Kill the PCAOB

The PCAOB "inspected" the CPA firm I work with in November. The "inspectors" were two "former" Big 87654 operatives. My opinion: they are functionally Big 87654 seniors. Neither understood discounted cash flow analysis. I had to tell them if you have a series of cash flows, you can specify the interest rate or the present value (PV), not both. As the PV increases, future interest income decreases. Where did this "issue" arise? In sales-type lease accounting under "old" SFAS 13. These two didn't understand "incremental borrowing rate", a lessee SFAS 13 concept, paragraph, 5l. Don't raise the substance over form concept to these two. They only me-chan-i-cal-ly follow "the rules". Imagine what would happen if we were under IFRS. Rules are a GAAP problem. If you only follow the rules, you can't figure out when they lead to absurdities or when a transaction was concocted to evade the rules. I say shut the PCAOB. In the alternative, have it sign opinions and be liable to suit. It also should be liable for suit for passing a CPA firm which has clients with "cooked books" like: KPMG at Citigroup and GE, or PWC at AIG or Goldman, or D&T at GM, etc., etc. What do the PCAOB people think bank "structured finance" departments do if not design transactions with differing form and substance?

Let "saw off", also called "reductio ad absurdum". Suppose a company issues a $1 million note paid in a year for $2 million. What's this note's interest rate? I say 100%. What say you? If the note is paid in six months, I say 300%. Why? It doubled in six months and I assume would double six months later. 2 x 2 = 4; 4 -1 = 3; hence 300%. If it doubles in three months, we get 2 x 2 x 2 x 2 = 16, 16 - 1 = 15; hence 1,500%. If it doubles in a month, we get 2*12 = 4,196; 4,196 - 1 = 4,195; hence 419,500%. Now a week, we get 2*52 = 4.5036 x 10*15, or 4.5036 quadrillion. A big number. Now if you have a $1 million note which the buyer can immediately sell for $2 million, I say the interest rate is infinite because it has no time dimension. I explained this to the Big 87654 partner who hired the PhD consultant I mentioned in my 16 August 2009 post:

http://skepticaltexascpa.blogspot.com/2009/08/economathematicians.html. The PCAOB "inspectors" believe the consultants cost of capital (COC) study has significance and should be used to value a lessor's sales-type lease. Doesn't this give you "warm and cuddlies" with respect to Big 87654 partners, PCAOB apparachiks and PhD consultant's skills? The PhD consultant thought my client's COC was 13%. The Big 87654 partner had no idea how the consultant derived 13% but he knew: the consultant had an MIT PhD. The PCAOB people don't know anything except a Big 87654 firm accepted the consultant's report so it must be right. I add, the consultant is also an audit client of the Big 87654 firm in question. Did a Big 87654 firm bring him in to "further client relations" with its auditee? Never.

Absurdities? Like me-chan-i-cal-ly applying paragraphs 55-57 of SFAS 123(R). You can get stock option expense for an employee who leaves a company then returns, exceeding that if he was continuously employed. Dealing with PCAOB "inspectors" reminded me of Supreme Court case Graffam v. Burgess, my 24 October 2007 post: http://skepticaltexascpa.blogspot.com/2007/10/call-out-cops.html.

Could the PCAOB help investors? Maybe? It could stop "inspecting" CPA firms and "inspect" audits. With a $15 trillion US stock market capitalization (MC), let the PCAOB inspect 500 audits a year, one per $30 billion. Thus XOM, WMT, MSFT, APPL and other "large caps" audits will be inspected annually. So? Of 500 audits inspected, 494 will be by the Big 87654, four by the "little three" and two by 1,790 other firms. Think of the time the PCAOB could spend with Vampire Squid, GS-NYSE, current $86 billion MC instead of micro caps. If the PCAOB inspects two audits for each of the 1,790 small firms, that's 3,580 audits. With total MC audited of $60 billion, that's a $17 million average auditee size, or 25% of Lloyd Antoinette Blankfein's 2007 year end $68 million bonus! What gives? The PCAOB is a scam. Kill it Supremes! Please. If every audit by the 1,790 small firms is defective, how much can that reduce investors' returns? Not much. Every hour the PCAOB spends with micro caps is one less hour it spends at: GS, C, FNM and other members of my "rogues gallery". Ladies and gentlemen of the blogosphere, why do you think the Big 87654-controlled PCAOB spends as much time as it does on the 1,790 small CPA firms in question? What say you?

PCAOB Apologists

"The legality of a federal board that oversees accounting firms was debated before the Supreme Court on Monday, with conservative justices suggesting that the board enjoys more independence from the president than the Constitution permits. ... During oral arguments, conservative justices including Antonin Scalia noted that the president's control over the accounting board is limited because the board answers to all five independent commissioners of the SEC, not just the chairman. ... Because of its power to initiate investigations into accounting firms, the board can take 'actions that have devastating consequences for the regulated bodies,' said Chief Justice John Roberts. ... Jeffrey Lamke, the attorney representing the [PCAOB] .... said the president has the same control over the board as he does over everything else that falls under the SEC's jurisdiction. 'Which is nothing,' said Justice Scalia. Several former SEC chairman and accounting-industry groups support the current setup of the accounting board", my emphasis, Fawn Johnson and Jess Bravin at the WSJ, 8 December 2009, link: http://online.wsj.com/article/SB126020055598680141.html.

If the AICPA and Big 87654 support the PCAOB, how much has it improved investor protection since 2003? Remember the AICPA, Big 87654 and SEC all supported CPA "peer review". I await the PCAOB barring a Big 87654 firm from further practice in front of the SEC.

I found a 21 July 1993 piece by Janice Shields, who was then an Associate Professor of Accounting at Bloomburg University titled, "Bad Audits ... Not Deep Pockets" about the Big 6's auditing failures. Nothing has improved since 1993. Here's a link: http://www.enronwatchdog.org/PDFs/bad_audits.pdf.

