Volcker challenges the benefits of financial engineering

"You wonder what the net impact is on the GNP, let's put it that way," Volcker told a gathering of US bond market professionals today in New York. He claimed William Sharpe, winner of the 1990 Nobel Prize for his work on the capital asset pricing model, told him at another conference that he thought it didn’t have any.

Volcker said 85% of financial engineering is designed to find ways around accounting rules and IRS rules, and criticised those who became experts in US accounting and tax standards only to find complex financial means to evade those standards.

But Volcker, who is also chairman of the Board of Trustees for the International Accounting Standards Committee Foundation, said fair value accounting in the US may play a part in encouraging companies to smooth out earnings results with complex financial techniques and help their long-term viability. However, he warned of the complexity of derivatives. "There is no living person who understands all 650 pages [of the US Financial Accounting Standards Board's recent manual on derivatives accounting],” he said.The former Fed head also called for a regulatory body with investigatory power to oversee US auditing companies. He described himself as on "standby role" as head of the Andersen Independent Oversight Board, created in early February to recommend fundamental changes in the practices of the Enron auditor, which faces an unprecedented legal attack for its alleged mishandling of the bankrupt firm's financial statements.

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