized over remaining loss recognized immediately upon sale
contractual life of assets sold of asset
Increase equity Not included as equity
Increase equity Not included as equity
Recognized on some assets and Not recognized
increased equity
Merger accounting GoodwiIl amortized over time frame FASB (1983) required
longer than amortization of discounts on
assets
Rechtssiftcation Certain subordinated debt and contra- These accounts excluded from equity
asset accounts included as equity
Richard Pratt, chairman of the PHLBB, testified
to Congess:
We are clearly following a strategy which buys time. We
have no choice. We have limited resources.. (U.S.
House, 198213, p. 1512).
Pratt aJso discussed the use of mergers and
default prevention actions that enabled the
PSLIC “to stretch considerably the financial and
human resources available to [it]” (U.S. House,
1982b, p. 1500). The alternatives available to
the PSLIC and PHLBB were limited and Pratt
indicated:
We have made every eRort to provide breathing room
for the thrift industry to adjust to the new economic
order. Our record with respect to accounting rules,
the structuring of assistance agreements, support for
expanded powers, and my recent capital assistance
alternative are but a few examples of the efforts we
have made to aid individual savings institutions and the
industry as a whole (U.S. House, 1982b, p. 1565).
The regulators seemed to seek breathing room
for the thrift industry in the hopes that interest
rates would fall and the new asset powers
granted to the industry would facilitate a return
to profitability.
Opening a gap between RAP and GAAP
Prior to the savings and loan crisis, there were
few differences between RAP used in reports
Sled with the PHLBB to monitor compliance
with statutory and administrative requirements
and GAAP used by companies in reports filed
with the Securities Exchange Commission. As
the PHLBB began to reconstruct and alter RAP,
the gap between RAP and GM increased
substantially. The altered practices promoted by
the PHLBB included more rapid recognition of
loan fee income, deferred recognition of losses
on mortgage sales, recognition of financial
instruments as assets and capital, and the
application of purchase accounting for savings
and loan mergers. These techniques are dis-
cussed in detail in the following paragraphs and
summarized in Table 1.
Loan fees, In 1979, the PHLBB began to permit
thrifts to recognize loan fee income on a more
liberal basis thau that permitted by GAAP.
The earnings from loan fees ‘were greatest
for those thrifts with signiticant construction
loan volume” (U.S. Senate, 1990a, p. 137).
This difference between RAP and GAAP was
believed to “almost certainly [have] induced
many institutions to enter into additional
construction loans (however risky) in order to
GE’l-IlNG THE ACCOUNTING “RIGHT” 63
generate immediate income” (U.S. Senate,
1990a, p. 137).
Deferred losses. In August 198 1, the FHLBB
proposed a rule to permit savings and loan
entities to defer the recognition of losses arising
from the sale of mortgages whose book value
exceeded their market value. In contrast, GAAP
accounting required the savings and loan entity
to record a loss on the mortgage when it was
sold. As a consequence, many savings and loan
organizations retained such mortgages in their
portfolios to avoid recognizing losses. In justify-
ing this accounting change, the FHLBB proposal
stated that GAAP failed
to reflect the true economic consequences of a sale
and reinvestment of the proceeds, [and] effectively
inhibit[ed] institutions from selling mortgages and
mortgage-related securities when it would be in their
best interest to do so (U.S. House, 1987b, pp. 11-12,
FASB correspondence).
The FHLBB further asserted that the change
would help thrifts caught “in an earnings
squeeze because much of their mortgage port-
folios consist of the long-term, low-rate mort-
gages” (Wall Street J ournal, 1 October 1981).
In allowing thrifts to delay recording losses from
the sales of mortgages, the FHLBB was encourag-
ing these thrifts to sell unprofitable mortgages.
Through accounting, the FHLBB hoped to
encourage thrifts to take actions to improve
their long-term profitability. Even with revised
representations of the “real”, the FHLBB could
act upon the organization from a distance rather
than directly intervening into the operations of
the entity. It is estimated that this accounting
change increased savings and loan industry
capital by $6.3 billion (U.S. Senate, 1990a, p.
138).
Financial instruments. In 1981, the FSLIC
developed a new financial instrument, the
income capital certificate, that was designed to
help resolve financially troubled savings and
loan associations without requiring cash payouts
to depositors. These certificates combined both
equity and debt features and were claimed to
provide “true capital substance, thereby elimi-
nating many complex legal issues that would
arise if an association were to continue to
operate while in or near book insolvency”
(Faucette & Kneipper, 1981). In other words,
these certificates would boost savings and loan
capital and facilitate regulatory inaction. Among
its many provisions, the Garn-St. Germain bill
permitted the issurance of net worth certificates
to increase the recorded capital of savings and
loan organizations meeting certain requirements.
Under this program, a savings and loan entity
issued a net worth certificate to the FSLIC in
exchange for a promissory note in the same
amount. The transaction was designed to mimic
the accounting arising from the sale of stock.
Appraised value. In 1982, the FHLBB per-
mitted thrifts to increase capital by recording
the difference between the appraised values and
book values of certain capital assets such as
owned and leased office properties and lease-
hold improvements. This appraised equity capital
increased thrift capital levels even though the
assets had not been sold. Under GAAP, an
institution would not recognize such unrealized
gains until the asset was sold. This rule is
estimated to have increased reported regulatory
net worth by $2.2 billion (U.S. Senate, 1990a, p.
136).
Merger accounting. The FHLBB also encour-
aged troubled thrifts to merge with healthier
institutions. To make these transactions more
attractive, the FHLBB staff encouraged “liberal”
treatment of goodwill arising from these trans-
actions. Using an interpretation of purchase
accounting prescribed by GMP, an acquiring
thrift would record the fair value of assets and
liabilities (both tangible and intangible) acquired
by discounting such items using current interest
rates (which were generally higher than those
prevailing when these instruments were issued).
In many instances, the fair value of liabilities
exceeded that of assets by a substantial amount
and the excess was recorded as goodwill. If the
goodwill was amortized (i.e. expensed) over a
period that exceeded the amortization period
of the asset discount (i.e. income), the sub-
sequent reported earnings of the combined
enterprise could show a dramatic increase
relative to the sum of income absent the
64 J. J. YOUNG
business combination (FASB, 1983, para. 22).
This accounting treatment is estimated to have
increased recorded capital by over 115 billion
in 1982 alone. In 1982, goodwill as a percentage
of t0ta.I industry GAAP capital rose from 6% to
approximately82% (U.S. Senate, 199Oa, p. 142).
Rdassf~tfon I n 1982, the FHI8B approved
a rule to allow savings and loan associations to
remove certain accounts from the liability
portion of their ledger and thereby make it
easier for savings and loan organizations to
maintain required levels of net worth (Wal l
Street J ournal , 16 July 1982). The FHLBB
permitted savings and loan entities to classify
certain subordinated debt as net worth, and also
classified contra-asset accounts such as deferred
fees and unearned discounts as net worth. Under
GAAP, none of these items was classified as
capital.
Some earl y opposftfon
FHLBB efforts to alter regulatory accounting
were not uncontested within regulatory space.
During this act, the primary opponent of the
FHLBB changes was the FASB. It responded to
the FHLBB policy on the recognition of loan fees
by issuing a GASP standard to slow this
recognition (FASB, 1986). The FASB vigorously
opposed the deferred recognition of loan losses.
