A transcript of the FT’s interview with Sam DiPiazza of Pricewaterhouse Coopers. He speaks to Chrystia Freeland about the credit crisis.

Financial Times: Thank you for joining us, Mr DiPiazza.

Sam DiPiazza: Thank you, glad to be here.

FT: Some people are saying that the Bear Stearns rescue may mark the moment when the credit crunch certainly in the financial markets came to an end and we saw the beginning of the recovery. Do you think that’s a reasonable judgment?

Sam DiPiazza: Well, I would like to think so. I think it’s – this is a very volatile market. It’s a difficult market to call at this point. There are – you’re beginning to see some of the – maybe some strengthening in spots but I don’t know that I would say Bear Stearns would drive that answer. I think it becomes a question of confidence.

FT: Maybe the implicit guarantee, though, that the Fed has now given the financial sector?

Sam DiPiazza: Well, I certainly the actions of the Fed have created a level of confidence and a backstop, and I think if you listen to the European regulators and some others they would say there is more of that that’s going to need to come.

It does show a commitment from the regulators that they have to be a part of the solution at a bigger degree but these are faltering markets and the markets are going to have gain confidence.

When it’s over, this is really all about confidence in the people you’re doing business with, confidence in the counter-parties, confidence in transparency, and I think that does take a little bit of time to recover. I hope we’re on the way back.

FT: Do you think the Bear Stearns meltdown was preventable?

Sam DiPiazza: Well again, I’m not sure that I have the visibility into what ultimately happened at Bear Stearns. It was a question of liquidity, it was a question of lack of confidence and it moved quickly. We all saw the issues with Bear Stearns last Fall with some of the transactions but –

FT: People lost their jobs.

Sam DiPiazza: Yeah, people lost jobs and people lost money but what happened in the last week or two I think it’s probably going to take a little bit of time for us to understand how it ended up exactly where it did. Preventable – you know I don’t know that – there are some things about this entire environment that you might say could have been at least better understood. How did the risk management processes really work? Did companies understand and banks understand the impact that the leverage was having on their risk exposure? And even though the assumptions –

FT: Doesn’t the answer have to be no?

Sam DiPiazza: Well, obviously in some cases the answer is no and so now what does that mean in terms of the risk management processes that needed to be in place to manage through that?

FT: And what about Europe? Should we be worried about the European banks?

Sam DiPiazza: Again I would – I’d say the European banks are – you look at a few of them, they’ve taken pretty aggressive action, UBS in the lead at that. I don’t see any reason to single out European banks versus any others.

FT: Maybe because they’re not quite as transparent about the assets that they’re holding? They’re not required to be?

Sam DiPiazza: And I wouldn’t necessarily say that as well. I would say they do report under different standards but in fact the European banks – and a lot of the European banks operate in a world where a lot more of their vehicles were consolidated. They dealt with things under a different set of standards, some of which more principle- based that actually forced them to have to face some issues early. So I’m not going to suggest that the European banks were – that there’s another problem coming down the path with Europe.

FT: And fair value accounting, it’s been criticised by some people as possibly exacerbating the current problems. Do you think that’s a fair critique?

Sam DiPiazza: Well you won’t be surprised, no, I don’t think it’s a fair critique. This is not an accounting problem. This is a market problem. This is a problem with valuations being driven by the marketplace and fair-value accounting is simply reflecting what’s going on in the marketplace at a point in time.

Now you have a choice. You could say no, we don’t want to know that, we don’t want to reflect in the financial statements what is actually happening in the marketplace. We’d rather defer that over some period of time maybe the way Japan did in the 90’s.

I just don’t think that’s a good answer, that the SEC’s actions of a week ago suggesting higher levels of disclosure, looking for ways to create a better understanding of what’s happening between maybe current valuations and ultimate settlement values. All of that, that’s –

FT: Do you think that was right, what the SEC did?