31 More Years?-6

"When the financial crisis began, few players on Wall Street looked more ripe for reform than the Big Three credit rating agencies. ... It was the near universal agreement that potential conflicts were embedded in the ratings model. For years, banks and other issuers have paid rating agencies to appraise securities--a bit like a restaurant paying a critic to review its food, and only if the verdict is highly favorable. ... What explains the timidity of Congress' proposals? This is not a case of lobbyists beating back ideas thay might hurt their clients, say those close to the discussion. Instead, Congress is worried that bold measures may backfire. The Big Three, by allowing companies and public entities to raise money by issuing debt, are an essential engine in the country's vast credit factory, and given the still-fragile condition of the equipment, lawmakers are reluctant to try anything but basic repairs, patches and a new alarm system. ... While Congress may be happy with cosmetic surgery, law enforcement officials are getting more aggressive. Dozens of lawsuits have been filed against the rating agencies, inclduing a case filed on Nov. 20 by the Ohio attorney general on behalf of public pension funds. The Ohio suit, as well as the earlier suits, seeks billions of dollars in damages from the rating agencies and accuses the firms of negligence and fraud. ... But even if there is no foolproof way to reform the rating agencies, the measures that Congress is now backing are strikingly weak, a number of critics say. There is no talk, for instance, about creating a fee-financed, independent credit rating agency, one modeled along the lines of the [PCAOB]. ... Academics and former rating agency employees who have been warning lawmakers about the Big Three for years, say Congress is tiptoeing when it ought to be charging ahead. ... Both bills enhance the power of the SEC to supervise the rating agencies and both require the companies to bulk up their compliance teams. ... 'I think these bills are misguided and wrongheaded because they will have the ironic effect of making the incumbents even more important,' said Lawrence J. White, an econmics professor at the Stern School of Business at New York University. 'They're going to encrust the procedures already in place and discourage new business models'," my emphasis, David Segal at the NYT, 8 December 2009, link: http://www.nytimes.com/2009/12/08/business/08ratings.html.

Even if there was a ratings agency like the PCAOB, who would staff it? Former S&P executives?Until rating agency executives live in terror of being indicted for aiding and abetting securities fraud, nothing will change. Any more than Sarbox cleaned up the CPA business. Why are the Big Three essential? If you can't sue them, they're just paper shufflers. What "foolproof" way fixed the CPA business? What's ironic? Didn't Sarbox help the Big 87654?

Freeman on Sarbox

James Freeman (JF) blasts Sarbox at the WSJ, 7 December 2009: http://online.wsj.com/article/SB10001424052748704431804574539921864252380.html. JF notes, "On the other hand, news of potential relief from the law pushes up American stock prices. That's not a vote of confidence from the people supposed to benefit from the law". No it isn't. Cost-benefit analysis anyone? Nah, just say the mantra, "internal controls good. Lack of internal controls bad".

"As the CEO of a small bank, I know first-hand that internal and external audit costs for Sarbox compliance can easily reach six figures. ... The questions the [SEC] should be asking are: Would any of these accounting and disclosure regulations help discover or prevent the massive big bank and Lehman Brothers failures or AIG's near collapse? Do small companies under the SEC represent the real risk to our financial system and economy? I suspect the answer is a resounding no", Allen Sterling letter to the WSJ, 16 December 2009: http://online.wsj.com/article/SB10001424052748704869304574596441223615728.html.

Yes Sterling.

PCAOB Attacked!

"From the marbled corridors of Congress to the tony salons of Georgetown, liberal lawmakers are abuzz with ideas of how to rein in US corporations. Yet over in the courts, two conservative lawyers are mounting a serious challenge to a law, enacted earlier in the decade, that imposed tough restrictions on American businesses. A ruling in their favor could deal a serious blow to the pro-regulatory movement in Washington. ... The two are representing Brad Beckstead, the head of a small auditing firm in Henderson, Nev., who is suing the [PCAOB], the panel created by SarbOx to make sure auditors are doing their jobs. Beckstead says the PCAOB picked apart his business in a grueling 2004 audit. 'I became the poster boy for what not to do when auditing small companies,' he says. The cost of complying with the rules was so great, he claims, that he had to abandon his auditing practice. ... A finding for Beckstead could reopen the entire Sarbanes-Oxley Act. Some board defenders fear a victory for Beckstead could even shake the foundations of established bodies such as the [Fed]. 'The implications are potentially far-reaching,' says Gillian Metzger, a Columbia law professor who is supporting the PCAOB board in filings with the high court. ... In Beckstead, [Michael] Carvin and [Noel] Francisco are taking on their boldest challenge yet. The PCAOB was estalished as an independent nonprofit largely to let it pay market wages for its workers rather than civil servant salaries and to shield it from political influence. In 2004 seven PCAOB auditors descended on Beckstead & Watts to pore over its practices. The result was a detailed report listing deficiencies based on the SarbOx rules. Beckstead penned a spirited response, but he says the cost of complying was too great and he had to shut down his auditing practice", my emphasis, Theo Francis at Businessweek, 30 November 2009, link:

http://www.businessweek.com/magazine/content/09_48/b4157040803359.htm.

"Congress wants to wallop business with even more regulation in the wake of the financial panic, but perhaps the Members should pause of Monday and visit the Supreme Court. The justices will hear arguments on whether major portions of the last great Congressional overreaction, the 2002 Sarbanes-Oxley Act, are constititional. ... At iuuse is whether the ... PCAOB, which supervises compliance with the law, violates the Constitution's separation of powers. Under the Appointment's Clause, all 'officers' of the [US] must be appointed by the President and accountable to him--a condition PCAOB members do not meet. ... The dissenter on the DC Circuit Panel, Judge Brett Kavanaugh, called the case the most important separation of powers case in 20 years and said the appeals court had created a constitutional hash. Though the PCAOB 'performs numerous regulatory and law enforcement functions at the core of the executive power,' he wrote, for the first time in US history we have an independent agency whose heads are appointed by and removable only for cause by another independent agency.' ... The accounting board's wide-open mandate--to make whatever rules 'may be appropriate in the public interest or for the protection of investors'--has cost the economy nearly $1 trillion according to a study by the AEI and the Brookings Institution. The benefit is supposed to be investor protection. But despite these costs, the law did nothing to warn about the meltdown of mortgage-backed securities, much less expose Bernie Madoff or other fraudsters. ... As the Supremes now take their turn, the case has implications the regulation-loving press corps hasn't notices. A decision to uphold the PCAOB would open the door for Congress to create any number of equally unaccountable regulators across the economy. However, a ruling against the PCAOB could bring down the whole law because Sarbox does not have a 'severability clause,' which means that if one part goes down, the entire law may be invalidated", WSJ Editorial, 4 December 2009: http://online.wsj.com/article/SB10001424052748704107104574571662869948676.html.

"Regarding 'These Men Could Kill SarbOx' ... : I hope SarbOx is eliminated. It certainly didn't help control Bear Stearns, Lehman, and numerous failed banks. If the [PCAOB] cannot prevent financial collapses of that magnitude, why should public corporations have to spend millions of dollars to adhere to useless 'control' mechanisms?", Joseph D.Agostin letter to Businessweek, 14 December 2009.