In September 1981, the FASB staff wrote the
FHLBB that the “FASB staff believes that
adoption of the proposed r&e would have an
undesirable effect on industry credibility and
could produce misleading results”. The staff
asserted that
cban@ng RAF’ so that savings and loans will not appear
to have sustained decreases in their net assets would be
a disservice to the users of the fmancial statements .
Such misinformation might well result in the loss of
credibility for institutions that report it and regulations
that encourage it (see copy reprinted in U.S. House,
1987b).
Later, the FASB voted to endorse formally the
views expressed by the FASB statI (see FASB
letter dated 16 September 1981 reprinted in U.S.
House, 1987b, p.15)’ In 1983, the FASB issued
Statement No. 72 to address and eliminate the
accounting abuses perceived to arise from
purchase accounting for mergers as interpreted
by the thrift industry and the FHLBB.
The FASB also opposed the use of new
financial instruments including income capital
and net worth certificates to increase savings
and loan capital for GAAP purposes. The FASB
staff responded negatively to a Congressional
letter inquiring whether federal government
guarantees could increase recorded thrift capitai
because such guarantees were not assets under
GAAP (see 19 May 1982 letter reprinted in U.S.
House, 198713, pp. l&19). They argued that net
worth certificates issued by savings and loan
associations in exchange for an FSLIC note did
not increase GAAR capital but instead increased
the recorded liabilities of an association (see 23
November 1983 letter reprinted in U.S. House,
1987b, pp. 23-24). In a report to Congress,
the GAO also noted that net worth certificates
were not capital under GAAP and recommended
that “agencies qualify regulatory financial
reports on thritts and other institutions provided
to the public that differ from those standards
because the reports could be misleading” (GAO,
1984).
As late as 1987, the FASB continued its
protests against the “creative” use of accounting
to buy time for ailing savings and loan organiza-
tions. In 1987, the FASB wrote to Rep. St.
Germain to encourage his Congressional com-
mittee to avoid altering accounting practices to
achieve desired regulatory results. The FASB
encouraged forbearance of supervisory actions
rather than forbearance through the modifica-
tion of financial statements. The staff gave its
reasons as
8 It is interesting that the FASB and its stafT did not encourage abandonment of historical cost accounting principles that
did not require thrift institutions to record losses on underwater mortgages retained in their mortgage portfolios. The
FASB x&s only opposed to delayed recognition of losses on those loans that the thrift sold in an effort to mitigate its
interest rate mismatch problems.
GE’ITING THE ACCOUNTING “RIGHT” 65
modifying financial statements even if designed for only
regulatory purposes so that they are no longer a faithful
representation of an enterprise’s financial position and
results of operations is likely to further impair the
credibility of financial reporting by thrift institutions, the
very institutions that the legislation is attempting to assist
(see U.S. House, 1987b, p. 43).
Despite these protests, the FHLBB and Con-
gress altered the role of accounting in the
regulatory process. The accounting changes
promoted by the FHLBB increased the recorded
capital of savings and loan institutions relative
to GAAE in an apparent effort to buy time. The
use of this revised RAE resulted in the classifica-
tion of many entities as “healthy” whereas under
GAAP they might have been classified as
“unhealthy”. The regulators were walking a
tightrope between the necessity to convince
Congress of the need for action and the need
to maintain public confidence in the health of
the savings and loan system by concealing the
poor financial condition of many of these
organizations. By altering reporting practices,
the FHLBB could apparently justify not interven-
ing directly into the operations of savings
institutions; for example, by closing them.
Accounting provided a way of “seeing” these
organizations (Espeland & Hirsch, 1990) as not
requiring regulatory intervention. By not requir-
ing taxpayer monies to close institutions, the
FHLBB and Congressional actions echoed the
balanced budget rhetoric emanating from the
Reagan White House.
A new “‘t-i @’ accounti ng
With these accounting changes, regulatory
accounting appeared to shift from a disciplinary
technique to an avoidance technique. Before the
crisis, the FHLBB and F!%IC had used accounting
in their decisions about whether to intervene
directly into the operations of specific organiza-
tions. However, as the crisis emerged, account-
ing was used to avoid regulatory action and to
cloud the picture of the organization presented
to the regulatory center. Rather than serving as
a basis for regulatory action, RAE provided the
regulator with reasons to avoid action. Now, a
“right” accounting became one that permitted
inaction and avoidance.
The FASB appears to have opposed the FHLBB
perspective on a “right” accounting. Adhering
to its conceptual framework, the FASB asserted
that a “right” accounting must be neutral in its
effects. From this perspective, a “right” account-
ing could not be a tool to provide time for the
thrift industry to work through its problems but
must “reflect the true economic consequences”
and reveal the “truth” about an organization.9
It appears that the FASB was trying to prevent
the FHLBB perspective on “right” accounting
from becoming the dominant perspective and
to undermine the use of accounting as a tool for
regulatory inaction. However, limited Iinancial
resources and the political rhetoric of reduced
federal spending and the balanced budget
precluded the closure of savings and loan
entities. The FHLBB sought to justify its inaction
through altered accounting practices. During
this act, accounting was one of the few tools
available to the FHLBB and the protests of the
FASB were ignored.
In this act, the FASB and FHLBB disagreed on
the propriety of speciIic accounting practices.
These disagreements arose over difTeringperspec
tives on the definition of a “right” accounting: an
accounting intended to “reveal” or an accounting
intended to “conceal”. Despite these different
perspectives, neither the FASB nor the FHLBB
questioned whether one could get the accounting
“right” through the selection of appropriate
accounting practices. The ability of accounting
to become “right” Ibr any purpose remained
unquestioned by either group.
These parties also disagreed on the role of
accounting Prior to the actions of the EHLBB,
accounting had served as a disciplinary technique
for the regulator to employ in monitoring the
organization. After the actions of the FHLBB,
9 See Hines ( 1988) for a dixussion of the ditEculties with this position, Hopwood (1990) for a dicussion of substance over
form. and Power ( 1992) for an analysii of the politics of accounting “truth” with respect to brand accounting in the U.K.
accounting became an avoidance technique. In employed by thrifts (2 1 March 1985). Barrens
concealing rather then revealing, accounting had earlier questioned the “accounting alchemy”
would no longer serve as a basis of action by the of the FHLBB and its “magic wand . . . [that]
FHLBB to close troubled thrift institutions. Now would create profits from deficits” (Mills, 31
through a changed accounting, the FHLBB per- May 1982). Forbes questioned accounting for
mitted these institutions to stay open. In mergers (Baker, 198 1). However, as the savings
contrast, the FASB maintained that financial and loan crisis continued, reguatory space
accounting should reveal the “truth’ about would become more crowded and the attitudes
these organizations. These opposing views of the actors in regulatory space would become
suggest that accounting has no single purpose critical of BAP and the FHLBB conception of a
or role. Accounting purposes or roles as well as “right” accounting.
its practices can be restructured amid a complex
of contingencies that impinge upon the partici-
pants in regulatory space. The changing roles ACT 2: RAP IS RAPPED
for accounting may be either stated or unstated.