Sam DiPiazza: I do. I mean I think what –

FT: You don’t think that was softening fair value accounting standards in ways that are perhaps inappropriate?

Sam DiPiazza: Well again, let’s ask the question, what would be the alternative? If you’re not going to value – these are tradable assets. These are assets – not always entirely liquid. The Level 3 Slide does require some assumptions but you can either record them at cost and ignore the fact that there is a declining market against them or you reflect the fair value.

Ultimately there’s two parts of this. One is – the real question is the capital adequacy. Is it the fact that you’ve had to reflect the fair value that’s a problem or that it has had a huge impact on capital? I think the latter.

FT: Maybe it’s had an impact on psychology though.

Sam DiPiazza: Well it’s clearly had some impact on psychology but again, that’s what the market is doing and so to suggest that you are better off not knowing I think is just not a good answer, and the second part of that is – and Bear Stearns shows this in a classic way – a lot of the crises we’ve seen with some hedge funds and companies that have struggled have shown the same, the liquidity issue is occurring because counter-parties have day-to-day visibility into the valuation of assets. Somebody has an asset, they borrow against it. The counter-party is assessing that value every day. When that value reaches a certain point, the counter-party calls the loan, creates a liquidity problem. Very simple.

FT: And that’s not connected with the value accounting?

Sam DiPiazza: That’s not an accounting issue, no. No, it’s a counter-party saying I’ve loaned you money and I’m going to loan it against an asset, and when that asset drops in value I’m going to do a margin call. It’s the same thing we’ve seen in markets all over the world for decades. Here, it’s just big numbers and so I think the counter-parties appropriately are dealing in fair value, the investor should have the same visibility.

Now, is it perfect? No, it’s not perfect. As we said, Level 3 assets, this less liquid group of assets requires a level of assumptions but if you’re transparent about those assumptions and if there is a consistency and frankly that’s a role that we play, I mean our job is not to come in and set markets, our job is to try to help good transparency and reporting, and if you have that then I think the market is better off than if you say as they did in other markets such as Japan, we’re just not going to talk about this for a few years.

FT: Do you think there is a possibility that there will be a retreat from fair value accounting?

Sam DiPiazza: I hope not. I hope not, you know, and I think the SEC implicitly suggested that they believe that fair value accounting is the better answer.

FT: Should we be troubled when we see different financial institutions using different assumptions and marking at different levels?

Sam DiPiazza: Well I think the more disclosure we get the more comparability we understand and I think that’s good for the investor. Troubled maybe, but maybe not. These are very sophisticated and complex instruments generally dealing with different levels of collateral, different types of instruments that cannot always be apples and apples compared. But the more –

FT: So there’s not a role for some regulator or overall body to say these are the levels you should be at?

Sam DiPiazza: Well I don’t think to say that this is the value of that security and that’s the value of this security because I think the regulator would spend all of their time valuing hundreds of securities over dozens of institutions but that’s a role that we play helping to be sure that there is some logic and consistency to the valuations.

It’s also a role the counter-parties are playing because the counter-parties are interested in their collateral. They’re watching how companies are valuing these securities and the regulators are not standing on the side. They’re participating in this conversation through intense reviews, looking at the way companies disclose and how they value things.

FT: You and your profession lived through the Enron and WorldCom era and that led to a real shake-up of the accounting world. What lessons should we learn from that period and should we be bringing to bear on the current crisis?

Sam DiPiazza: Well, it was a traumatic period for the profession. The profession needed to change. There were things that we needed to pay more attention to and you – we went through our own loss of confidence at that time. People wondered were we disciplined? Were we committed to the investor versus the management? Where was our accountability? And so I mean I think you learned a few things and I’ve said this over and over for years, for capital markets to work you need to have transparency. Capital markets work on trust. Trust is built through transparency. At Enron there was a lack of transparency. People didn’t know what was going on, how that company was making their money and in the end maybe they weren’t, and that was part of the downfall.

