Bank Accounting May Get Worse

"Tucked into the Treasury Department's proposed regulatory overhaul is a push for banks to salt away more money for losses when times are good. ... For more than a decade, banks have been restricted by accounting standards and the [SEC] from building capital reserves for loan losses that are likely to occur, but difficult to predict. 'Banks felt under pressure to keep reserves thin,' said Eugene Ludwig, the former comptroller of the currency who now heads consulting firm Promontory Financial Group LLC. ... The reserves they set aside during good times didn't cover their losses during the financial crisis, and banks had to scramble for capital. ... 'We recommend that the accounting standard setters improve accounting standards for loan-loss provisioning by the end of 2009,' the Treasury said in the financial-overhaul plan. ... Many bankers disapprove of the current rules. JPMorgan Chase & Co. Chairman and Chief Executive James Dimon wrote in the bank's annual repiort, 'I find it absurd that loan-loss reserves tend to be at their lowest point precisely when things are about to get worse.' Bank of America Corp. CEO Kenneth Lewis said bankers 'ought to have maximum flexibility to allow for the judgment of management, provided, of course, everything is transparent to the investor'," my emphasis, Matthias Rieker at the WSJ, 23 June 2009, link: http://online.wsj.com/article/SB124569316530037889.html

That's it boys. Let's return to pre-SFAS 5 accounting and contingency reserves. Bank accounting stinks and if the bank-controlled Treasury has its way, will get worse. This is stupid. Accounting reserves are not capital. They are accounting entries! Dimon and Lewis are saying banks are bad at estimating loan losses. This is news? What does Timmy Boy Geithner consider an "improve[d] accounting standard"? My guess: letting banks report any numbers they want. Dimon's statement is beautiful, when else would loan loss reserves be lowest if not when things look best? Has Dimon any concept of a business cycle? For decades I believed bankers our second dumbest group of businessmen after insurance executives. I still do. "Maximum flexibility" means "we want the Big 87654 to be even more supine than they have been in the past. We want to report whatever we want and never get indicted for securities fraud".

The Supremes Win One!

"Last week, the US Supreme Court issued a significant ruling, one that upholds the right of a criminal defendant, during trial, to confront the analyst who prepared a forensic report if the prosecution plans to use that report as evidence. ... But many prosecutors, and the court minority, complained that it would place undue strain on forensic analysts and prosecutors", Editorial at the Houston Chronicle, 1 July 2009.

This case should have been another no-brainer, 9-0 decision. The sixth amendment gives us this right. What copy of the constitution do Kennedy, Roberts, Breyer and Alito have? Was the page with the sixth amendment missing? Prosecutors and forensic analysts lack of integrity used to amaze me. It hasn't in years. What they are really afraid of is: "The CSI Effect", jurors being able to spot faulty science and poor evidence handling. Jurors looking at tests performed and wondering why other tests weren't. Imagine, our Supremes came up with Daubert in 1993. What a joke.

California Real Estate Update-7

"California's median price for existing homes rose 1.4% in April from March, marking the second consecutive monthly increase in housing prices and prompting some industry officials to declare that the state's long swoon in housing values could be at or near the bottom. ... It was the first back-to-back increase in the state's housing prices in two years. ... April also marked the eighth consecutive month of single-family home sales about 500,000 units. The inventory of unsold homes continued to shrink, to 4.6 months' supply from 9.8 months a year ago", Jim Carlton at the WSJ, 29 May 2009, link: http://online.wsj.com/article/SB124353047811163187.html.

"California's median price for an existing single-family home rose for the third straight month, a sign that the state's battered real-estate market may be bottoming out. ... Prices were still well below their year-ago levels, down 30.4% compared with May 2008", Stu Woo at the WSJ, 26 June 2009, link: http://online.wsj.com/article/SB124597490775357441.html.

The long slide in California real estate appears over.

Is the SEC Toast?

