Thursday, March 26, 2009
The Keating Five Return
"If mark-to-market [MTM] is to blame for the current financial crisis, then the National Weather Service is to blame for Hurricane Katrina; if it hadn't told us the hurricane hit New Orleans, the city would never have been flooded. ... Edward L. Yingling, the president of the American Bankers Association, says the proposal addresses 'systemic risks that accounting standards can have on the economy'. ... '[MTM] accounting is the principal reason why our financial system is in a meltdown,' [Steve Forbes] wrote in a Wall Street Journal op-ed piece. They say the problem, in short, is not that the banks acted irresponsibly in creating financial instruments that blew up, or in making loans that could never be repaid. It is that someone is forcing them to fess up. ... The panel's chairman, Representative Paul E. Kanjorski of Pennsylvania, said the accounting rule 'does provide transparency for investors,' but that 'strict application' of the rule had 'exacerbated the ongoing economic crisis.' ... I call it 'Alice in Wonderland' accounting, after Humpty Dumpty's claim in that book that 'When I use a word, it means just what I choose it to mean, neither more nor less.' After Alice protests, he replies, 'The question is, which is to be master--that's all.' ... Conrad Hewittt, who was chief accountant at the [SEC] when it conducted a Congressionally mandated review of the issue late last year, said at a recent Pace University accounting forum that he asked all the complainers if they had a better way to determine market value than the one prescribed by Statement 157. None did. ... In other words, accept that market values are low and report the facts to investors. But give the banks a break by not acting as if that will last forever. Of course, many doubt that the regulators will really get tough when things improve. ... The bankers assert that those assets are now trading for less than they will be worth at maturity. In fact that is unknowable, which is one reason we have markets. ... 'Cheap volatile assets with a huge upside are precisely the kinds of optionlike investments that clever zombie managers are energetically looking for,' [Edward Kane, Boston College Finance Professor] said. If they soar, the banks' stock may be worth something. If not, the taxpayers will take the loss. ... Will [a banker] offer you a mortgage loan based on what you think your home should be worth, which you can repay only if you make a lot more money than anyone will pay you? If so, then perhaps the bank should be able to use 'Alice in Wonderland' accounting on its own books", Floyd Norris (FN) at the NYT, 13 March 2009, link: http://www.nytimes.com/2009/03/13/business/economy/13norris.html.
Accounting standards endanger the economy? Is Yingling nuts? I read Forbes' piece. He's written similar stuff before. I conclude Forbes is an intellectually challenged Princeton legacy. If the Big 87654 did their jobs properly, financial industry conditions would never have reached the point they have. The Big 87654 would have told institutions like Citigroup, "You ain't got a clue what any of that stuff is worth no matter how much 'file stuffer' you have. We're disclaiming an opinion". I doubt KPMG has done a decent Citigroup audit in three decades! I have an idea for Kanjorski, an intellectual descendent of the "Keating Five", repeal the laws against wire, mail and securities fraud. I remember the "zombie thrifts" of the 1979-86 S&L crisis. We're seeing the same behavior today from zombie banks. I made FN's argument about bank accounting. Congressmen running interference for "their" banks is one reason I have little faith in bank regulation. Repeal the Federal Reserve Act. Make banks which hold federally insured deposits general partnerships only!