The Big 87654-staffed PCAOB defends the Big 87654's cartel. In 1998 or 1999 I computed the SEC registrant audit industry's "Herfindahl Index", to be 3,700, above the DOJ's 1,800 excessive industry concentration guideline. Well, DOJ, will you bust up the Big 87654? The PCAOB in substance, gives "former" Big 87654 partners semi-retirement sinecures. Seven PCAOB goons at Beckstead! How many multibillion-dollar market cap registrants did Beckstead audit? I applaud the Jones Day lawyers work here. Sarbox did not "impose tough restrictions" on American business. It just increased SEC registrants' paperwork. Securities, wire and mail fraud were criminal before Sarbox. 1977's Foreign Corrupt Practices Act had a "books and records" provision. Sarbox did nothing for investors. The PCAOB exists "to make sure auditors are doing their jobs"? Says who? Even the Big 87654? The PCAOB is shielded from "political influence"? Says who? Is the Fed? Or the FASB? Is the PCAOB's "parent", the SEC?

Members? As the term used in Shakespeare's time? May the Supreme's kill this monster.

Why indeed?

The SEC as Passover's Fourth Son

"The [SEC] has 'historically been slow to act' in regulating the nation's credit rating agencies, the agency's inspector general said in a report released Friday that called for a broad range of improvements in oversight. ... The audit report found that the commission delayed adopting rules on the rating agencies and sometimes failed to follow the rules that existed. ... The report recommended that the SEC impose further restrictions on the consulting and advisory services that rating agencies provide to issuers of rated debt, to avoid conflicts of interest. It advised a rotation requirement for credit ratings analysts to 'reduce the risk of undue pressure' on analysts to sign off on questionable products to maintain relationships with issuers. It also called for a review of the effect of what is called a revolving door syndrome, in which analysts leave to work for an issuer whose debt they were rating", my emphasis, Cyrus Santi at the NYT, 29 August 2009, link: http://www.nytimes.com/2009/08/29/business/29rating.html.

"The [SEC's] internal watchdog criticized the SEC's handling of credit-rating firms, saying some won federal approval despite slipshod applications and, in one case, suspicious financial data. ... In a report released Friday, the SEC's inspector general, David Kotz, cited serious concerns about one firm, including 'suspicions regarding the accuracy of the financial information provided in its application and concerns about the authenticity of a number of certifications.' ... The big three credit-ratings firms have been blamed by some critics for exacerbating the financial crisis after giving overly positive ratings to certain kinds of debt, including some backed by subprime mortgages. However, the problems identified in Mr. Kotz's report appear to involve primarily smaller firms", Sarah Lynch at the WSJ, 29 August 2009, link: http://online.wsj.com/article/SB125147990818867325.html.

"When everyone else is blaming you for creating the credit crisis, it helps to have a friend at the [SEC]. Especially when the SEC has the power to prevent new competitors from entering your market. ... Yet David Kotz, the SEC's inspector general, has apparently concluded that the real problem is not this government-anointed oligopoly, but the upstarts that have lately been approved to compete with them. ... Kotz has also issued recommendations certain to make competing with the Big Three more difficult, time-consuming and expensive. ... Of course, the greatest reform of all would be to get the government out of the business of approving credit raters. The SEC should enact its 2008 proposal to remove all references to NRSROs from the agency's rules and let markets decide how to judge default risk. ... Among the most costly of Mr. Kotz's ill-advised recommendations is the suggestion that all rating agencies should be audited by a firm regulated by the [PCAOB], the bureaucratic monster created by Sarbanes-Oxley", Editorial at the WSJ, 1 September 2009, link: http://online.wsj.com/article/SB10001424052970204731804574384983262268864.html.

This is worthless. Kotz advocates the same "solutions" that did not improve Big 87654 audits for 33 years. He must be "Passover's fourth son", the one who cannot ask a question. Why is Kotz worried about the rating agencies "revolving door syndrome"? Kotz, first look at the SEC and DOJ. Did not the Master say, "Why do you look at the speck of sawdust in your brother's eye and pay not attention to the plank in your own eye? How can you say to your brother, 'Let me take the speck out of your eye,' when all the time there is a plank in your own eye? You hypocrite, first take the plank out of your own eye, and then you will see clearly to remove the speck from your brother's eye", Matthew 7:3-5 (NIV).

Kotz's report could have been written by the PCAOB. It's worthless. The problems appear to be clerical.

I knew Kotz would use his report to further a PCAOB power grab. Aren't the Big Three already audited by large CPA firms?

I anticipated Kotz's PCAOB idea, but meant it sarcastically. Kotz took me seriously. See my 27 September 2007 and 28 April 2008 posts: http://skepticaltexascpa.blogspot.com/2007/09/let-market-work.html http://skepticaltexascpa.blogspot.com/2008/04/sec-investors-friend-fiend-2.html.

Added links 7:40 PM:

http://retheauditors.com/2008/02/21/the-big-4-and-the-ratings-agencies-a-self-fulfilling-prophecy/

http://retheauditors.com/2008/03/06/auditor-musical-chairs-at-moodys/

Whose Watching?

"The Big Four accounting firms are used to embarrassing headlines about their purported misdeeds. After all, the past decade has seen one business catastrophe after another at companies audited by the major firms. Witness the scandals at Tyco, WorldCom and Xerox. ... In investor lawsuits filed in recent months, BDO Seidman [BDOS] and McGladrey & Pullen stand accused of shoddy audits and signing off on the books of fraud-ridden businesses and investment funds. The cases, together with a string of earlier ones involving the two firms, raise unsettling questions about the level of confidence investors can put in financial audits. ... The gray area centers on what is reasonable, an issue that often plays out in the courts because accounting firms can be one of the only solvent players left when a company goes down. ... [BDOS] had audited [ES Bankest LLC] and concluded its books were free from material error. ... 'Auditors are supposed to have professional skepticism, and that is just inconsistent with the client relationships that they try to preserve to keep the money flowing,' [Steven] Thomas says. ... [BDOS] ... also is contesting a civil lawsuit from the collapse of Le-Nature's Inc., a Pennsylvania iced-tea producer shuttered in 2006 after allegedly faking $240 million in revenue, according to forensic accounting undertaken by a bankruptcy court. [BDOS] auditors had certified that Le-Nature's financial statements were free from material error. ... For McGladrey & Pullen, some tough questions have come from Frederick J. Grede, a Chicago bankruptcy trustee who claims the firm's auditors actively participated in the 'looting' of Sentinel Management Group, a $1.4 billion investment fund that failed in August 2007. ... According to New York Attorney General Andrew Cuomo, [J. Ezra] Merkin repeatedly lied to his customers about what he was doing with the $2.4 billion they had given him. ... The Merkin funds were audited by [BDOS], which attested that the books were free of material error. ... In a lawsuit [New York Law School] blames [BDOS] for not telling investors about Merkin's alleged sleights of hand. Exhibit A: the 2007 audit of Ascot, which lists the fund's assets on a week-to-week basis, but doesn't mention that just one broker, Madoff, held nearly all those assets. ... But New Jersey lawyer, Alan Wasserman, who is preparing another case against [BDOS] on behalf of Merkin investors, says Merkin's heavy reliance of Madoff is a 'red flag any accounting firm should have seen' and noted. ... In the view of Richard L. Kaplan, a law priofessor at the University of Ilinois, a diligent auditor should go to source documents to verify the financial statements it is scrutinizing. If a fund claims it has cash in a bank account, auditors should get records directly from the bank, he said. Kaplan has advocated tougher oversight of accounting firms. Still, he acknowedged there are limits. 'A very determined crook.' he added, 'will deceive virtually any auditor'," my emphasis, AC Thompson and Jake Bernstein at Barron's, 11 May 2009.