"Three months ago, in a courtroom in Bridgeport, Conn., a 72-year old former Morgan Stanley [MS] broker named Richard A. Kwak was cleared of any involvement in a small-time stock manipulation scheme. ... Kwak's life is now in tatters. He is around $1 million in debt and suffers from emotional problems. He has struggled to stay out of bankruptcy. Although he is still a broker--he certainly can't afford to retire--he long ago lost his job with [MS], where he had spent several decades without so much as a hint of impropriety. Needless to say, his business is a small fraction of what it once was. ... Indeed, it was the [SEC's] Boston office--the same one that so relentlessly pursued Mr. Kwak--that Mr. Markopolos first approached about Mr. Madoff, whom he strongly suspected of financial chicanery. In 2000, 2001 and 2005, he peppered investigators with evidence that, while circumstantial, was far more compelling than anything the SEC ever had on Mr. Kwak. ... The first is that the [SEC] spends too much time going after small fry like Mr. Kwak. 'It happens more times than you can possibly imagine,' said Steven N. Fuller, one of the lawyers in the case. ... But even the new SEC enforcement chief, Robert Khuzami, acknowleged that the agency has for too long judged itself primarily on 'quantiative metrics'--that is, the number of actions it brings and cases it settles--something he hopes to change. ... Clearly, it is far easier for the SEC to add scalps by going after little guys, who will often agree to a settlement and a fine even when they are innocent. They either run out of money, or lose the will to keep fighting, or both", my emphasis, Joe Nocera (JN) at the NYT, 27 June 2009, link: http://www.nytimes.com/2009/06/27/business/27nocera.html.

"When it comes to corporate America, critics and skeptics are about as welcome as skunks at a pool party. And when companies try to silence dissenters, shareholders are often imperiled. ... Matrixx shares have fallen 71 percent since the FDA announcement. ... Last Tuesday, Matrixx's problems grew when it said the [SEC] had begun an informal inquiry into the company related to the FDA action. ... Matrixx filed a defamation suit against the posters. Then, as part of their case, it subpoeaned Tim Mulligan, an independent research analyst who had published a critical report on the company in his accounting-oriented newsletter, the Eyeshade Report. ... Over the years, he had questioned the practices of several companies that were subsequently investigated by the SEC. ... Matrixx never named Mr. Mulligan as a defendant in its defamation case, but the years of legal work and costs that he incurred defending himself against the company's subpoena finally drove him to shutter his research operation in late 2005. ... Citing regulatory filings and other public documents, Mr. Mulligan's 24-page report that August also warned that Matrixx might not be able to supply the FDA with adequate support for its claims that Zicam reduces the severity of cold symptoms. ... In an interview, [Bill] Helmet said Matrixx's subpoena was not intended to silence Mr. Mulligan. ...In addition to his dismay over the legal battle, Mr. Mulligan said he was perplexed by encounters with SEC officials regarding Matrixx. Amid his legal wrangle, he contacted two SEC enforcement officials offering his research about the company. They dismissed him as 'suspicious,' Mr. Mulligan said, and refused to provide e-mail addresses to which he could send his work", my emphasis, Gretchen Morgenson (GM) at the NYT, 28 June 2009, link: http://www.nytimes.com/2009/06/28/business/28gret.html.

Welcome aboard JN. I've questioned SEC case selection for decades. It's worse than JN thinks. The SEC chases nobodys like Kwak to avoid politically powerful defendants. In Yves Smith's parlance, it's a "feature, not a bug". Besides, could Kwak, a nobody, offer an SEC attorney a NY BigLaw job when he decides to "go private"? Hey Khuzami, how about this? Offer Kwak a position as your deputy. Well? Look at SEC disasters in cases like: Joe Jett's, the PWC Two and Gile. See my 9 December 2008 post: http://skepticaltexascpa.blogspot.com/2008/12/linda-thomsen-please-go-home.html.

