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There are two ends of the spectrum about the length of time it will take to recover from the credit crisis. Some, like Warren Buffet, recommend buying stocks now because in a few years it will be too late — that the economic recovery will be in full swing. Others predict a financial nuclear winter of 10 to 15 years.
Which prediction comes closest to reality depends in part on accounting standards, said Dennis Chookaszian, ’68, chairman of the Financial Accounting Standards Advisory Council and a keynote speaker at the eighth annual Chicago Asia Business Conference October 18 at Harper Center. The student-led Chicago Asia-Pacific Group
sponsored the conference.
“These are unprecedented times, but I’m reasonably confident you’re going to see recovery in a couple of years,” Chookaszian said. “I’m not one who believes in nuclear winter.”
A few Congressmen and the American Bankers Association have written to the Securities and Exchange Commission demanding that FAS 157, a fair value accounting standard, be suspended. That way, the “banks won’t look like they’ve got these big losses, and we won’t have this liquidity crisis,” Chookaszian said.
He criticized the proposal. “What they’re really saying is, let’s not look at anything; let’s just pretend that the values are what we paid for them. Who cares what the real values are?”
Chookaszian pointed to the a similar, earlier crisis in Japan where fair value accounting was not required. Japanese banks had “phony” balance sheets, he said. Consequently, it took Japan 12 to 13 years to emerge from its credit crisis.
“Do you want to tear the band-aid off slowly as Japan did over 15 years or just rip it off, like what fair value causes you to do?” Chookaszian questioned. “I’d argue that you might as well get on with it.”
Chookaszian chairs the board of the Chicago Mercantile Exchange, the vehicle for trading futures and options in the United States. The Merc is the only agency immediately equipped with the technology to run a proposed new exchange specifically for the trade of credit default swaps, which are currently clogging the financial system in the wake of the subprime mortgage crisis. A couple of such exchanges may end up being created, he said.
U.S. Treasury Secretary Henry Paulson and Federal Reserve Chairman Ben Bernanke are “pushing so much money into banks” so the banks will maintain enough liquidity to keep solvent after they take “the fair value hit,” Chookaszian said.
Chookaszian also presented statistics that showed that the United States and Europe will continue to dominate the global economy over the next 20 years, but that Asia will dominate the global economy after about 50 years. “China will more or less double its GDP in the next 20 years, and India will come close to tripling its GDP in that period of time,” Chookaszian said.
China will need to further develop corporate governance standards that match those used elsewhere in the world, he said. A “well-developed corporate infrastructure” brings about “investor confidence, a willingness to invest in capital markets, and rapid growth.”
Xin Ye, a student in the Weekend MBA Program, said Chookaszian provided “very important information for me,” particularly in light of his interest in going back to China to start his own company.