Yes, Thomas, one problem with CPA audits is the fee arangement. Another is the SEC. I disagree with Kaplan, CPAs have too much regulation now. It doesn't work. The SEC should eliminate the "large accelerated filer" and "accelerated filer" concepts. It should give registrants 120 days to file: 10-Ks and 60 10-Qs. But the "analyst community" will scream. So? CPAs have enough excuses for shoddy work, short SEC filing deadlines should not be another. Go "to source documents", how novel. What did PWC do at Satyam? If you haven't recently, read a 10-K. The SEC has registrants include much repetitious material. Why?

Spokane Fraud Squad

"Welcome to Spokane, Wash., a metropolitan object lesson in what can befall the unwary when rugged individualism is revered and consumers unsuspecting. ... Some recent antics: A father and son were sentenced to prison for selling nonexistent railroad engine parts worldwide over the internet. A Spokane man began serving a five-year federal sentence for his role in a $50 million Colorado Ponzi scheme. The SEC sued Spokanite Craig T. Jolly and his Quest Holdings, alleging Jolly was running a Ponzi scheme that collected $4 million by promising a low-risk return of up to 20% a month. He had no comment. ... Dicey stocks are another longtime growth industry. Founded in 1897, the Spokane Stock Exchange was the country's last regional exchange devoted to questionable penny stocks when it was shuttered in 1991 amid SEC pressure. ... Two years ago the Public Company Oversight Board [PCAOB] in Washington censured Spokane accounting firm Williams & Webster and individually suspended both names on the door after charging that they knew of financial problems at Utah insecticide firm Diatect International but provided an unqualified audit opinion anyway. The firm now calls thus 'past events.' ... Just what makes Spokane look like an overachiever in dodgy endeavors is a matter of debate", my emphasis, William Barrett at Forbes, 25 May 2009.

Another PCAOB triumph. Does the PCAOB think say KPMG is unaware of problems at Citigroup? Or is the PCAOB aware that it is? How can anyone take the SEC and PCAOB seriously? Is Spokane more fraud plagued than Wall Street? Or just less well connected? Now if Goldman Sachs moved its offices to Spokane ...

See No Evil, Speak ...

"Numerous accounting firms missed the alleged fraud at Bernard L. Madoff Investment Securities LLC as they inspected the investment company's books or those of so-called feeder funds that helped steer money to it. As a result, those accountants could now be legally vulnerable to claims that they should have uncovered red flags, according to legal and accounting experts. ... Lynn E. Turner, former chief accountant for the [SEC], said he finds it hard to believe that auditors of so-called feeder funds checked out Madoff's auditor as a way of bullet-proofing their confidence. 'If they didn't,' he said, 'then investors will have to hold the auditor accountable.' ... Others say they had no obligation to check out Mr. Madoff's auditor. They contend their primary role is to make sure the numbers their clients supply add up, not to detect fraud. ... Friehling & Horowitz [F&H] wasn't registered with the [PCAOB]. Nor was it 'peer reviewed,' a system in which auditors check out one another for quality control. David Friehling, the firm's only active accountant, was enrolled in a peer-review program at the [AICPA], but wasn't required to participate because he didn't handle audits, according to the AICPA. ... 'Our audit conformed to all professional standards,' said KPMG spokeswoman Kathleen Fitzgerald. "This is not a KPMG issue,' she said, noting that lawsuits have been filed against many top auditing firms. ... ''PWC was not the auditor for Bernard Madoff Investments, where the alleged fraud occurred,' the Canadian [PWC] affiliate said in a statement. Fairfield [Greenwich Group] is also a defendant in the suit", my emphasis, Ianthe Dugan and David Crawford at the WSJ, 18 February 2009.

I agree, feeder fund CPAs might be liable for Madoff's fraud. Disagreeing with Turner, had the other CPA firms "checked out" F&H, what then? F&H wasn't PCAOB registered? So? KPMG, yeah those guys, "audits" Citigroup. PWC "audits" Satyam, etc., etc., ad nauseum. Peer review, bah humbug. I've mentioned it on 28 April 2008: http://skepticaltexascpa.blogspot.com/2008/04/sec-investors-friend-fiend-2.html. Peer review was an AICPA scam, PCAOB review replaced it for CPAs which audit SEC registrants. Another scam. KPMG Canada must use PWC's "random word generator". Isn't it remarkable how similar KPMG's words are to PWC's comments about the Satyam fiasco, my 4 February 2009 post: http://skepticaltexascpa.blogspot.com/2009/02/silver-blaze-and-cpas.html.

Fitzgerald just admitted F&H is a "top auditing firm". How? By revealing the secret membership requirement: at least one large lawsuit being filed against the firm! Laugh.

Price Watergate-3

"Indian police arrested two partners of an Indian arm of accounting giant PricewaterhouseCoopers [PWC] Saturday on charges of criminal conspiracy and cheating in connection with the fraud investigation at Satyam Computer Services Ltd., [[SCSL], according to senior police official A. Siva Narayana. ... Srinivas Talluri and S. Gopalakrishnan, the two partners at [PWC], one of [PWC'] Indian businesses, couldn't be reached for comment Sunday. The men are in judicial custody. ... 'Like everyone else, we were shocked by the massive fraud at Stayam and by the steps undertaken to conceal it,' [PWC] said. ... The firm has offices in nine Indian Cities. [PWC] said that the Indian firm is a member of its international network and is owned by the Indian partners", Jackie Range at the WSJ, 26 January 2009.

