Positive Money Podcast Episode 1 – Steve Baker MP (including part 2)

Steve Baker is Conservative MP for Wycombe following his election in May 2010. He is a director and co-founder of The Cobden Centre, an educational charity for social progress through honest money, free trade and peace. He is Chairman of the All-Party Parliamentary Group on Economics, Money and Banking.

Previously, Steve served in the Royal Air Force as a fast-jet engineer officer before reading for an MSc in Computer Science and becoming a consulting software engineer. Steve has worked with banks and their regulators in the UK, USA and Europe. His last contract was as Chief Architect of two global programmes at Lehman Brothers in the months and years leading up to its failure.

He says it wasn’t his fault.

We have here two parts of a podcast interview we’ve recorded over the past week, if you’d like to listen, just click play!

We reported earlier on about Steve Baker and Douglas Carswell’s private member’s bill to reform money and banking and prevent banks from creating money. Since then, Steve has been busy.

Today, he claimed that EU-mandated International Financial Reporting Standards (IFRS) are forcing UK and Irish banks to deceive themselves and all their stakeholders about their true financial positions.

Joining a growing body of opinion amongst accountants, investors and Parliamentarians, Baker says that auditing banks under IFRS means that their true solvency is not accounted for and that banks which look profitable under IFRS may in fact be unprofitable and destroying their capital.

Commenting on his Financial Services (Regulation of Derivatives) Bill, which would require financial institutions to prepare prudent parallel accounts in line with UK company law, Baker said,

“When I introduced my Bill on 15 March, I explained how the accounting rules for banks incentivise trading in derivatives by enabling unrealised profits to be booked up-front, leading to large but unjustified bonuses and dividends.

“On 30th March, the House of Lords Economic Affairs Committee published a report recommending that the Government reassert prudence as a guiding principle. That is what my Bill does and I hope the Government will adopt it.

“While complying with the rules, banks are producing accounts that grossly inflate their profits and capital in three ways. First, using IFRS mark-to-market and mark-to-model accounting, banks record unrealised gains in investments as profits. Second, IFRS prevents banks from making prudent provision for expected loan losses by allowing recognition only of incurred losses. Third, IFRS encourages banks not to deduct staff compensation from profits. Taken together, these flaws mean that banks’ accounts under IFRS are at once rule-compliant and dangerously misleading.

“By way of example, we have deduced from the accounts of the UK Asset Protection Scheme that RBS may be overstating capital by as much as £25bn.

“Boards take decisions based on their accounts. If the accounts are misleading, is it any wonder that boards and regulators are failing shareholders and taxpayers? The public are furious about the injustices manufactured by the banking system, and they are right to be, but how much greater is the injustice if grotesque bonuses are based on false profits?

“Banks are living in a fools’ paradise in which their boards cannot get a firm grip on vital measures like capital and profit. That is plain wrong.

“Thanks to the European Union, the UK cannot simply mandate prudent accounting in compliance with UK Companies Law but we can require parallel accounting to British standards while international negotiations proceed. That is why I am calling on the Government to adopt my Bill.”

The Financial Services (Regulation of Derivatives) Bill is scheduled for second reading with other private members’ bills on 10 June 2011.