As the subprime mortgage meltdown grows, some experts are starting to see the resulting fallout rivaling corporate scandals of earlier this decade, like Enron, that prompted the passage of the Sarbanes-Oxley Act.

Even former Securities and Exchange Commission Chairman Arthur Levitt expects to see more massive writedowns on the way. He believes banks aren’t being candid about the full extent of their subprime mortgage holdings. Last week, he told Bloomberg News that he thinks the Financial Accounting Standards Board should force the banks to close a loophole that lets them keep the structured investment vehicles holding subprime debt off their balance sheets.

“These banks claim these entities were separate,” he said. “If so, then why are billions of dollars being spent bailing out these companies? Evidently they were not as separate as claimed in their accounting.”

As FASB struggles to cope with how to value the banks’ holdings in the midst of a shrinking market for mortgage debt, it also will need to look at exactly what the banks can do with the billions they hold in subprime mortgage debt to let investors know the true extent of their holdings. Treasury Secretary Henry Paulson is working on an agreement to temporarily freeze rates so that mortgagees can avoid the sharp increases in adjustable rates, at least for a while, and hopefully avoid foreclosure. That may help bring some stability to the market, or it could just help extend the timing of the inevitable crisis.

Experts are beginning to question whether increased regulation will help. “We seem to fly from one crisis to another,” said FASB Chairman Robert Herz at the IFAC World Accountancy Forum in New York. “When I go abroad nowadays, [I see] we’re losing credibility. It doesn’t play on Main Street anymore and it doesn’t play in most foreign capitals.”

Former SEC Commissioner Roel Campos is doubtful if the answer is increased regulation. “The regulator’s tools are disclosure,” he said at the IFAC conference. “I don’t know if it’s fair to expect regulators to prevent the next subprime mortgage [crisis]. The tools are there.” He noted that the portfolios can change so quickly on these holdings that by the time a quarterly statement comes out, they could already have changed. But knowing what’s on those balance sheets, even if it’s just a snapshot in time, is still going to provide investors with more data about the risks.

By closing the loopholes so banks are forced to account for their full subprime mortgage holdings, investors too will be less subject to the rude shocks of learning of the latest write-offs. These and other changes could lead to legislation that may not be as sweeping as Sarbanes-Oxley, but it will certainly have an impact that’s closer to home for people trying to hold onto their homes.

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