The SEC should require SEC registrants filing such suits to file them on Form 8-K with a copy to the SEC's enforcement division which should intervene. If the suit was meritless, the SEC should bar the attorneys who filed it from further SEC practice. But "that will chill zealous advocacy". Tough. If you're an SEC registrant you ain't got no "zealous advocacy" in such matters. The attorneys who acted against Mulligan should be forced to reimburse his legal fees. If they don't the SEC should bar them from further practice. Welcome aboard GM. That's my SEC experience too. If you tell it about something "questionable" and you are not an "approved source", you will be ignored at best, if not investigated yourself. The SEC has approved sources? Didn't the Fed claim it had no TBTF list? Whether or not Matrixx's subpoena was "intended to silence Mr. Mulligan" is a jury question. The SEC should refer this to the DOJ and let the sparks fly. Mulligan may have a good abuse of process claim too.

China on Bank Regulation

"First of all, the firewall between capital and banking markets was eroded by unsound financial innovations. Second, macro-prudential regulation was neglected. Third, financial institutions had too much leverage and were too opaque. Fourth, incentives for staff at fincancial institutions were driven by short-term gains, rather than long-term benefits. Fifth, the bail-out put the cart before the horse by pumping in capital and liquidity before cleaning up balance sheets. ... We believe banks are deeply rooted in the real economy and while the financial sector can temporarily outpace the real economy, this cannot continue forever", Liu Minghang (LM) at the FT, 29 June 2009.

LM is chairman of China's Banking Regulatory Commission. I wonder if LM wants to replacce Tim Geithner?

Whose Good Start?

"With clear signs of stability returning to the US financial system, this is an appropriate time to look ahead to the rebuilding process and to the steps that must be taken to prevent the recurrence of another such crisis. ... I especially support the creation of a single bank regulator, which is long overdue. ... Also welcome in the administration's new proposals is the focus on strong capital and liquidity requirements for a broad range of financial institutions. ... A big chunk of the activity that led to the current crisis took place in the shadows at financial institutions that weren't as carefully watched as banks. ... However, let's not forget that businesses large and small still need customized derivative products to hedge risk. ... Regulation of derivatives must be smart and effective, and done in a manner that reduces the risk of manipulation or abuse without choking off access to a needed product. ... First, we must preserve the ability to innovate and to steer capital toward the most promising innovations. ... The primary regulators of financial institutions must be responsible and held accountable for protecting consumers", my emphasis, Jamie Dimon (JD) at the WSJ, 27 June 2009, link: http://online.wsj.com/article/SB124605726587563517.html.

"At issue was whether New York's AG could demand mortgage data from federally chartered banks to fish for evidence of discrimination under the state's fair lending laws. Mr. Spitzer was running for Governor, and he wanted to play the racial lending card even as he now denounces the same banks for lending too much to the same people. ... As recently as two years ago in Watters v. Wachovia, the Supreme Court upheld precisely this principle. But now a five-Justice majority, improbably led by Antonin Scalia, who was joined by the Court's entire liberal wing, has opened the gates of state regulation against national banks", original italics, my emphasis, Editorial at the WSJ, 30 June 2009, link: http://online.wsj.com/article/SB124631935435570967.html.

This is special pleading. JD, JPMorgan CEO, wants the "to steer capital toward the most promising innovations". Is he kidding? Shades of the Atari Democrats of 24 years ago. "Single bank regulator"? Easier to control, you mean. JD wants non-banks subject to capital requirements. Why? They do not create money unlike commercial banks. It sounds like JD wants the Feds to "muscle out" his competition. "Weren't as carefully watched as banks". Hahahahaha, would say the Mogambo Guru. So? How carefully were banks watched? Did JD forget Citigroup got about $306 billion in various forms of federal largesse? Why do small businesses need derivatives? How did they exist in the old days? I don't want any bank holding FDIC insured deposits to "innovate". Period. Bank regulators, which protect banks should protect consumers? This sounds like a conflict of interest. This piece was titled, "A Unified Bank Regulator Is a Good Start". I say for who? Banks or bank customers?

