Sarbanes/Oxley.....Some Reflections

An interesting message from my Dad:

The Sarbanes/Oxley legislation came about as a result of the Enron scandal. According to Sarbanes/Oxley, companies no longer carry their assets on the books on the basis of purchase price less depreciation. Instead they have to continually mark their assets on the basis of what they can be sold for at the time.

Some years ago I was negotiating an insurance program for Republic Airlines (now merged with another airline). In looking at their financial statement, I realized that Braniff Airlines had recently gone broke and had a lot of planes they couldn't sell. If Republic had to mark their assets down to their sale price at that time, they would have had to report that they were bankrupt. At first glance, you might say that they were bankrupt but there was no reason why they had to sell their planes in that down market. If they were going to sell planes, they could do so in a better market or over time in all kinds of markets.

Sarbanes/Oxley has resulted in mortgage guarantee companies having to mark down the mortgage assets at "fire sale" prices. That is ridiculous but it is the law. The organizations lending money to mortgage guarantee companies normally have codicils in the lending contracts that say the borrowers have to come up with additional cash when their net worth falls below a certain level. Just as was the case with Republic Airlines, no mortgage company has to cancel all of their mortgages today in this down market, but that is the requirement of today's accounting principles.

Reversing Sarbanes/Oxley would go a long way toward solving today's crisis because it would more realistically portray the financial status of the mortgage guarantee companies.