Despite efforts to alter the definition of a Time runs out
“right” accounting, accounting could still be I f the savings and loan industry had returned
seen as an element of govemmentality that to health, the changes made in RAP might have
permitted the regulator to act upon the operat- gone unremarked or heralded as a success
ing practices of the organization. By changing except for the active disapproval of the FASB.
the accounting treatment of losses from mort- However, the savings and loan industry did not
gage sales, the regulator encouraged thrift return to health. Although the new regulatory
institutions to sell unprofitable mortgages. By accounting practices had been adopted to
taking advantage of existing rules on merger purchase time for the savings and loan industry
accounting, the regulator encouraged thrift to recover from the asset mismatches, time was
institutions to merge. Through accounting and nmning out. Even with RAP, it began to be
other means, the regulators provided incentives necessary to close savings and loan institutions.
for organizations to undertake actions desired Further, it became increasingly difficult for even
by the thrift regulator. Although accounting was Congress to deny the large number of savings
no longer a disciplinary technique, it still and loan associations likely to fail in the coming
facilitated action at a distance. years and to ignore the demands these possible
During this act, the major actors in regulatory failures might place upon the insurance fund.
space were the FHLBB and FASB. Other potential From 1980 to 1985, the FSLIC expended
actors in regulatory space such as the press paid $3767.5 million to assist troubled thrifts (U.S.
relatively little attention to the actions of the Treasury, 199 I ). This expenditure contrasted
FHLBB and were relatively uninvolved in the significantly with FSLIC assistance from 1934 to
early debates over a “right” accounting. An 1979, 1306.1 million (U.S. Treasury, 1991). In
exception was the Wall Street J ournal, which six years, the FSLIC had expended more than
published articles questioning the use of good- ten times its expenditures in the previous 46
will and purchase accounting in the industry years. The insurance fond of the FSLIC began to
(Andrew, 1981) and claimed the increase in decrease as payouts to depositors of failed
industry capital was illusory (2 August 1982). savings and loan associations and aid to failing
Later, in 1985, the Wall Street J ournul noted thrifts increased (Wall Street J ournal, 20
that federal and private accountants were raising November 1984). Although the FHLBB began
serious questions about the devices used by the to assess special charges on the savings and loan
FSLIC to prop up insolvent thrifts ( 10 December industry to fund the insurance fund ( WaZZ Street
1985) and earlier in the year a front page J ournal, 17 October 1985,20 February 1986),
article questioned the accounting legerdemain debates erupted about the financial health of the
66 J. J. YOUNG
GE’ITING THE ACCOUNTING “RIGHT” 67
insurance fund as well as the thrift industry
(Wal l Street J ournal , 26 December 1985, 10
December 1985). News accounts reported on
large operating losses incurred by the FSLIC as
a result of keeping failed thrifts open (W&Z
Street J ournd, 22 September 1987). These
accounts also discussed the continuing decline
in the recorded capital of thrifts (WuZZ Street
J ournuZ, 12 August 1988) and the possibility
that accelerating and mounting thrift losses
could consume all the cash the FSLIC could earn
or borrow over the next several years (Wal l
Street J ournal , 28 March 1988).
In this act, the set of possibilities for
accounting shift again. Now, a “right” account-
ing was to reveal the “truth’ about the organita-
tion and serve as a basis for regulatory action
rather than an opportunity to avoid action.
Getting the accounting “right” now demanded
that accounting render the organization visible
to the regulatory center. This shift required
illustrating the multiple ways in which RAP had
concealed the financial conditions of thrifts and
facilitated regulatory inaction. The return to
GAAP accounting in this act represented a move
to get the accounting “right” and to reinstate
accounting as a disciplinary technique.
With the continuing financial difficulties in
the savings and loan industry, accounting
practices continued to be an object of a policy
process. Whereas RAP had been employed by
regulators to gain time for savings and loan
associations and to promote confidence in the
savings and loan system, now these same
regulatory accounting practices became the
subject of investigation and denunciation by
Congress and others. Earlier, there had been
little questioning of the accounting practices
promoted by the FHLBB, but now many others
joined the FASB to criticize RAP. Regulatory
space became crowded with critics of RAP and
these critics had ample opportunity to criticize
RAP during Congressional hearings held to
examine the continuing savings and loan crisis.
The rappi ng of RAP
Rather than searching for ways to delay the
closure of institutions, the regulators began to
close more institutions. However, closing institu-
tions posed severe strains upon the resources of
the insurance fund of the FSLIC. The F!XIC could
not close all “failed’ institutions without a
recapitalization of the insurance fund. Despite
the previous reluctance of Congress, it became
necessary to estimate the amount of the required
capitalization to occur through “contributions”
by U.S. taxpayers.
As the strains upon the insurance fund
increased, Congressional hearings began to
focus upon the adequacy of the insurance fund
to permit the closure of failed institutions. With
this change in focus, demands began to be
voiced that accounting practices no longer buy
time for the savings and loan industry but instead
reveal the “truth” about the financial condition
of savings and loan institutions. With this desire
for a different “truth”, the accounting practices
that the FHLBB (often with the encouragement,
consent or at least knowledge of Congress)”
had adopted for savings and loan institutions
were criticized for the same reasons used to
justify their earlier adoption. It was claimed that
these policies had presented a “rosier” picture
of the institutions’ financial conditions (as
compared to the picture generated ‘by GAAP)
and had maximized the recorded capital of these
institutions. Now, as members of Congress
began to accept that many of those institutions
they had been intent upon saving were beyond
salvage, these members expressed dismay and
outrage over the extent to which RAP had
“concealed’ the poor financial condition of
savings and loan entities.
During these hearings, RAP was labelled as a
“As late as 1987, the Wall Street Journul reported that the House of Representatives had approved legislation that would
allow the FSLIC to prop up struggling thrifts through accounting transactions. Congress also held hearings about the FSLIC
secondary fund write-off and its impact on the financial statements of some thrift entities and considered alternative ways
to prevent the write-off of these “assets” in the financial statements of individual thrii (U.S. House, 1987d).
68 J. J. YOUNG
“false” accounting that failed to represent
adequately the savings and loan organization.
With RAP, one did not get the accounting
“right”. These denunciations began to increase
and intensify as the financial condition of the
thrift Industry was perceived as poorer and
poorer. In 1985, the Oversight and Investiga-
tions Subcommittee of the House Energy and
Commerce Committee (the DingeII committee)
began to explore the regulatory accounting
principles used to “inRate” the net worth of thrift
institutions. Rep. Ron Wyden characterized RAP
as foIlows:
The Bank Board has, through a variety of sleight of hand
devices, turned mountains of debt into assets, said it is
acceptable to take blatantly inadequate real estate
appraisals, the creation of essentially worthless income
capital certificates held by management consignment
teams and used a wide txsriety of cbicunery to postpone
and worsen the huge additional write-downs that are
going to take place eventually as a result of all these
tricks and accounting devices, to keep mm the
American public what is actually going on in the
savings and loan industry (U.S. House, 1985c, p. 396,
emphasis added).
In other hearings, Rep. Stan Parris referred to
RAP as “cooking the books, nothing but not too
sophisticated government fraud” (U.S. House,
1987a).