"A U.S. judge issued a ruling in the Parmalat securities litigation that could worry large accounting firms with offices in many countries. ... At issue in Tuesday's ruling, by U.S. District Judge Lewis Kaplan of New York, was whether Deloitte Touche Tomahatsu potentially could be held liable for an allegedly defective Parmalat audit by its Italian member firm. ... 'This is huge,' says Stuart Grant, counsel for people who bought Parmalat shares. 'Judge Kaplan has finally made the law reflect reality. These accounting firms sell themselves as worldwide, seamless organizations. Now they are going to be held responsible in the same fashion'," Nathan Koppel at the WSJ, 29 January 2009.

"The Satyam case is just the latest in a sequence of events which have begged the age-old question: 'Where were the auditors?' ... First, BDO. A case next month will determine whether BDO International, the umbrella organisation that links all the BDO firms, is resposible for BDO Seidman, the US arm of the firm. ... If BDOI is brought in, this could open the floodgates for all sorts of litigation against the big accounting firms, which because they face unlimited liability in most countries, have sought to present a single global brand but to distance themselves from each other when trouble looms. ... 'It makes sense, that they want to have a brand just like IBM or Mercedes. But when they get sued, they say "that's not us, it's someone elase". No-one else gets to do that, why should accounting firms be able to?' says Steven Thomas, the lawyer leading the case against BDO. ... We also know that the PCAOB, the US audit regulator, was in India last spring and, as part of its inspections of US registered firms, looked at the Satyam files of PWC and raised concerns about the file with the firm", my emphasis, Jennifer Hughes at the FT, 29 January 2009.

"Common complaints about India's disclosure regime include the absence of a requirement on companies to file full balance sheets along with quarterly results. The other problems is enforcement. ... And almost no serious white collar criminal inIndia has ever served time after sentencing. ... 'Corporate crime in India can't be addressed by more laws or indeed more governance,' says Krishnamurthy Vijayan, executive chairman of JP Morgan Asset Managemant in Mumbai. 'I suspect that rapid and forceful action against the perpetrators is the main answer'," Joe Leahy at the FT, 30 January 2009.

PWC must be incompetant if it was "shocked by the massive fraud". This is a Captain Renault line from Casablanca, 1942. Some day the SEC may put an end to this Big 87654 fiction of being one firm for all purposes except being sued.

Judge Kaplan's ruling is over 30 years late. The SEC should have intervened in the case as should the PCAOB. I read Judge Kaplan's 30-page ruling. It looks good to me, link: http://online.wsj.com/public/resources/documents/parm.pdf.

How nice, the PCAOB "raised concerns". Why believe the PCAOB knows what it's doing? I agree with Thomas, the reform is long overdue: if you use the name PWC, and get sued, all PWC firms get sued. Period. Well Madame Schapiro, how about it?

I agree with Krishnamurthy. Corporate governance is another scam to put to bed.

Buiter's a Wimp!

Yves Smith (YS) has a fine 24 August 2008 post at her Naked Capitalism, "Buiter Provokes Wrath at Jackson Hole, Says Fed Too Close to Wall Street". My complaint: YS's too easy on these guys! Here's a link: http://www.nakedcapitalism.com/2008/08/buiter-provokes-wrath-at-jackson-hole.html. YS's 1 September 2008 post, "Troubling Signs From Fed's Jackson Hole Conference" is also a fine read. YS skewers some academic clowns. Two from Chicago. The shame, Chicago professors skewered by a Harvard grad! Here's the link: http://www.nakedcapitalism.com/2008/09/troubling-signs-from-feds-jackson-hole.html.

Now I'll leave my two cents. To associate Jackson's name with a central bankers' conference is an outrage. May Andy, like Lazarus, return from the dead to smite them. Off with all of their heads!

YS quotes John Dizard (JD), "In addition, worthy borrowers are denied loans". How does JD know which borrowers are worthy? Can JD access Ed McMahon's hermetically sealed mayonnaise jar? YS nails it: "There are plenty of parties that are keen for high return ventures, such as private equity firms. There is no reason for those to be undertaken by the banking system". Absolutely! "Banks are ... playing accounting games", writes YS. I am shocked! Gambling at Rick's. "Round up the ususal suspects", said Captain Renault in "Casablanca", 1942. Where is Mark Olson and his PCAOB to crucify the Big 87654 which audit these banks for incompetence? Or worse? Are the Big 87654 and PCAOB complicit in delaying banks' loss recognition? YS writes of a "fictive disease of 'too much [bank] capital'." YS takes Chicago's Anil Kashap and Rajhuran Rajan and Harvard's Jeremy Stein seriously when I conclude they wrote tongue in cheek! Laugh. It's funny. A bank with too much capital? Hahahaha! Can you imagine a college fraternity party with too much beer? "Here you have fairly undiversified risk". Absolutely. Banking risks are uninsurable.

Why give the Fed, ECB and BOE the benefit of the doubt? I don't. Incompetence is their defense! These are smart guys. Helicopter Ben (1590 SATs) has a Harvard AB, MIT PhD and was a Princeton professor. I'm overwhelmed. Alan Blinder, AB Princeton, PhD MIT, is a Princeton professor. We should all kowtow in the especially servile Russian serf manner in each of these illustrious personages prescence.

Now for the meat: "Beginning in 1966, the Justice Department, as well as the Federal Trade Commission, became involved in investigations into possible anti-trust violations in the gypsum board industry. ... The indictment charged that the defendants had engaged in a combination and conspiracy 'beginning sometime prior to 1960 and continuing thereafter at least until sometime in 1973,' ... in restraint of interstate trade and commerce in the manufacture and sale of gypsum board", US v. US Gypsum, 57 L Ed 2d 854, 863 (1978). "The focus of the Government's price-fixing case at trial was interseller price verification", 864. "Rather, we hold that a defendant's state of mind or intent is an element of a criminal anti-trust offense which must be established by evidence and inferences drawn therefrom and cannot be taken from the trier of fact through reliance on a legal presumption of wrongful intent from proof of an effect on prices", 868. "In dealing with the kinds of business decisions upon which the antitrust laws focus, the concepts of recklessness and negligence have no place. ... [W]e conclude that action undertaken with knowledge of its probable consequences and having the requisite anticompetitive effects can be a sufficient predicate for a finding of criminal liability under the anti-trust laws", my emphasis, 874. "The business behavior which is likely to give rise to criminal anti-trust charges is conscious behavior normally undertaken only after a full consideration of the desired results and a weighing of the costs, benefits and risks. ... Where carefully planned and calculated conduct is being scrutinized in the context of a criminal prosecution, the perpetrator's knowledge of the anticipated consequences is a sufficient predicate for a finding of criminal intent", my emphasis, 875. Wow, what a mouthful from the Supremes! Imagine if the DOJ applied this concept to the Fed and Wall Street! Why distinguish mail, wire and securities fraud from anti-trust violations? If the DOJ acted, you'd have a waiting list for jail longer than the Ivy League, Stanford and MIT's combined waiting lists! The DOJ could start with Ben "Helicopter" Bernanke and Hank "formerly of Goldman Sachs" Paulson in the initial indictments.