How terrible. Get out your crying towel for Citibank, et. al. Since the Feds won't regulate these monsters, which is why they originally sought federal charters, apparently the states will have to do it. This give me another idea for our current regulatory stew: end national banking charters. That might cut a Citigroup down to size.

Isn't "Defense" The Culprit?

"In contracts with the United Auto Workers, GM promised high wages, lifetime employment, generous pensions and comprehensive health insurance. All this now is ancient history: new workers get skimpier benefits. ... Since 1960, government has changed radically. Then, 52 percent of federal spending went for defense, 26 percent for 'payments to individuals'--the welfare state. By 2008, 61 percent went for 'payments to individuals,' 21 percent for defense. ... Any sober examination of figures like these suggests that the system has promised more than it can realistically deliver. We are borrowing not to finance investment in the future but to pay for today's welfare--present consumption", Robert Samuelson (RS) at Newsweek, 29 June 2009.

Yes, RS. But isn't defense spending "busting the budget"? No. Social security and such will collapse. Bet on it.

Shaken Baby Baloney

"So-called 'shaken baby syndrome' is another area where it increasingly appears that flawed forensic testimony helped secure numerous false convictions over the years. ... According to an essay by Maurice Posley at The Crime Report: ... 'If research shows that the physical conditions that once automatically resulted in a prosecution could actually have been the result of an accident, the implications are enormous. "Given the scientific developments ... we may surmise that a sizeable portion of the universe of defendants convicted of SBS-based crimes is, in all likelihood, factually innocent," [Deborah] Tuerkheimer writes, adding that a far greater number of defendants among the group were likely convicted on legally insufficient evidence.' ... Convictions are still being obtained based on this forensic theory even though 'there is no consensus among medical professional as to whether the symptions that have traditonally been attributed to SBS are necessarily indicative of intentional shaking'," Grits for Breakfast, 22 June 2009, link: http://gritsforbreakfast.blogspot.com/2009/06/science-undermining-shaken-baby.html.

The real world is not that of CSI NY's Gary Sinese. Much "forensic evidence" is nonsense which prosecutors get "made as instructed". Lawyers are among those least capable of detecting such nonsense. That's why we have cases like Massachusetts' Amirault and California's McMartin preschool case. It's shameful what prosecutors can get away with.

The SEC's Graffam Moment

"The recent insider-trading charges against former Countrywide Financial Corp. Chief Executive Angelo Mozilo show how prearranged stock trading plans, commonly thought to limit the misuse of inside information, might instead signal an intent to game the system. ... However, research from Stanford University accounting professor Alan Jagolinzer suggests that prearranged trades are actually more likely to predict future stock-price movements than other insider transactions. ... Academics have established that insider transactions correlate with future stock performance. But, as Prof. Jagolinzer says, the effect is even more pronounced with transactions made under 10b5-1 plans. The legal protections afforded by the trading plans could spur some insiders to be more aggressive with their trades, he theorizes. He said insiders may be willing to push the boundaries of trading rules based on 'the perception of reduced legal risk. ... For example, while insiders can't embark on a trading plan while in possession of inside information, they are able to cancel such plans based on inside information. The SEC's guidance is that if there is no trade, there is by definition no illegal trade", my emphasis, David Reynolds at the WSJ, 24 June 2009, link: http://online.wsj.com/article/SB124580361150344795.html.

Is the SEC this stupid it failed to realize this would result? I saw this coming when these plans were first inaugurated. As Yves Smith would ask, is this a "feature, not a bug"? The SEC lacks an "opportunity cost" concept. To hold a stock is to not sell it. This is another SEC "Graffam Moment".