Congressional members appeared to approve
of testimony that criticized RAP. As the decade
wore on, the problems in the savings and loan
industry were seen as more and more signticant
and more and more costly to the American
taxpayer. With the perception of Increasing
problems, the attacks upon RAP accounting and
its role in “hiding” the savings and loan problem
from Congress, the public and even regulators
increased. PHLBB regulators also had little good
to say about RAP. Edwin Gray, former PHLBB
chairman, called for a revelation of the true
financial condition of thrifts and an end to RAP:
We cannot survive a continuation, much less an increase,
in accounting principles that bide the true fhancial
condition of tbriifrs. Worse, like price subsidies, phony
accounting is addictive . . My experience at the Bank
Board in trying to wean thrifts from their addiction to
creative regulatory accounting principles has taught me
how diEicult it is for a thrift to go “cold turkey” and
report its true @an&al c ondi t i on af t er year s of
re$wrting an artifZcially infkzted net worth (Edwin J.
Gray, chairman of the Federal Home Loan Bank Board,
in U.S. House, 1987b, p. 73, emphasis added).
By the end of the decade, the imagery used
to describe RAP became quite colorful:
Accounting principles were modifed in a way that
allowed the insolvent institutions to appear to have
positive net worth, thereby creating in effk-ct a stealth
balance sheet. By mating an accounting facade that
was like a Hollywood movie set - the front of the
building and perhaps some sides, but nothing else -
net worth suddenly appeared out of what was in reality
a sea of insolvency. . . Sadly, unlike the fabled emperor’s
new clothes of children’s stories, tbe thrift accounting
standard did conceal the underlying reality Born many
observers. Indeed, the appearance of earnings and
solvency was used to justify not only expansion, but also
dividends, enormous salaries, acquisitions, opulent and,
indeed, at times repulsive corporate life styles and many
other expenditures that drained cash from tailing tirms
(Richard Breeden, SEC Chairman, in U.S. Senate, 199Oa,
p. 100, emphasis added).
During the many hearings, RAP was described
as “accounting gimmicks” (U.S. Senate, 1990b,
p. 70) and “rinky-dink accounting” (U.S. House,
1987c, pp. 24, 25). RAP was claimed to have
“concealed economic reality” (U.S. Senate,
1990a, p. 131; U.S. House, 1985c, p. 364) and
was described as “not a faithful representation
of economic reality” (U.S. House, 1987b, p. 8).
RAP was called “misleading” (U.S. House, 1989,
p. 112, 1986, p. 3, 1985c, p.396) and alleged to
“artificiaIIy in.tIate the reported financial picture
of financial institutions” (U.S. House, 1986, p.
3). RAP was characterized as “more liberal than
GAAP” (U.S. House, 1988, p. 99). RAP accomp-
lished this liberality by “overstating net worth”
(U.S. Senate, 19903 p. 133) “masking the
erosion of capital” (U.S. Senate, 1990a, p. 135)
and creating purely “imaginary earnings and net
worth” (U.S. Senate, 1990a, p. 142). RAP was
claimed to be “contrary to sound accounting
principles and not necessarily reflective of
economic realities” (U.S. House, 1985c, p. 367).
In short, for many actors in regulatory space,
RAP was “pure accounting poison” (U.S. Senate,
1988, p. 167) that “decreased the credibility of as prepared on a GAAP or RAP basis. It was
financial reporting” (U.S. House, 1985c, p. 325, argued that those prepared on a GAAP basis
1987b, p. 8). better revealed the truth about the financial
The business press also entered regulatory condition of savings and loan associations than
space to denigrate and criticize R4P accounting. RAP, a sentiment prevalent in Congress and
When RAP accounting was being constructed, the press. In part, this belief arose Ram the
the press paid relatively little attention to RAP. gloomier picture that GAAP painted of the
Now, however, these actors supported the Snancial health of these organizations. GAAP
critical perspectives of Congress and the FASB accounting suggested that more Institutions
on RAP. In the press, RAP was described as a were insolvent and that more institutions
means to “inflate” earnings and net worth when required the attention and assistance of the
the regulator and the insurance fund. Increasingly
GAAP became the standard by which to assess
true picture of the industry’s financial health [was] far
the extent of the “deception” arising from RAP
worse . netting out the effects of these accounting
practices Born earnings and net worth paints a gloomy
reporting. l1 For example, Rep. Ron Wyden
but more accurate picture for the continued viability of
compared GAAP to RAP insolvent thrifts:
the savings and loan industry (Auerbach 81 McCall, 1985,
p. 17). If you go by the generally accepted accounting
principals [sfc], according to GAO, their view of net
These authors claimed that thrift accounting was
inaccurate and not to be trusted (Downs, 1985;
Simonetti & Andrews, 1987; Ring, 1987; Berton,
worth - at the end of 1984 there were 434 thrifts that
were in serious trouble. Yet, ifwe look at the accounting
principals [sic] that are used at the Bank Board, the
regulatory accounting principals [s/ c] known as RAP, to
1985) and saw R4P as a means to conceal
determine net worth, there are only 71 institutions that
the truth (Day, 1986). In criticizing an account-
are insolvent (U.S. House, 1985c, p. 442).
ing characterized as concealing, these actors
appeared to have accepted that accounting Few voiced any defense of RAP. One exception
should “reveal” the savings and loan organiza- was McEachern ( 1986) a certikd public accoun-
tion to the regulators and others. Despite their tant active in the AICP& who claimed that the
criticisms of a specific set of accounting net worth difkences between R4P and GAAP
practices, they appear to also believe in the were not significant. He also argued that the
possibility of finding a set of accounting prac- lower GAAP net worth did not imply that GAAP
tices to reveal the “truth” about the financial was better than RAP. Jacobe (1987) of the U.S.
condition of savings and loan organizations. League of Savings Institutions argued that a shift
Despite the many criticisms of R4P as to GAAP was only cosmetic and not a solution
misleading and deliberately deceptive, many to thrift problems. He complained that:
actors in regulatory space never questioned the
role of accounting in revealing the “truth” about the generally accepted accounting principles method
the organization. Rather than question the use
has been glorified as though it were divinely inspired.
of accounting as a regulatory tool, they simply
Next thing, we will see FASB members elected by a
advocated the use of GAAP accounting to reveal
consortium of accounting gurus confined to a room until
the Enancial condition of savings and loan
white smoke signals that their choice has been made. At
least this process would give a ceremonial claim to FASB
institutions. In short, GAAP was now granted infaBibility (J acobe, 1987, p. 45).
the title of the “right” accounting. Figures and
charts detailing the financial condition of the ignoring these voices, Congress passed legis-
savings and loan industry were carefully labeled lation in 1987 to require all federally insured
GETI’ING THE ACCOUNTING “BIGHT’ 69
” See, for example, Breeden testimony in U.S. Senate (199Oa).
70 J. J. YOUNG
savings associations to adopt GAAP for reporting
to FHLBB and in their annual financial state-
ments and allowed thrifts five years in which to
make this switch (Competitive Equality Banking
Act of 1987). The Wall Street J ournul later
reported that this move to “tighten” accounting
standards for savings and loan institutions was
enacted “partly in response to concern that
accounting procedures were masking losses at
some thrifts” (Taylor, 1987).
