Tuesday, December 29, 2009

Zimbabwe Ben's "Audit"

In his 29 November 2009 Washington Post piece, Zimbabwe Ben (ZB) states, "Our financial statements are public and audited by an outside accounting firm". He's right. The Fed's website let's you download the Fed's audited 2008 financials. Some interesting points (millions):

The Fed has $2,245,728 in assets and $42,152 in capital, a 1.88% capital ratio, or 53.3X leverage ratio. ZB, didn't the SEC recently tell investment banks leverage ratios of 35X were unsound? Or did you miss that? Or is the Fed a highly leveraged, poorly managed hedge fund?

The Fed has its own accounting principles. Junior at Junior Deputy Accountant noted this. Why not use GAAP ZB? It's good enough for Vampire Squid. Why does the Fed need ZBAAP?

Why let Deloitte & Touche (D&T) audit the Fed? Doesn't D&T audit these federal bailout money recipients: Merrill Lynch, Morgan Stanley, General Motors, Fannie Mae and who knows how many others? Doesn't D&T also audit Blackstone which works for the Fed? ZB, do you see any potential conflicts of interest here? Now looking at the financials we see with page numbers:

a. D&T gives the Fed a "clean opinion", noting the financials are on a "comprehensive basis of accounting other than" US GAAP, referring to footnote 4 (page 11). D&T's opinion in substance states it only did some arithmetic, "An audit also includes ... assessing the accounting principles used and significant estimates made by mangement". Did you do this D&T? Don't be bashful. Tell us.

1. The Fed loaned depository institutions (DI) $544,010, others $100,082, had $553,728 in central bank liquidity swaps and $411,996 in investments in variable interest entities (VIE). On the liabilities side the Fed has $860,000 in DI deposits. Each of these amounts is at least ten times the comparable 2007 balance.

2. The Fed collected $43,003 in 2008 interest income. Averaging its 2007 and 2008 footings, during 2008 the Fed had $1,580,252 in average assets, a 2.72% yield. Does the Fed think it has an "AAA" loan portfolio? Did Moody's or S&P tell it that? The Fed's income statement had no loan loss provision. Banks usually do. Page 116 of Citigroup's 2008 financials has a $33,674 loan loss provision. As critical as I have been of Citigroup, I conclude an insolvent Citigroup is in better financial condition than the Fed. Imagine, I said something nice about Citigroup.

5. Here the Fed describes its various programs "designed to support the liquidity of financial institutions and to foster improved conditions in financial markets".

11. "Accounting principles for entities with the unique powers and responsibilities of a nation's central bank have not been formulated by accounting standard-setting bodies. The Board of Governors has developed accounting principles and practices that it considers to be appropriate for the nature and function of a central bank". Like 2 + 2 = any number ZB wants it to be? ZB's financials do not reconcile US GAAP and ZBAAP. Why not ZB? "Accordingly, fair values, earnings, and any gains or losses resulting from the sale of such securities and currencies are incidental to the open market operations and do not motivate decisions related to policy or open market activities". Is ZB indifferent to how much of Joe Schmoe's money he loses? I realize AU 623.10 does not require a reconciliation for D&T to opine on ZBAAP financials. Still D&T, show us some professionalism and refuse to be associated with ZB's sham. Instead of feeding us pap like you did in my 5 December 2009 post: http://skepticaltexascpa.blogspot.com/2009/12/big-87654-firm-angles.html. AICPA ethics interpretation 203-1 states in part, "There is a strong presumption that adherence to officially established accounting principles would in nearly all instances result in financial statements that are not misleading". Was ZBAAP designed to mislead? What say you D&T?

12. "Loans are reported at their outstanding principal balances net of unamortized commitment fees". What are the $544,010 + $100,082 = $644,092 worth? I'd be amazed if this pig slop could be sold for $500,000 in the market. It might only be worth $322,046 or 50% of par.

21. "At December 31, 2008 and 2007, no loans were considered to be impaired, and the Reserve Banks determined that no allowance for loan losses was required". Huh? Every Fed loan is impaired. If the counterparty could have gotten non-Fed financing it would have. This is a joke. Aren't you impressed that D&T accepted this? Has the Fed an "internal control issue"? Need it hire SOX consultants? This sounds like a job not for Superman, but Huron.

22. At 2008 the Fed has Treasury paper worth $566,427 recorded at $502,189, meaning the Fed "made" $64,238 speculating in Treasury paper. Hey ZB, quit and set up a hedge fund. You have a promising future ahead of you.

25. Tells us about Fed VIEs. The Fed is exposed on $405.4 billion in VIE assets. During 2008 it took $5,237 in net losses on the VIE portfolio. How many losses are to be recognized?

32. ZB has an interesting chart here. It states, "At December 31, 2008, the sector/rating composition of [Maiden Lane] II's portfolio, recorded at fair value as a percentage of fair value, was as follows (in millions):" Then we see a chart with percentages. Read it carefully and see if you can figure out what it means. The chart is not expressed in dollars.

33. Apparently ZB lent ML III about $30 billion. See my 26 November 2009 post about ML III: http://skepticaltexascpa.blogspot.com/2009/11/aig-sequel.html. D&T, are you sure these assets were not impaired at 31 December 2008? In July 2008 Merrill Lynch (MRL) sold $30 billion of what may have been similar paper for 22 cents on the dollar, my 7 October 2008 post: http://skepticaltexascpa.blogspot.com/2008/10/fair-value-accounting.html. Was D&T aware of MRL's sale? But isn't MRL a D&T client? Fun and games. D&T may have been unaware of MRL's sale. Why? Because $30 billion in immaterial to MRL. Isn't it?

34. We are told the VIEs use fair value accounting. I don't believe it.

40. "As of December 31, 2008, both the probable loss and the fair value of the FRBNY's loan commitment were deemed to be zero, because under a range of scenarios it is unlikely that the FRBNY will be required to make the loan". The FRBNY thinks it will not suffer any losses on its $60,000 and $244,800 commitments to AIG and Citigroup respectively? If you say so D&T.

Remember, this is the same group that gave us the "stress tests".

"Contrary to conventional wisdom, the Fed's activities are already widely audited. [D&T] examines the Fed's financial statements, which are published", Robert Samuelson (RS) at Newsweek, 7 December 2009, link: http://www.newsweek.com/id/224596. RS, the Fed's "audited" financials aren't worth the paper they are printed on.

Jim Willie questions the Fed's balance sheet and solvency at Financial Sense, 15 December 2009, link: http://www.financialsense.com/fsu/editorials/willie/2009/1215.html. ZB, we are not all fooled. D&T, take note.

George Washington quotes William Bregman (WB), a former Fed economist at Naked Capitalism, 15 December 2009, "Well, for one thing, the appearance of extensive auditing authority doesn't mean audits are effective. Good auditing requires the willingness and ability of auditors to do their jobs", link: http://www.nakedcapitalism.com/2009/12/guest-post-the-feds-independence-argument-is-false.html. Well said WB. D&T's "audit" fails.

30 years ago I said the difference between bankruptcy today versus in the 1930s, was then you went bust. You gave your creditors your assets. They sold them, got 50 cents on the dollar and walked away. Now you go to the Fed. It prints a pile of money which you give your creditors and pay them 100% in fifty-cent dollars. See ZB, we're not that stupid. We figured out what you do. My bottom line: as of 31 December 2008, the Fed was insolvent by $100-400 billion. Thank you very much D&T. For nothing. As far as I am concerned, D&T is just a bunch of bookkeepers.

1 comment:

Anonymous said...

It's an honor to cheer you on IA...

Strike at the heart of the matter...


That should make our creditors feel secure...