Will the PCAOB Do Anything?

"In the midst of an otherwise difficult time, auto maker [GM] is close to putting one problem behind it, announcing Thursday that the company has reached a $277 million settlement with a class of shareholders over alleged accounting irregularities. GM auditor Deloitte and Touche LLP [D&T] will kick in an additional $26 million, bringing the total settlement to $303 million. The settlement is still subject to court approval. ... In a statement, [D&T] said it was 'pleased' to be able to resolve the matter. 'Although it has strong defenses to these claims, Deloitte concluded that it was in the the best interest of the firm and its clients to settle this matter now rather than face the burden, expense and uncertainty of continued lititgation'," Ashby Jones at the WSJ, 9 August 2008.

I await the PCAOB taking any action against D&T in this matter. Well Mark Olson, what will you do about this? Kick sand in the face of another 97-pound weakling CPA firm?

Saving Sergeant PCAOB

"A federal appeals court Friday rejected a constitutional challenge to the Public Company Accounting Oversight Board [PCAOB], which oversees U.S. public-company accountants. In a 2-1 decision, the U.S. Court of Appeals for the D.C. Circuit ruled that the private non-profit board doesn't violate the presidential-appointments requirements of the U.S. Constitution. The challengers plan to appeal, possibly to the Supreme Court. ... Free-enterprise groups joined with Beckstead & Watts LLP, a small Nevada accounting firm, to challenge the oversight board on constitutional grounds. ... The majority ruling disagreed, finding that the SEC's authority over the board is 'explicit and comprehensive' and 'extraordinary,' and it doesn't infringe on the president's broad-ranging authority. ... Judge Brett Kavanaugh dissented from the majority opinion in a 58-page rebuttal, saying the board plainly violates the appointments clause of the Constitution", my emphasis, Judith Burns at the WSJ, 23 August 2008.

This is another no-brainer decision, right out of Alice in Wonderland. Kavanaugh is right. So? What is the PCAOB? A Big 87654 tool. It harasses small CPA firms and does nothing to the Big 87654. Let's consider its "reviews". The Big 87654 audit 98+% of US publicly-held companies by market cap (MC). Three small firms audit less than 1%, 1300 tiny firms audit less than 1%. The PCAOB concerns itself with "process", not the substance of audits. The total US MC is about $15 trillion. Suppose the PCAOB wants to "review" 1000 audits a year, audits not firms, audits, that's one review per $15 billion in MC. Exxon's audit, with $415 billion in MC will be selected 28 times ($415 / 15 = 27.7). Similarly, say Microsoft will be selected 17 times ($252 / $15 = 16.8), etc., etc. I suspect only about 300 reviews need be performed. As to the three small firms, if they audit $150 billion in MC, only a total of ten of their audits will be reviewed, ($150 / $15 = 10), similarly for the 1,300 small firms, ten reviews amongst the lot of them. What is the PCAOB doing? Stepping on ants while the elephants dance. Imagine, a tiny firm will have a .0077 (10 / 1,300) probability of having one of its audits reviewed. From my perspective, 99% of the PCAOB's work on the 1300 is pure waste. Hey Olson, did you hear that?

Talk of regulatory capture. What percentage of PCAOB employees are "former" Big 87654 partners? If I ran the PCAOB, I would not hire any one who worked for the Big 87654 in the last 10 years! Is the PCAOB the Big 87654 cartel enforcer? If not, what is it? Did the PCAOB ever make a finding a plaintiffs' law firm could use to sue a Big 87654 firm or make a criminal referral to the DOJ? If not, after six years, who needs these useless paper shufflers? I read the 92-page opinion including Kavanaugh's 58-page dissent. It's at: http://pacer.cadc.uscourts.gov/common/opinions/200808/07-5127-1134687.pdf. My short version: Janice Brown, formerly of the California Supreme Court, did as instructed, she came up with whatever rationalization she felt she needed to keep this useless beast alive.

The PCAOB reminded me of some 1950's Charles Atlas (CA) ads. They had a bully kick sand in a 97-pound weakling's face. The PCAOB is that bully. You can see some of the CA ads at http://www.sandowplus.co.uk/Competition/Atlas/Adverts/adverts.htm.

IRS SILO-LILO Amnesty

"The [IRS] is offering a type of amnesty to more than 45 companies that engaged in complex leasing transactions that the agency has challenged as abusive tax shelters, an amnesty under which the firms would give up most of the tax benefits from the deals but avoid potential penalties. The transactions are known as SILOs or LILOs, for sale in-lease out or lease in-lease out. Long popular with banks, they involve companies' buying or leasing assets outside the U.S., such as telephone networks or railroad and power systems, then leasing them back to their original owners. Such arrangements created tax benefits for the U.S. companies, which claimed depreciation expenses for the assets on their tax returns", WSJ, 7 August 2008.

I read IRS Revenue Ruling 2002-69, 4 November 2002, available at www.irs.gov/businesses/corporations/article/0,,id=120633,00.html. I am amazed any CPA or attorney ever thought SILO and LILO would fly. I agree with the IRS's analysis, LILO and SILO lack economic substance. The IRS should go further and bar from practice in front of it any CPA or law firm which promoted SILO or LILO. For that matter, Mark Olson (MO) at the PCAOB, will you review the tax accrual workpapers of whichever CPA firms audited the banks and companies in question? Well MO?

Toothless SEC-6

"Prudential Financial Inc. agreed to settle a [SEC] lawsuit alleging that it had engaged in improper accounting of sham reinsurance contracts with General Reinsurance Corp., the SEC announced Wednesday. No fines were imposed on [Prudential], which didn't admit or deny the SEC's allegations", WSJ, 7 August 2008.

Another SEC triumph. I wonder if Mark Olson's PCAOB did anything to PriceWaterhouseCoopers, Prudential's CPAs? Why ask?

