Let me begin by saying what an honor it is for me to be here today to discuss these important issues with you. The FDIC has stood for almost three quarters of a century as a bastion of financial integrity and soundness and it presents an excellent forum in which to have this discussion today. I want to commend Don Powell who is doing a superb job as the FDIC’s new chairman for having the foresight to convene this forum. I also want to say what an honor it is for me to be on this panel with friends and colleagues: House Financial Service Chairman Oxley, former Federal Reserve Chairman Volcker, SEC Commissioner Glassman, and the Chairman of Sullivan & Cromwell, Rodgin Cohen.

Transparency, including importantly transparency in accounting, is something we correctly salute like the American flag. It is of course the bedrock of our free market economy. With that said, it would be wrong to think that transparency is a magic wand that we can waive over our financial services companies and thereby resolve all safety and soundness problems. Moreover as both the bank regulator and the banker know, there can be significant safety and soundness downsides to transparency.

Put another way, transparency is like many other powerful medicines we utilize to ensure the health of financial institutions and our free markets. It is necessary. However, it does not cure all ailments and like virtually any medicine it can produce some serious side effects. Accordingly, knowing the strengths and limitations to this wonderful medicine is almost as important as using the medicine in the first place.

In this regard, I want to make three points today. First, for transparency to be effective as a means of truly informing the public, it has to focus attention on information that is reliable and meaningful. Second, for transparency to be effective it has to provide information that can be understood, and hopefully, clearly understood by the relevant public. And, three there are cases at least in the banking area where transparency should be limited to the depository institution supervisor, lest we cause a liquidity event or worse, a contagion.

Let me start with saying a word about reliability and meaningfulness of information.

Federally insured banks vis-à-vis their bank regulators are about as transparent as one could realistically hope to achieve. I remember going out on a few examinations myself. We arrived early in the morning at a bank, met up with the examiners who were permanently assigned to the institution, and then asked for and received any and all pieces of information we requested – loan documents, daily P&Ls, daily trading positions, etc. [As an aside, you can imagine how relaxed it made the banker to see his friendly Comptroller himself arrive at the bank to pour through bank records.]

> Thinking back over that examination experience, it is clear to me that the issue was not whether there was enough available information about the bank, or enough transparency if you will; but whether we were looking at the right information, at meaningful information, and whether the information was reliable.
· As to what is the right information on which to focus I could go on all day. Let me just mention one: Companies should disclose a much more robust set of risk-management metrics than is currently the case.

These would include for example:

• Number of full- and part-time risk-management personnel in what areas;
• To whom does the senior risk-management officer report;
• Approval process for large credits and large trading positions;
• Bank’s own credit risk and market risk measurements and bases for those measurements.

> As to reliability of information, it is worth noting that transparency in and of itself cannot solve a fraud problem. Similarly, transparency in and of itself does not resolve problems with flawed modeling. In the Allfirst fraud case that we just investigated, the problem was not transparency; the problem was data integrity. And, in another institution of which I am aware, management and the public relied on accounts that were well accounted for and honestly presented but dead wrong because the mathematical models that calculated value were simply flawed.

My second major point is that transparency from an accounting perspective at a modern financial organization is a subject the complexity of which should not be under estimated. Transparency for a modern financial firm is not like looking through a clear pane of glass at a chair; it is not even as simple as looking through a pane of glass at the inner workings of a complex machine. Rather it is like looking through a microscope at a Petri dish filled with a colony of complex sub ocular life forms, forms that are hard to see in and of themselves, and moreover, forms that are constantly changing as you are watching them. Indeed, in our modern world of accounting it is even more complex than this because the rules as to which lenses you are allowed to use are constantly changing. The fact is that accounting rules are in almost continual flux which of course is necessary given the complexity and dynamism of our financial services firms. On the other hand this constant change makes it even more challenging to have a consistently clear view of the financial condition of the entity.

In this regard, I have tremendous sympathy for legislators and regulators, senior management of banks and others who are trying to come to grips with the proper accounting for complex financial organizations. Over the years, I have been seen several major financial services company accounting problems. In one case, a public accounting firm, after having issued clean specific opinions on one issue regarding a bank’s accounts, came in one day and said, "We know what we have been telling you for the last several years. But guess what? It wasn’t right. We made a mistake," they said. By the way that mistake cost the company hundreds of millions of dollars. In another case, the rules that the bank had relied on simply changed, costing that bank many hundreds of millions of dollars, too. As an aside, let me affirm to my fellow former and current regulators that there is a big difference between an Enron type of situation, where management appears to have manipulated the books, and cases where management relied on accounting approaches and opinions which were represented by their accounting firms in good faith. I fear that we run the risk of not making that distinction clear enough and, in some cases, punishing management too severely for what was human error that many of us could have made given the advice that was given.

• This leads me to another pet accounting/transparency issue of mine: Presenting more than one set of books. I would encourage firms to publish an accrual set of books, a cash-based set of books and a set of books that brought on balance sheet all the off-balance sheet assets and liabilities. Many institutions are using the first two sets these days, and we can all agree that the accrual books should still govern. But the other presentations of reality might well be helpful to give the public a better sense of the reality of the firm.

Finally, a point about the limits of transparency: Bank regulators know that there is certain information that we are reluctant to give to the public, for example CAMELS ratings. Indeed, it is a criminal offense to do so. Why is that? Because, it is believed that certain information whether or not accurate could cause a liquidity event at an individual institution or worse still a contagion. Moreover, certain information can be misused. For example, I remember when I was Vice Chairman of Bankers Trust, there was a period in August and September of 1998, when we were faced with market rumors perpetrated by competitors to take advantage of a public misconception that we were both heavily involved in Long Term Capital Management and the Russian GECO debt situation. The fact is that we were a rather smallish player in LCTM. And, in the case of the GECOs, we were in fact well hedged on the other side of the transaction. In both cases, market players misused the information available in the marketplace in hopes to gain a competitive advantage over the company which could have had the effect of destabilizing it.
In sum, transparency is extremely important, but understanding the limits of its powers and the toxins that arise from its misuse are almost as important as the concept itself.