Prior to Congressional action requiring a
transition to GAAP accounting, the thrift regu-
lators had already begun to alter the accounting
and operating practices of the industry. FHLBB
chairman Edwin Gray sought to limit the growth
of thrifts through brokered deposits and also
sought to enhance the capital of the thrift
industry. In 1985, the FHIBB issued new
regulations to eliminate the five year average
calculation of net worth and to require thrifts
to comply with capital requirements at the end
of each quarter rather than the beginning of the
year, in a stated effort to address the inadequate
capitalization of the industry (Federal Register,
31 January 1985). Later, in 1986, the FHLBB
increased capital requirements from 3% to 6%
of liabilities, an increase to be phased in over
six years to allow the thrift industry time to
adjust to the new requirements (Federal Register,
15 August 1986). In 1985, Gray also transferred
the examination Rmction Ram the central FHLBB
Office of Examination and Supervision to the
twelve regional Federal Home Loan Banks. This
move contravened an Office of Management
and Budget restriction on hiring and salaries
and allowed the Bank Board to attract quali-
fied, experienced examiners ftom the banking
regulators.
The Bank Board also began to “toughen” up
savings and loan accounting. In 1985, the FHIBB
indicated that thrifts must follow GAAP for
acquisition, development and construction loans.
The thrift regulators had already begun to
employ GAAP and, in some cases, were applying
accounting methods more stringent than GAAP.
The Competitive Equality Banking Act of 1987
explicitly directed the Bank Board not to require
thrifts to record reserves in excess of those
required under GAAP. Where before regulators
had employed RAP to conceal poor Iinancial
condition, they were now beginning to use RAP
to require more conservative accountings than
those required by GAAP and the mandated
switch to GAAP reined in both types of
perceived regulatory excess.
Although regulatory space was crowded with
actors criticizing accounting, these actors were
criticizing a specific form of accounting, RAP,
which they claimed had concealed the financial
condition of savings and loan organizations.
These actors still wanted to get the accounting
“right”. They appeared to have believed in the
possibility of finding a set of accounting prac-
tices that would reveal the organization to the
regulator, Congress and others. Rather than
questioning the ability of accounting to reveal,
these actors turned to GAAP accounting as an
alternative. Yet, it is highly signiIicant that the
truth-revealing capabilities of GAAP are dis-
cussed only in contrast to the truth-concealing
capabilities of RAP. Because GAAP would
suggest a need for action in circumstances
where RAP did not, it was constructed as more
truth revealing. GAAP was not constructed as a
“right” accounting on its own merits but only
in relation to the demerits of RAP. The move to
GAAP was not so much an act of careful analysis
by the actors in regulatory space as a reaction
to the perceived faults of RAP.
The return to GAAP also represented an effort
to return a disciplinary function to accounting.
The participants in regulatory space did not
question whether accounting could reveal a
savings and loan organization. Instead, they
searched for ways to return this previously
claimed function to savings and loan accounting.
Getting the accounting “right” now required
showing organizations as less healthy and as
requiring FSLIC assistance. Accounting again
was to help the regulator decide whether direct
intervention into the operations of the regulated
entity was required.
The actors in regulatory space were unwilling
to relinquish their faith in the possibility of a
“right” accounting. They were unwilling to
renounce their belief that a “right” accounting
could render the organization transparent and “assets” on the balance sheets of entities using
present it back to the regulatory center. The GAAP accounting. A GAO report claimed that
refusal to question these beliefs led these actors because of uncertainties regarding the “true
to continue to search for ways for accounting condition of problem thrifts and the future
to realize the claims of representational faithful- economic environment, it is not possible to
ness and for accounting to assist the regulator estimate FSLIC’s financial need with much
in disciplining the organization. The search for precision” (GAO, 1989, p. 20). Later in the
new accounting practices to re-present the report, the author claimed that “available
organization continues in the third act as information on the financial condition of prob-
GAAP is also criticized for its representational lem institutions is not a reliable guide to the
inadequacies and market value accounting is true economic value of these institutions”
promoted as an alternative representational (GAO, 1989, p. 24). This available information
possibility. included reports prepared using GMP. Thus,
the GAAP offered earlier as the “right” account-
ing began to show cracks in its representational
ACT 3: PROMOTION OF MARKET VALUF faithfulness.
ACCOUNTING As stories and reports began to Iilter in about
these accounting problems, the focus of atten-
The cri si s conti nues tion once again examined ways to reflect the
Following the mandated switch to GAAP, the “true” financial condition of savings and loan
necessity for recapitalizing the insurance fund entities. The concern now was not with
continued to be discussed. These discussions criticizing RAP but rather centered on GAAP’s
were heightened when the GAO suggested in a inability to reflect the true economic rather than
report the “continuing deterioration of FSLIC’s accounting condition of these entities. As in the
financial condition” that “raise[d] serious ques- last act, a “right” accounting was still one that
tions about its ability to deal with the industry’s revealed the organization and the feature to be
still growing problems” (GAO, 1988, p. 4). The revealed was still insolvency. However, the
GAO concluded that actors in regulatory space began to question
whether GAAP with its emphasis upon historical
the eventual costs of restoring the thrift industry’s cost accounting could reveal economic insol-
financial health are likely to exceed the funds that FSUC
vency. As these actors considered how to reveal
wiil have available. In addition, because of the distressed
financial condition of a large segment of the industry, it
economic insolvency, they also expressed con-
also appears unlikely that the industry would have the
cerns about the protection of the insurance fund
resources to provide such funding. Consequently,
and how accounting might be used to this end.
further congressional action may well be needed to In particular, some discussion occurred about
obtain adequate funding (GAO, 1988, p. 11).
how a “right” accounting might be useful to
discipline not only savings and loan organizations
Estimates of the amount of the recapitalization but also savings and loan regulators. Amid this
began to escalate.” Changes in these estimates set of demands upon accounting, some actors
occurred in part because of the “accountings” in regulatory space began to promote market
employed by the institutions being closed. As value accounting.
regulators closed down institutions, they found
significant asset quality problems. Many of the Promoti ng mzrket val ue accounti ng
loans originated by these failed institutions were In criticizing GAAP, market value accounting
essentially worthless but were recorded as began to be promoted as a more “truthful”
GETI’ING THE ACCOUNTING “RIGHT” 71
I2 For a discussion of the changing estimates, see GAO testimony in U.S. House ( 1989).
72 J. J. YOUNG
disclosure of the iinancla.l condition of savings
and loan organizations. Market value accounting
began to be seen as the way to get the
accounting “right”. For some actors in regula-
tory space, market value accounting would have
revealed the poor linanclal condition of many
savings and loan associations and prevented the
concealment of this intbrmatlon more effectively
than either RAP or GAAP. These actors claimed
that market values were “true” economic
numbers in contrast to the “constructed”
numbers of RAE and the historical cost numbers
of GAAP that had lost touch with economic
“reality”.
Early attempts: market value as academic.
This was not the lirst time market value
accounting had been discussed within the
regulatory space for the savings and loan
industry. In 1982, the FHLBB appointed a task
force to study the use of market value account-
ing. At a conference, some stalf members of the
FHLBB had indicated that the reporting pro-
posed in their study would emphasize to savings
and loan managements the “interest sensitivity
relationship between assets and liabilities”
(Journal of Accountancy, 1982, p. 10). The
FHLBB had also considered requiring thrifts to
carry certain debt instruments at market value
but concluded that such a major change would
not appreciably increase accounting accuracy
(Federal Register, 1982, p. 5020). In 1983, the
FHLBB indicated that market value accounting
would help quantify Interest rate risk and
improve the quality of information on the
economic value of saving and loan entities
(FHLBB, 1983, p. 80) but no further action was
taken.
