Monday, November 10, 2008

Shoot the Messenger

Ray Ball, a University of Chicago accounting professor wrote, "Don't Blame the Messenger ... or Ignore the Message", 12 October 2008, about mark-to-market accounting. I agree with Ball. "The message is simple: highly leveraged institutions gambling heavily on risky, low-transparency securities are asking for trouble. ... Wall Street is not lobbying for fair value to be suspended in the books of their corporate clients. ...Nor is Wall Street lobbying for an end to FAS 159, which allows them to book gains when the credit risk rises and the fair value of their own debts falls". Here's a link:

"The Bush administration is expected to allow banks that participate in the government's $250 billion capital-injection program to avoid triggering a rule that could have hurt the banks' finances. ... However, the $700 billion rescue legislation passed by Congress requires that the warrants be treated as a liability on [banks] balance sheets. That could force the banks to record a loss and thus impair their capital levels--the very opposite of what the government is aiming to accomplish. ... The problem stems from the fact that the banks will eventually have to officially issue the stock to cover the warrants, since the government may opt to convert its warrants into stock", Deborah Solomon at the WSJ, 20 October 2008.

"European banks could soon find it much easier to avoid write-downs thanks to changes in accounting rules being pushed through by European policy makers. ... The new accounting rules are 'one of the many weapons being deployed to fix the banking crisis,' Belgian Finance Minister Didier Reynders said in an interview. ... 'Given the current weak accounting enforcement in EU countries, any proposal permitting certain exceptions in 'rare' circumstances is open to abuse,' wrote J.P.Morgan analyst Sarach Deans in a recent report", my emphasis, Sara Munoz at the WSJ, 20 October 2008.

"Authorities in the U.S. and abroad are focusing on what they now believe is the core problem: the massive destruction of capital caused by markdowns of troubled assets. Restoring this financial raw material is crucial to economic growth", James Cooper at Businessweek, 27 October 2008.

"Mark to market is a business rarity--an accounting term that draws reactions from people who don't know spreadsheets from bedsheets. Mark to market, which we'll call MTM, evokes images of Enron's made up profits and the other corporate scandals that marred the first years of this decade. Not pretty. ... Accountants argue that MTM--known formally as Financial Accounting Standard 157--is fine, although the Financial Accounting Standards Board has agreed to tweak it some. ... This week the [SEC] is scheduled to hold a high-profile public meeting about MTM. ... The guy who got 133 into the bill, Representative Spencer Bachus (R-Alabama), the ranking minority member of the House Banking Committee, told me he wasn't trying to politicize accounting. 'It just say, "Study it,"' he told me. "It doesn't say [to do] a study to repeal it. It doesn't say [to do] a study to suspend it.' ... Second, it a little-noted move, regulators allowed banks with losses on some Fannie Mae and Freddie Mac securities to treat the resulting tax savings as tier one in their regulatory statements for the third quarter. ... How often has my source for this nugget--accounting guru Robert Willens of Robert Willens LLC--seen such grandfathering in his 40-year career? 'Never,' he says. ... It's easier to blame accountants for your problems than to admit you made your institution vulnerable by overleveraging its balance sheet and buying securities you didn't understand", Allan Sloan at Fortune, 10 November 2008.

It's Uncle Sam's job to enable banks to cook their books. Bank stock buyers, beware.

Bank stock book cooking will get worse. Expect no help from the regulators on this.

Think about this. It is not the decline in value of the underlying collateral that the "authorities" think is the problem, but the accounting entries. Do the "authorities" really believe this?

If Chris Cox had some: cojones and integrity he'd have told Bachus what Gen. Tony McAuliffe is supposed to have said at the battle of Bastogne in 1944, "Nuts". Sure. Cox, hahahaha. Hey Cox, what do you think of Linda Thomsen getting a pass from your administrative law judge?


Anonymous said...

Einstein said...

“Perfection of means and confusion of goals seem - in my opinion - to characterize our age”...

Ray Ball has a very good argument.. an abstract argument ... the accountants rarely win against the "managers"... the numbers war.

Cox seems a clever one and hopefully not corruptible...

Edgar Alpo said...

Banksters make me want to hurl.

Been there said...

@ "Shoot the Messenger"

"...The guy who got 133 into the bill, Representative Spencer Bachus (R-Alabama), the ranking minority member of the House Banking Committee, told me he wasn't trying to politicize accounting. 'It just says, "Study it,"' he told me. "It doesn't say [to do] a study to repeal it. It doesn't say [to do] a study to suspend it..."

I would normally say this was a reasonable proposition (if only it hadn't been uttered from the lips of a politician). However, the discussion should have been held years ago- BEFORE the adoption of SFAS 133. I've always been of the opinion that 133 is not as practical as historical cost standards for auditors to verify. Once you get beyond verifying the values of securities traded on a market exchange, there's just too much room for monkey business in coming up with a FMV. Especially for other assets not listed on exchanges. Verifying historical cost seems to be more of a science(trace the item back to what was paid- cancelled check or charge on Bank statement) while the FASB adoption SFAS 133 moved the auditing profession in the direction of being more like an art(Let's see, whadda we think this is worth?).

Having said that, I'm truly conflicted on this issue because SFAS 133, if followed properly, does seem to provide important additional information. In theory, 133 made a great deal of sense. However, in practice (human nature being what it is) we can see it was not followed appropriately. The various CDO values blessed by the auditors, over the past few years, turned out to be highly inflated (probably due mostly to misrepresentations of risk associated with these instruments).

ps- I seem to recall the Baucus was one of the hardliner holdouts to the Treasury's initial bailout bill. Wonder where he's coming from on this.

(also posted comment on NC blog)