The Supremes Strike Out

"Convicts have no constitutional right to DNA testing, the Supreme Court found, a ruling that left the accessibility of potentially critical evidence to the discretion of individual states. ... But the opinion, by Chief Justice John Roberts [JR] drew a sharp distinction between defendants, who are presumed innocent at trial, and convicts like William Osbourne, who was sentenced to 26 years imprisonment for kidnapping, raping and shooting an Alaska prostitute in 1993. 'A criminal defendant proved guilty after a fair trial does not have the same liberty interests as a free man,' Chief Justice Roberts wrote, adding that it remains an 'open question' whether 'proof of "actual innocence"' is enough to overturn a conviction after a fair trial. ... Justice Stevens wrote that the state had refused to provide access to the evidence even though the burden was minimal", Jess Bravin and Jennifer Forsyth at the WSJ, 19 June 2009, link: http://online.wsj.com/article/SB124533135682627425.html.

"The US Supreme Court ruled Thursday that former Enron broadband executive Scott Yeager cannot be retried on lingering charges because a jury in 2005 acquitted him of others related to the same alleged scheme. ... Justices Samuel Alito, Antonin Scalia and Clarence Thomas dissented, citing precedent that a retrial on counts on which a jury hung in a first trial is a part of the same prosecution, so protection against a second trial on the same allegations doesn't apply", Kristen Hays, at the Houston Chronicle, 19 June 2009, link: http://www.chron.com/disp/story.mpl/special/enron/broadband/6486253.html.

"In an appalling 5-to-4 ruling on Thursday, the Supreme court's conservative majority tossed aside compelling due process claims, the demands of justice and a considered decision by a lower federal appeals court to deny the right of prisoners to obtain post-conviction DNA testing that might prove their innocence. ... Writing for the majority, Chief Justice John G. Roberts Jr. noted the 'unparalleled ability' to prove guilt or innocence using DNA evidence. But he treated that breakthrough more as an irritant than an oppotunity. ... As Justice Stevens noted in his dissent, 'There is no reason to deny access to the evidence and rthere are many reasons to provide it.' ... We are also puzzled and disturbed by the Obama administration's decision to side with Alaska in this case", my emphasis, Editorial at the NYT, 19 June 1009, link: http://www.nytimes.com/2009/06/19/oinion/19fri1.html.

I opposed JR elevation to Supremes believing him a spoiled, unscrupulous child of privilege. This is the "Supremes" worst decision since Kelo. If proof of actual innocence isn't enough, what is JR? A writ from the Master himself? What did JR learn at Harvard Law School: to play word games. I hope on judgment day you are sent to Dante's Ninth Circle of Hell. JR and Alito making this decision, did not surprise me. That Thomas and Scalia exhibited such contempt for facts is shocking. I see the issue this way: In substance, SUBSTANCE, remember the law respects substance over form, Osborne moved for a new trial based on new evidence, an improved DNA test. Osborne offered to pay for the test with his own money. Alaska says no deal. If I were a Federal District Court judge hearing a habeas corpus case, I would release Osborne. Why? The best evidence rule, Clifton v. US, 11 L ed 957, 960 (1846), "The meaning of the rule is, ... no evidence shall be admitted, which, from the nature of the case, supposes still greater evidence behind in the party's possession or power". My presumption: Kenneth Rosenstein, Alaska Assistant Attorney General will not submit Osborne's DNA to a jury because it's already been tested and would exonerate him. What's JR's problem? Osborne be a "niggah" and ain't got no rights. JR, you disgust me to elevate "due process" whatever that means over substance. To call the trial "fair" begs the question. The Supremes here are just playing word games.

I agree with Scalia, Thomas and surprisingly Alito. JR switched sides on this case despite clear precedent. Why? JR saw Yeager is a white boy. Yeager may even be a Hogan & Hartson client. Further, by establishing this precedent, who knows who else JR can protect on Wall Street?

"Chief Justice" JR? That's an oxymoron if I ever read one. A problem with DNA evidence is: it is scientific and less susceptible to manipulation than words, a lawyers stock in trade. As science encroaches on the law, lawyers lose influence. A terrifying prospect for JR, a master word manipulator. Obama's failure to intervene in Osborne surprised me too. Did showing solidarity with fellow Harvard Law grad JR trump Obama's showing racial solidarity with Osborne?

I disagreed with the Supremes decision today in an employment discrimination case, that's three today.