During 1985 hearings on the financial condi-
tion of banks and thrifts, Congress inquired
about the positions of various individuals on 15
proposed deposit insurance reforms including
market value accounting (U.S. House, 1985a, b).
At this stage the proponents of market value
accounting in regulatory space were few,
consisting mainly of academics such as Edward
Kane, George Benston, and John Eisenbels.i3 In
contrast, savings and loan industry representa-
tives were adamantly opposed to market value
accounting in spite of their emphasis on the
need for more “market discipline” as a means
to reform deposit insurance. They found market
value accounting too academic and impractical.
This testimony was summarized by Rep. St.
Germain as:
In other words, what you are saying is - I think aII of
you - that in the eyes of academia it might be very,
very accurate, but in the real world - aren’t those
fellows lucky they don’t have to live in the real world?
(U.S. House, 1985b, p. 1263).
Regulators testifying at this hearing were luke-
warm to the idea of market value accounting.
James L. Sexton, Texas Department of Banking,
indicated that such accounting would be better
at discouraging earnings management than
GMP, but expressed concerns about the difE-
culty of implementing market value accounting
(U.S. House, 1985b, p. 622), as did Stanley
Silverberg of the FDIC staff (U.S. House, 1985b,
pp. 644-645) William Issac of the FDIC (U.S.
House, 1985b, p. 1474) and Edwin Gray of the
FHLBB (U.S. House, 1985b, p. 1526).
Despite this early labeling of market value
accounting as academic and possibly impractical,
very powerful allies in regulatory space began to
support it. In 1988, the FHLBB proposed a rule
to require thrifts to mark down securities held
to trade to market values and permit only
securities held for long-term investment to be
carried at cost. This rule was “designed to
prevent misleading accounting practices that
can hide losses within thrifts securities port-
folios” (Taylor, 1988). Some regulators began
to advocate market value accounting as a means
I3 There were relatively few articles discussing market value accounting at this time and most of these were written by
academic authors even though the articles may have been published in practitioner journals. See, for example, Johnson
& Peterson (1984) and Carron (1982). Also see Benston (1985, p. 175) who recommended that market value accounting
not be required for public reports due to Interpretive dithculties, and see Kane (1985).
GElTING THE ACCOUNTING “RIGHT” 73
to ensure they would have “sutlicient informa-
tion to monitor the true economic condition of
institutions” (Timothy Ryan, Office of Thrift
Supervision, U.S. Senate, 1990a, p. 47; White,
1991b). Further, it was claimed that market
value accounting would narrow the differences
between accounting and economic measures
which were seen as more “real’ (W. Angell,
Federal Reserve Board of Governors, U.S. Senate,
1990a, p. 69) and would be an early warning
system to permit the closure of institutions long
before they would be insolvent according to
GAAP much less RAE (Kormendi et al ., 1989;
Report of a Task Force, 1989). Once again, these
individuals suggested that “better” (i.e. market
based) financial information was necessary to
monitor and supervise institutions effectively.
Richard Breeden, SEC Chairman, emphasized
this point:
Market based information can permit regulators and
investors alike to make a much more meaningful
assessment of the real economic value and risk exposures
of a financial institution. Knowing current market value
also allows regulators to take appropriate actions before
a situation deteriorates irretrievably (U.S. Senate, 199Oa,
p. 149).‘4
Probl ems fw GAAi ? For these regulators.
GAAP accounting was believed to offer too
broad a range of acceptable alternatives for
safety and soundness reporting (Timothy Ryan,
Office of Thrift Supervision, in U.S. Senate,
1990a, p. 47). In particular, the historical cost
accounting required by GAAE was believed to
have “enabled institutions to ‘manage’ the timing
of gains and losses” and manipulate reported
Income and capital (Richard Breeden, SEC, in U.S.
Senate, 199Oa, p. 152).15 Ryan warned:
GAAP must move toward better reports of the economic
value of a financial institution and help us, the regulators,
I* Also see Barth et al. (1986).
identify economic risks to the insurance hmd. If not,
GAAP will become increasingly irrelevant as a regulatory
tool (U.S. Senate, 199Oa, p. 58).
Despite criticisms of GAAP accounting, regu-
lators continued to advocate the use of account-
ing as an important and perhaps crucial regulatory
tool. The role of accounting in regulation was
unquestioned. Getting the accounting “right”
was the goal. For example, Charles Bowsher of
the GAO indicated that capital was the only
‘widely accepted measure of unsafe and un-
sound practices” (U.S. House, 199 1, pp. 48-49)
and urged that “the underlying score-keeping
[be] done properly” (p. 11 ).I6
This move from GAAE to market value
accounting occurred despite recognition of the
difliculty of translating market value principles
into accounting practices. Indeed, industry
members continued to resist the promotion of
market value accounting. These members claimed
that market values were available for only a small
portion of the assets in their company portfolios
and that “market” values would have to be
constructed or estimated for many assets.
Despite these objections, market value account-
ing was promoted by powerful supporters.
Charles Bowsher, U.S. Comptroller General,
began to advocate the use of fair market values
to prevent the “concealment” of loan losses and
the overstatement of asset values and capital
(e.g. GAO, 1992a). The GAO indicated its belief
that “accounting rules were a major factor that
allowed bank management to unduly delay the
recognition of losses and masked the need for
early regulatory intervention” (GAO, 1992b, p.
11). It later stated that the
role of accounting is to report the facts. The troubled
real estate market is a reality that has very much
adversely affected the recovery values of collateral for
nonperforming loans Reliable financial data on the
l5 In 1989, Congress passed legislation that required thrii to use the more conservative banking RAF’. Bank RAP was
expected to produce lower net income and net worth relative to GAAP.
I6 Also see testimony of Wolf of GAO (U.S. House, 1986, p. 3) on the need for “clear and accurate reporting”.
74 J. J. YOUNG
conditions of the institutions is fundamental to the
success of these reforms. The regulators need to be able
to rely on the accuracy of reported bank capital (GAO,
1992b, p. 13).
In another report, the GAO recommended
that:
The Senate and House Banking Committees may want
to urge the regulators to adopt accounting rules that will
reflect the fair value of nonperforming loans for
regulatory fmancial reports . Absent the adoption of
such accounting rules by either the regulators or FASB,
the Congress may wish to hold hearings and consider
legislating such requirements for financial reports
prepared for the banking regulators (GAO, 1992b, p. 10).