Citigroup's Argentina Bond Accounting

"Citigroup Inc. agreed to settle a lengthy federal investigation into its accounting of Argentina bonds during the debt crisis earlier this decade. ... In reaching the settlement with the [SEC], Citigroup agreed to cease and desist from future securities-law violations, a relatively light sanction. The SEC alleged Citigroup failed to keep accurate books and records and didn't maintain sufficient internal controls over accounting, but it didn't allege the New York bank committed fraud. ... We are very pleased to see this accounting matter from six years ago resolved with no fine or penalty,' said Citigroup spokeswoman Shannon Bell. ...The Argentina crisis saddled some banks, including Citigroup, with billions of dollars of losses. Many of the debt products at the heart of the currency credit crunch don't trade on public exchanges. And once the over-the-counter market for them dried up, banks turned to in-house models to value the debt. How banks came up with those models, what assumptions they used and how timely they were in taking losses are areas the SEC is interested in. ... The Citigroup case 'highlights the importance for all companies to make sure they conduct proper impairment analysis and use reasonable assumptions when they're valuing securities,' said Scott Friestad, co-deputy director of the SEC's enforcement division. 'In this instance, Citigroup failed to do that' when confronted with the crisis in Argentina. ... The SEC says Citigroup should have reported pretax losses between $236 million and $416 million, instead of the $82 million the bank reported", my emphasis, Kara Scannell and David Enrich (S&E) at the WSJ, 17 June 2008.

This is another SEC triumph for investors; a "cease and desist order", a nothingburger. Bell is pleased Citigroup got no "fine or penalty". Good. Look at Craig Giles (CG) fate, see my 25 June 2008 post. Was CG Citigroup's blood sacrifice to Mike Garcia (MG)? Should MG have thrown CG into a volcano's mouth? The SEC "alleged Citigroup failed to keep accurate books and records". Was that an FCPA violation? What's your opinion MG? Friestad indicates Citigroup did not "conduct proper impairment analysis". Do Friestad and the PCAOB think KPMG should have found this? If so, what will they do about it? Amazing, CG goes to prison over $2 million and Citigroup used its own models to justify not reporting at least $154 million ($236 - $82) in losses and no one is indicted, nor subject to a civil fine by the SEC.

GSEs and their CFOs

"Freddie Mac recorded a $151 million net loss for the first quarter as changes in accounting policies offset higher costs related to U.S. home-mortgage defaults. Without the accounting changes, the loss would have exceeded $2 billion, Buddy Piszel [BP], chief financial officer, said in an interview. But he said the accounting changes mean results better reflect the underlying business. ... Freddie also reported that the 'fair value,' or estimated market value, of its net assets was a negative $5.2 billion as of March 31, compared with a positive $12.6 billion three months earlier. ... Piszel said the negative fair value reflects current distressed prices for mortgage securities and has 'no impact' on the operations of a company like Freddie that is a long-term holder of mortgages. ... Freddie's main regulator .... Ofheo, 'is aware of all of the accounting changes and has taken no exception to them,' Mr. Piszel said. ... Joshua Ronen, an analyst of Graham Fisher & Co., a New York research firm, said the accounting changes 'put a lot of lipstick on this pig'," WSJ, 15 May 2008.

"Fannie Mae and Freddie Mac are 'a point of vulnerability for the financial system' because their capital is meager in relation to their mortgage assets and obligations, the companies' main regulator said. With that skimpy capital cushion, the government-sponsored companies 'could pose significant risk to taxpayers as well as financial institutions and other investors,' the regulator, James Lockhart, director of [Ofheo] said at a conference in Chicago. ... Fannie and Freddie each have 'core' capital equalling less than 2% of the mortgages they own or guarantee", WSJ, 17 May 2008.

I agree with Ronen. This looks like the "regulatory forbearance" that prolonged the S&L crisis of 1979-86. BP sounds like an accountant. I use that as a term of opprobrium. BP apparently doesn't understand Freddie is a highly-leveraged potential disaster area. I found out how many Freddie shares BP purchased recently: none. I found a Form 4 indicating he was awarded 12,538 shares on 31 January 2008 for services and owns 120,851 shares. Prices: $30.01 on 31 January and $25.73 per share currently. Hey, BP, if you believe Freddie is a good deal, buy say 100,000 shares with your sign on bonus. Right! Who is BP? Why did Freddie hire him? A 19 October 2006 press release indicates BP was once a Deloitte & Touche partner. My guess: Freddie hired BP to provide it "regulatory cover" with the SEC, PCAOB, etc., etc., ad nauseum. If BP's like 95% of the Big 87654 partners I've met, he's an economic ignoramus. Chuck Chaplin, CFO of MBIA wrote a letter the the WSJ, 19 May 2008, attacking "mark to market" accounting. It seems, he's another CFO who does not understand the economics of his own business.

"Could pose"? No, do pose.

McLean on Shorts

"'This is indeed a concern and we will tackle it.' That was SEC chairman Christopher Cox's handwritten note to a Senator worried that companies were retaliating against analysts who produced research critical of them. ... In an new book, Fooling Some of the People All of the Time, David Einhorn, who runs a $6 billion hedge fund called Greenlight Capital, recounts his multiyear battle with Allied Capital, a publicly traded private equity firm. ... But the most troubling material concerns an issue that is bigger than Allied and Einhorn's battle: It's the way criticisms of corporate behavior are received in the marketplace. Many, including the SEC, appeared inclined to shoot the messenger. ... After Einhorn gave his speech, the SEC launched an 'informal inquiry'--into Greenlight. When Einhorn testified at the SEC, the 'gist of the questions,' he writes, was 'When did you start manipulating Allied's stock?' The SEC declined to comment. ... Lawmakers have urged the SEC to investigate whether short-sellers spread rumors to bring down Bear Stearns. ... The larger point is that even if a blameless Bear Stearns was crippled by wicked short-sellers-ha!--there's a big difference between spreading rumors and publishing critical research", my emphasis, Bethany McLean (BM) at Fortune, 12 May 2008.

Way to go BM. BM has followed this story for years, see my 20 December 2007 post about the monoline insurers. The SEC has largely been a fraud. For decades. I've cited the Ray Dirks fiasco before. The SEC frequently, it not usually protects politically well-connected corporate miscreants. I never heard of the SEC investigating say, a CPA firm, finding it fired an employee who complained about a client's wrongdoing, putting the employee in a position to sue his former firm and the client in question and win millions in a wrongful termination public policy tort suit. Hey, Mark Olson, does the PCAOB regularly interview former CPA firm employees to find out what went on during an audit? What does the PCAOB do aside from beat up miniscule CPA firms? The SEC's long-held contempt for the First Amendment is appalling. Apparently the SEC only applies it to rating agencies, which no matter how bad their opinions are, use it as a shield against lawsuits. But I thought one could sue over bad "expert" opinion. Apparently the SEC conferred "sovereign immunity" on the NRSROs.