FT: Was SarbOx the right answer to some of those problems or did it go too far?

Sam DiPiazza: Well I think for the most part SarbOx was the right answer. Yes, it went to far in spots. So the answer to your question is yes and yes. You look at what Sarbanes-Oxley did, it required every public company to have an audit committee. It required the CEO and the CFO to sign the financial statements to put their good name behind the financial statements. What’s unusual about that? I mean that seems very logical. Most CEO’s they – I always have my name behind it. It required auditors to report to the audit committee. It required a level of independence on boards that we didn’t have consistently across the country. It required a lot of very positive things. It also required 404 and the reporting around controls, and in some respects that was very good because it brought a level of discipline and focus on controls. In some respects, it wasn’t so good. It was too rules-based, it was too complex, it took too much time. Some of the time wasn’t value-added but the SEC and the PCAOB have pulled back from that and they’ve made that process a lot better. So Sarbanes-Oxley I think was very good for the capital markets and I think we fixed some of the things that weren’t so good.

FT: Is it fair to blame the rating agencies for a significant part of our current woes?

Sam DiPiazza: I think there is enough blame in this one to go around to lots of people. These are basically investment decisions that were made by companies, management, by boards. Did they understand the complexity of what they were getting into? Did these structures, the nature of these structures, were they – and the leverage that was attached to them – did people really understand the risk they were taking? Investors who were chasing yield and frankly didn’t really want to know much about the instrument, all they wanted was to know the yield. There’s a lot of blame to go. The rating agencies are - there were a lot of others in this chain, but I don’t think it’s fair to pick one out and say that’s where the problem was.

FT: Was the level of risk apparent to you? Is it something that you – were things sufficiently transparent that someone in your position was able to see some of what was being built up?

Sam DiPiazza: Yes. I mean I think we saw issues – we saw issues in sub-prime lending but a couple of years ago we began to see those issues. We were concerned about the imbalance between risk and reward where lending was taking place with very thin, very minor levels of covenance. A lot of people saw that.

We knew there was a lot of liquidity in the market and liquidity was chasing transactions which were over-pricing and the yields didn’t make sense but that was – we all saw it but that didn’t mean that we all knew the answer.

We didn’t – I don’t think many of us could see the sub-prime mortgage collapsing the way they did and I don’t think many of us could see the liquidity crisis, which is driven by lack of confidence and lack of – it’s not that there is not liquidity in the market. There is plenty of liquidity in the market but there is a lack of confidence of where to place it and I think in that respect most of us are surprised at how difficult this has become.

FT: If the Paulson recommendations go through, what impact would that have on your business?

Sam DiPiazza: Well our senior regulator is the SEC, so clearly an SEC-CFTC combination would have an impact on us. I’m not sure how yet. I mean the proposals have just been out a matter of days. There’s not – Secretary Paulson didn’t try to lay out an explicit road map. He tried to put some things into the market for discussion. We think regulators need to be more streamlined. We think they need to be more nimble. We think they need to be more focused – continually focused on the investor.

So to the extent that any of these proposals do that, that’s good for capital markets and that’s good for us. I’m not particularly worried about the SEC and the CFTC combining.

FT: Are you ready to play long-short, Mr DiPiazza?

Sam DiPiazza: I am.

FT: Oil?

Sam DiPiazza: Short.

FT: US dollar?

Sam DiPiazza: Long.

FT:Vietnam?

Sam DiPiazza: Long.

FT: Manhattan real estate?

Sam DiPiazza: Short.

FT: Lehman Brothers?

Sam DiPiazza: No comment.

FT: China?

Sam DiPiazza: Long.

FT: Hank Paulson?

Sam DiPiazza: Long.

FT: London as a financial centre?

Sam DiPiazza: Shorter.

FT: McCain?

Sam DiPiazza: No comment.

FT: Obama?

Sam DiPiazza: No comment.

FT: Thank you, very much. That was great.