Richard Breeden of the SEC was an ardent
supporter of market value accounting,” as was
the newly appointed chief accountant of the
SEC, Walter Schuetze. Congress also considered
the possibilities for market value accounting and
directed the Treasury department in the Finan-
cial Institutions Reform, Recovery, and Enforce-
ment Act of 1989 (Public Law 101-73) to
review and evaluate the feasibility of market
value accounting for financial institutions. The
subsequent treasury report only outlined the
perceived benefits and costs of market value
accounting and did not support or oppose this
accounting (U.S. Treasury, 199 1). Current and
former thrift regulators also promoted market
value accounting as a way to get the accounting
“right” (see Timothy Ryan at U.S. Senate, 1990a,
p. 47, and Lawrence White at U.S. House,
1987b). However, some regulators including
Robert L. Clarke, Comptroller of Currency, and
William Seidman, Chairman of the FDIC, con-
tinued to express concerns about the difficulty
of computing market values for assets and
liabilities (see testimony in U.S. Senate, 1990a,
pp. 17, 28). Wayne Angel& Federal Reserve
Board of Governors, also expressed concerns
about computing market values but considered
that market value accounting might lead to more
effective regulation and supervision and closure
” See, for example, his testimony in U.S. Senate (1990a).
of problem institutions long before they would
be considered insolvent on a GAAP basis (U.S.
Senate, 1990a, pp. 62, 70).
The belief that accounting could continue to
serve as a regulatory tool to reveal the financial
condition of entities remained unquestioned. To
participants in regulatory space such as the GAO
and SEC, a “right” accounting was still seen as
one that revealed the organization to the
regulator, but they questioned the ability of
GAAP to accomplish this task. For accounting
to continue as a regulatory tool, it must be
gotten “right”. For these actors, GAAP account-
ing was no longer the “right” accounting.
Market val ue =Market di sci pl i ne. Al though
market value accounting was supported by a call
to get the accounting “right”, the rhetoric of the
market provides an appealing solution to per-
ceived problems in thrift regulation for other
reasons. The call to the market is also a call to
reinject discipline into the regulatory process.
Now, the regulator and the regulated would be
subjected to the control and discipline of the
market. The market was being called upon to
buttress the state’s authority and the authority
of its regulators, an interesting position as the
state is called upon to buttress the authority of
the market and to enforce the property rights
exchanged by the market,
How could the market be employed to
discipline the regulator? Through accounting.
The market was to enter the regulatory process
through accounting and decide for accounting
the values to be recorded in the financial
statements of the entity. With the rhetoric of
market value accounting, there is less a sense of
the accountant or the regulator constructing
accounting reports and numbers as compared
to RAP and even GAAP. Instead, the accountant
appears to be a passive recorder of market
“facts” and the regulator is a passive user of
market “facts”. There is a sense that with market
value accounting there will be less room for
manipulating and misrepresentating economic
GETTING THE ACCOUNTING “RIGHT” 75
“facts” and encouraging uneconomic business
decisions by regulators, financial managers and
others than is the case with historical cost
accounting.
Throughout the savings and loan crisis, there
was little talk of dismantling the regulatory
bureaucracy. The savings and loan crisis occurred
despite the regulatory solvency and capital
levels established for savings and loan organiza-
tions. Whether this crisis occurred because of
a failure of expertise by the regulators (an
explanation of and justification for the existence
of bureaucracy) (Frug, 1989), or because of a
failure to provide the regulators of the savings
and loan industry with adequate resources to
carry out their roles, was irrelevant to the
promotion of market value accounting. Instead,
it was taken for granted that regulation must be
improved to avoid future crises and to prevent
further recapitalizations of the insurance fund.
The market was not to replace the regulator but
to strengthen and improve the effectiveness of
the bureaucracy.
Action was considered necessary to reassure
the public that such a crisis would not reoccur.
Whereas in the past the bureaucracy and the
market were seen in opposition, now the market
was being called upon to buttress the bureau-
cracy. The regulator who had previously impeded
the action of the “free” market by keeping open
“failed” thrifts was now to be subject to the
discipline of the market. The market through
accounting was to regulate the regulator and to
delimit the freedom of action of the regulator
much as earlier the regulator had impeded
the freedom of action of the market. The
market through accounting was to discipline the
regulator and force the regulator to act upon
“insolvent” financial organizations.
Early in the savings and loan debates, there
were calls for more “market” discipline rather
than regulatory discipline. These calls for
discipline suggested that the market was more
evenhanded and truthful and less arbitrary than
regulators. ‘Ihe rhetoric of market value account-
ing also hints at this neutrality. As one proponent
of market value accounting, a former member
of the FHLBB argued:
Since the necessity of closing an insolvent depository is
an embarrassing admission of inadequate regulation by
the deposit insurer officials, they may be tempted to
delay action, hoping that the fortunes of the depository
will somehow improve or that they (the officials) will
move on to another position and escape the blame for
the insolvency. Also, elected officials may have an
interest in delaying the closure of insolvent depositories
controlled by friends or campaign contributors By
making insolvencies somewhat more transparent, market
value accounting will make this form of risk-taking at
the expense of the public more difficult (White, 1989,
pp. 19-20).
More “objectivity” and “facts” were to be
injected into and subjectivity removed from the
regulatory process. The discretion of the regu-
lator was to be reduced and his/her expertise
strengthened by the expertise of a more neutral
and impersonal “regulator” - the market. Thus,
market value accounting was to assist the
regulator in governing legitimately “in light of
the facts” as interpreted and presented in
accounting numbers (Rose, 1991). Despite the
failure of accounting, its disciplinary domain was
to be expanded to encompass both the regulated
entity and the regulator.
CONCLUDING COMMENTS
Each act of the savings and loan crisis exhibits
a concern about getting the accounting “right”.
However, the set of possibilities for a “right”
accounting shifts between the various acts.
Within the regulatory space of savings and loan
accounting, the definition of a right accounting
was malleable and changing. For example, a
“right” accounting could be one that concealed
the organization. During the early 1980s the
FHLBB appears to have promoted this definition
in its construction of RAE. RAP was used to
provide breathing room for the ailing savings
and loan industry. Rather than revealing the
organization and providing a basis for regulatory
action, RAE was a concealing tool to justify
regulatory inaction. However, as the problems
in the savings and loan industry continued, the
perspectives of other actors in regulatory space
on the definition of a “right” accounting
76 J. J. YOUNG
prevailed. These actors including the FASB and
Congress demanded that accounting “reveal”
the organization to justify regulatory action.
With these demands, GAAE was promoted as a
“right” accounting As organizations were closed,
flaws were also perceived in the ability of GAAE
to represent the organization. Actors such as the
GAO and SEC began to demand that accounting
practices become more “right” or better at
revealing the organization and especially better
at revealing economic insolvency to serve as a
basis for regulatory intervention. With these
demands, the definition of a “right” accounting
changed subtly. Now, a “right” accounting
should not only reveal the organization and its
solvency in order to protect the insurance fund,
but also discipline the regulator by removing
some discretion from her/his actions.
Despite these continual shifts in a “right”
accounting, the actors in regulatory space did
not consider whether it was possible to get the
accounting “right” and to represent the organiza-
tion. As accounting was employed (or deployed)
for different purposes, the failures of accounting
were seen as failures of specific practices rather
than as failures of the overall accounting enter-
prise, and we see continued shifts in the sets of
practices used to reveal or conceal the organiza-
tion. Despite the continual failures of accounting
to be “right” in the ways defined by actors in
regulatory space, these actors did not question
whether they could ever get the accounting
“right”. Instead, the actors promoted new sets
of practices as the “right” accounting.
Further, accounting appears to have traveled
in a circle in the savings and loan story. First,
accounting was data and a neutral policy input.