SEC, Investors' Friend, Fiend?-2

"The [SEC] was on the defensive as lawmakers pressed the agency to quickly increase its oversight of credit-rating firms in order to bolster confidence in financial markets. At a Senate Banking Committee hearing, lawmakers questioned whether some of the ideas for new rules presented by SEC Chairman Christopher Cox in private hearing would go far enough to fix and proactively stave off problems. Mr. Cox outlined a series of steps that the agency is considering, most of them focused on greater disclsoures. Others being discussed would seek a greater separation of the rating and business sides of the firms. ... Cox said that 40 SEC staff members were conducting reviews of the seven largest credit-rating firms, including Moody's Investors ... [S&P] and ... Fitch. ... So far, the SEC has uncovered violations of internal conflict-of-interest policies that occurred earlier this year. ... 'Who is rating the rating agencies?' asked Sen. Jack Reed. ... Under the law, the SEC is required to monitor policies and procedures, including conflicts of interest at ratings firms. ... Sen. Christopher Dodd, the chairman of the committee, and Sen. Shelby pushed the SEC to take a hard line, asking Mr. Cox repeatedly if he would revoke a rating firm's charter if it consistently resulted in poor ratings. ... Cox responded that Congress didn't give the SEC authority to revoke a license for getting ratings wrong. If ratings were consistently wrong because firms weren't following internal procedures, 'then [the registration] could be revoked,' he said", my emphasis, WSJ, 23 April 2008.

Cox, does your SEC accept a ratings agency's procedure if it consistenly looks into Ed McMahon's "hermetically sealed mayonnaise jar", and its ratings were no better than chance? I think Shelby misspoke. I think he meant to ask: would the SEC revoke a rating agency's NRSRO status? Well? Hey Mark Olson, have we an opportunity for you. Have the PCAOB adopt "Generally Accepted Ratings Agency Standards". Then you can conduct agency reviews. This will not ensure the quality of their work, but it will give the PCAOB something else to do. Besides, you guys need a "product extension". Nothing Cox suggested will do more to improve a rating agency's product than peer reviews did for the CPA profession. 31 more years are coming.

Incentives Count-For Bankers Too?-2

"Last week's congressional hearings on the Bear Stearns [BS] 'non-bailout' were fascinating, and frightening. Our leading financial regulators said the [Fed's] unprecedented action was necessary to ensure the stability of financial markets which would have melted down had nature taken its course. ... That raises the question of when [BS] became unsound, especially in light of the public statements about the company's strength by their CEO only days earlier. If Bear was under-capitalized and over-leveraged, shouldn't red flags have gone up long before? ... The unstated premise is that, with better government oversight, we would not be suffering today's bear market and financial chaos. Of course, during the previous outsized boom, no one was calling up his congressman to complain that home values were appreciating too quickly. ... Leverage--and the rapid creation of dollars--fueled the boom we all seemed to love. But leverage cuts both ways, accentuating the benefits of a bull market and the pain of a bear market. The lesson we all must take away now is that leverage is not a one-way path to wealth with no risk of loss. ... But as [Sen. Jim Bunning [R., Ky]] implied, isn't it the regulators' job to ensure that we don't end up here again? That is the dilemma of 'moral hazard'. Conseqences not suffered from bad decisions lead to lessons not learned which lead to bigger failings down the road. And so we have the insidious modern trend to shirk responsibility and blame others for out missteps. This trend, this 'victim mentality,' is a path toward personal disaster", my emphasis, Ethan Penner (EP) at the WSJ, 11 April 2008.

"As the credit crisis has slowly expanded and worsened, there has been a flurry of activity in Washington to reduce the damage from it. There are bailouts and tax breaks, and even checks to parents of school-age children. But there is remarkably little action aimed at getting the credit system functioning again. In part, that is because there is a scarcity of ideas. Paul Volker [former Fed head] ... was right this week when he said the financial engineers had created a 'demonstrably fragile financial system that has produced unimaginable wealth for some, while repeatedly risking a cascading breakdown of the system as a whole.' ... For the time being, the solutions being pushed would not seem unreasonable to an old-fashioned socialist. ... The Basel II capital rules for commerical and investment banks clearly need to be strengthened, and regulators need to develop the ability to do their own risk assessments, rather than leaving the task to the banks and the credit rating agencies. That will take time and cost a lot of money, and it will require the derivative markets to be much more transparent. ... Most of the critics--myself included--did not anticipate the severity of the credit collapse, and we should not act as if the executives and regulators who failed to prevent it were blind or stupid. ... Volker, who knows how inflation can get out of hand, said the current situation reminds him of the early 1970's when inflation began to accelerate", my emphasis, Floyd Norris (FN) at http://www.nytimes.com/, 11 April 2008.

Right on EP!. What does, "ensure the stability" mean? Why is stability good? "Meltdown" sounds frightening. What does it mean? I only know who gains and who loses. In today's America responsible savers lose, irresponsible bankers and borrowers gain. The regulators' job is to ensure politically favored classes have the public bear their losses. If we want to prevent this, shut down the regulators! Let investment banks fail! No, no, no! That might mean Lloyd Blankfein of Goldman Sachs might have to find a real job. Like shining shoes in Grand Central Station. See my 12 December 2007 post. Alcoholics Anonyomous (AA) has a concept, "hitting bottom". AA preaches an alcoholic won't sober up until he hits bottom. Similarly, bankruptcies may make our investment banker overlords hit bottom. I read terms like "meltdown" and think of Andrew Jackson's (AJ) war with Nicholas Biddle (NB) over the Second Bank of the US recharter. NB threatened to plunge the US into a depression unless the bank was rechartered. AJ was not dissauded. He launched his pet banks program and eventually killed the "moster". See my 24 December 2007 post.

I largely disagree with FN. First, the damage is, now! The "activity" intends to redirect the damage to politically disfavored classes. As for socialism, I agree, noting Karl Marx favored creating a central bank, see my 17 September 2007 post. The financial engineers were either fools or knaves, but created a system to redistribute wealth. The idea of regulators doing risk assessments is laughable. Why not have CPAs do it? Supposedly we should under Generally Accepted Auditing Standards. "Stuff and nonsense" said Alice. What does Mark Olson think about this? CPAs can't do it, even if they publish documents like that Francine McKenna cited at http://www.retheauditors.com/, 8 April 2008.

Why not think the executives and regulators were "blind or stupid"? I saw the collapse coming. So did others. So? Will FN suggest making me say, Comptroller of the Currency? I agree with FN, the executives and regulators were neither blind nor stupid: they knew what they were doing and planned to "cry wolf" to Congress all along if and when the credit markets blew up in their perennial game of "financial chicken" played with the real economy! Well, FN, fools or knaves? My vote: knaves.