Enron Accounting Redux

"Should we blame the accountants? Surprises multiplied as the subprime problem of 2007 grew into the credit crunch of 2008. ... It is something else, however, for a bank to report a multi-billion dollar loss from taking some risk that had never even been mentioned in its financial statements. ... Senator Jack Reed of Rhode Island ... said ... 'We thought this was already corrected and the rules were clear and we would not be discovering new things every day. Reed, a Democrat, has sent a letter to the [SEC], as well as the [FASB]. ... He is asking detailed questions about what went wrong and how it should be fixed. ... One rule that needs scrutiny now--called 46-R--was passed after Enron. ... Suddenly losses are booked. Investors learn that a company has taken a risk only after the risk has gone bad. ... The rules require that companies make some disclosures about vehicles off their balance sheets, even if they do not put them on their financial statements. ... The SEC, and perhaps the Congress, should ask some companies to explain their earlier lack of disclosures. ... In the report State Street explains why is has not taken any write-off on those conduits, which contain $28.8 billion in what the bank believes to he high quality assets. It can avoid consolidation because other investors would suffer the first $32 million of losses--about one-tenth of one percent of the assets. ... But State Street says its model indicates that defaults on the underlying assets will not cost that much", Floyd Norris (FN) at http://www.iht.com/, 28 February 2008.

"Accounting-rule makers plan to re-examine how banks treat off-balance-sheet vehicles that have played a big role in the credit cruch. ... It is time 'to look under the hood' of rules related to the treatment of these off-balance-sheet vehicles, Robert Hertz, chairman of the [FASB], said in an interview. He said the board still is gathering information about these vehicles and whether problems were due to existing accounting rules or the way banks used and disclosed these vehicles. ... 'But we also don't want to have blanket rules that make everyone consolidate everything.' ... The post-Enron rules were supposed to limit the use of such vehicles, but banks found ways to tailor new structures that sidestepped the new rules. ... Pressure has been building for rule makers and regulators to get a better grasp on off-balance-sheet structures that helped fuel the housing boom. ... 'It is vitally important that shortcomings in financial reporting for off-balance-sheet transactions as well as timely disclosure of information about subprime and related investments be addressed in an expeditious fashion,' Sen. Jack Reed ... wrote in a letter to the [SEC]. ... Citigroup disclosed in its annual report for 2007 that it had sold about $77 million in first-loss notes related to Citi-sponsored conduits that have $72 billion in assets", my emphasis, David Reilly at the WSJ, 29 February 2008.

This is nonsense FN. The rules look fine to me. Ask the SEC? Hahahah! See my 6 February 2008 post. Other investors absorbing .00111 of the losses was State Street's (SS) basis to avoid consolidating its conduits. Amazing! Where is the DOJ? Is it readying indictments? They should be easy to draft. The facts should be stipulated! The question: did SS and its employees believe what they said when they created those conduits? I ask: would SS make me an unsecured, non-recourse loan on say, a portfolio of stocks with .00111 down? If not, the convictions should be easily secured, the only issue being criminal intent. SS's 2007 proxy statement shows it paid Ernst & Young (E&Y) $12.5 million last year, including $7.9 million for its audit. I guess $7.9 million in audit fees doesn't go very far nowadays. Hey Mark Olson (MO) at PCAOB, what will you do about this? Anything? Of course not, unless Congress breaks your arm, after all as a "former" E&Y partner you must be a "West Side Story", 1956, character. I got it: beat up a dozen more small CPA firms, each of which audits less than say $1 billion in market cap of SEC registrants in lieu of looking at SS's conduit accounting. Does the PCAOB accept the new ".001 standard" for conduit non-consolidation? What is the PCAOB's position, or will it defer to the FASB to say .001 ain't enough? MO, this Leonard Bernstein-Stephen Sondheim song's for you:

When you're a Jet, You're a Jet all the way. From your first cigarette To your last dying day. When you're a Jet, If the spit hits the fan, You've got brothers around, You're a family man. ... When you're a Jet, You're the top cat in town, You're the gold medal kid With the heavyweight crown

Well MO. What is a "former" E&Y partner gonna do? Do you prefer my composite version of this song, at http://dragon.sleepdeprived.ca/songbook/songs2/s2_28.htm. ?.

Rufus Rastus Johnson Brown Watcha gonna do when the rent comes round Watcha gonna say, watcha gonna pay Watcha gonna do on judgment day.

Now MO: Rufus Olson Bernanke Paulson Brown, Watcha gonna do when fraud and insolvencies comes round Watcha gonna say, watcha gonna make Joe Sixpack pay Watcha gonna do on judgment day

Hmm, $77 million, $72 billion, .00107. Hmm, That's the new standard, .001 or greater to avoid consolidation. Don't most lenders want PMI if a home buyer puts down less that 10%? Doesn't SFAS 13 paragraph 5 have a 90% criterion to capitalize a lease? I realize it is difficult to analogize conduit non-consolidation and lease capitalization so no one at KPMG told Citigroup, .001 ain't enough, consolidate. Well, MO? What will you do about this? Will you revoke E&Y's and KMPG's ability to audit SEC registrants? Well?