Later, accounting was a policy object and then
an object of abuse. Now, there are again efforts
to restore accounting to its position as a
“neutral” policy input to employ in the policy
process. The redefinitions of a “right” account-
ing may return to accounting its claims for
“neutrality”. Despite this appearance of a return
to neutrality, market value accounting if enacted,
does not eliminate the possibility of manipulating
and misrepresenting economic “facts” and
certainly cannot guarantee a “true” representa-
tion of the entity to the regulatory center.
Even so, the ability of accounting to represent
savings and loan organizations and to serve as a
regulatory tool remains unquestioned. These acts
suggest the resiliency, adaptability and durability
of the accounting enterprise. Despite the con-
tinual questioning of its practices, accounting
was deployed in very different ways including
justifications for both regulatory action and
inaction. Despite many criticisms, accounting
emerged from the savings and loan story with
its status as a regulatory tool intact. Further, its
domain may actually expand to serve as a
disciplinary tool, not only for the regulated
entity but also for the regulator. Despite the
continual failures of accounting to live up to its
claimed representational possibilities, the search
for practices to get the accounting “right”
continues and will likely continue into the
future as new accounting crises and failures are
constructed and reconstructed by the actors in
regulatory space.
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78 J. J. YOUNG
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Miller, P. & O’Leary, T., Accounting and the Construction of the Governable Person, Accounling,
Organizations and Society (1987) pp. 235-266.
Miller, P. & O’Leary, T., Accounting Expertise and the Politics of the Product: Economic Citizenship and
Modes of Corporate Governance, Accounting, Organizations and Sociew (1993) pp. 187-206.
Miller, P. & Rose, N., Governing Economic Life, Economy and Society (February 1990) pp. 1-31.
MilIs, R. H., Accounting Alchemy, Earron’s (31 May 1982) pp. 29-30.
Pizza, S., Fricker, M. & Muolo, P., Inside J ob: The Looting of America’s Savings and Loans, 2nd Edn
(New York: McGraw HiII, 1991).
Power, M., The Politics of Brand Accounting in the United Kingdom, European Accountfng Review
(1992) pp. 39-68.
Preston, A., The Taxman Cometh, Accounting Organizations and Society ( 1989) pp. 389-413.
Report of a Task Force, Blueprint f or Restructuring America’s Fhancial I nstitutions (Washington, DC:
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Rose, N., Governing by Numbers: Figuring Out Democracy, Accounting, Organizations and Society
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Rose, N. & Miller, P., Political Power Beyond the State: Problematics of Government, Brflisb J ournal of
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Taylor, R.E., Stricter Accounting Rules Approved for U.S. Thrifts, Wall StreeiJ ournal(22 December 1987)
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Taylor, R. E., Bank Board Seeks Accounting Rule on Thrii Holding, Wall StreetJ ournal (10 June 1988)
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APPENDIX: DESCRIPTION OF THE FEDERAL HOME LOAN BANK SYSTEM
In 1932, the U.S. Congress passed the Federal Home Loan Bank Act and created the Federal Home Loan Bank Board
(FHLlIB). This independent regulatory organization was established to help relieve the financial strains on “sound building
and loan associations” and to “safeguard against a repetition of the experiences” of the 1930s’ depression in the savings
and loan industry (MarveII, 1969, p. 21). This legislation also provided for establishing up to twelve regional banks to act
as a central credit facility and supplement the resources of financial institutions making home mortgage loans. The FHLBB
was to supervise and regulate these regional banks.
In 1933, Congress enacted the Home Owner’s loan Act and granted the FHLBB the authority to charter and regulate
federal savings and loan associations. In 1934, Congress created the Federal Savings and Loan Insurance Corporation
(FSLIC) and placed this insurance corporation under the authority of the PHLBB. The purpose of the FSLIC was to insure
the safety of savings deposits placed with savings and loan associations.
The Bank Board consisted of three members appointed by the President with the advice and consent of the U.S. Senate.
These members established the general policies of the S&L system, such as the terms and conditions of Federal Home
80 J. J. YOUNG
Loan Bank advances, the chartering of federal savings and loan entities and maintenance of minimum liquidity requirements
for members. The Board oversaw a number of subdlvlsions lncludlng the office of examination and supervision and the
office of the FSLIC (Marvell, 1969).
Each of the twelve regional federal home loan banks was a separate corporation privately owned by stockholders (mostly
savings and loan amoclations) and these stockholders elected most of the bank’s board of directors (Marvell, 1969, p. 5 1).
These banks aided home-financing activity by making loans (advances) to individual lending institutions. The FHLBB
exercised limited control over these regional banks. The regional bank was required to obtain FHLBB approval of advances
to member savings and loan organlxatlons but the FHLBB could not force the regional bank to lend to a particular
organization. The FHLBB establlshed the interest rate on advances, examined the regional banks annually and established
the reserve levels required for these regional banks. Further, the FHLBB could create, liquidate or reorganize any regional
bank at will (Marvell, 1969, pp. 60-61).
Unlike the Federal Deposit insurance Corporation for bangs, the FSLIC was not an independent agency but was under
the control of the FHLBB. Federally chartered savings and loan organizations were required to have ESLIC insurance, and
state chartered organlaatlons meeting the requirements established by the FHLBB could also have their accounts insured
by the FSLIC. When the FSLIC was established in 1934, deposits of up to $5000 were insured. By 1969, the insurance
celling had been raised to S20,OOO and, in 1982, the Gam-St. Germaln Depository Institutions Act increased the insurance
ceiling to SlOO,OOO. The Office of the FSLIC paid insurance to account holders of fslled savings and loan institutions,
attempted to salvage falling institutions and managed the investments of the FSUC insurance fund.
All savings and loan lnstitutions associated with the FHLBB were subject to some form of regulation by the FHLBB. The
extent of regulation depended on the relationship between the entity and the FHLBB. Members of the federal home loan
bank system were subject to bank regulations which encompassed the rate of return paid on savings accounts and members
liquidity (Marvell, 1969, p. 126).
Associations that had deposits insured by the FSLIC were also subject to insurance regulations. These regulations included
lending territory, advertising and reserves (or capital requirements). ‘Ihe purpose of these capital requirements was to
cushion both equity owners and debt holders from unexpected losses (U.S. Treasury, 1991, p. 11-l) as well as to cushion
the insurance fund Tom such losses.
Federally chartered associations were also subject to federal regulations. These regulations covered lending, borrowing,
investments, reserves, management practices, accounting and other areas (Marvell, 1969, p. 138).
To monitor compliance with these rules, all ESLIC-insured savings and loan associations, including federal associations,
provided the FHLBB with reports covering their activities and were examined by FHLBB employees (generally annually).
The Office of Examination and Supervision was responsible for examhting FSUC- insured savings and loan associations to
monitor their iinancial condition and compliance with FHLBB regulations. These examiners were based ln the field and
reported to twelve chief examiners, one for each federal home loan bank district (Marvell, 1969, p. 145).
Traditionally, the relations between the FHLBB and the savings and loan industry were very “close”. The FHLBB was
strongly iniluenced by the industry to the extent that ln the past the U.S. Savings and Loan League wrote many FHLBB
regulations (Marvell, 1969, p. 255). Many authors analyzing the savings and loan crisis alleged that this cosy relationship
continued into the 1980s (e.g. Adams, 1990; Pizza er al., 1991).

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