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Posts Tagged ‘accounting games on Wall street’

Smoothing Out Earnings is Finance-Speak for ‘Cooking the Books’

Posted by Larry Doyle on September 14th, 2009 2:41 PM |

When I hear financial industry insiders opine that they need vehicles and procedures which allow them to ‘smooth earnings,’ I get very suspicious. Why? That very thought process was the business model which led to the failures of Freddie Mac and Fannie Mae.

I witness it again in Bloomberg’s commentary, Beware Bankers Spinning Story of Smooth Results:

The financial results that companies give investors are supposed to paint a picture of how things are. Banks and their regulators want to turn that notion on its head so they can spin a smooth tale of how they would like things to be.

Sadly, some accounting rule makers may be ready to appease banks and the politicians who back them. If that happens, financial results will change from a vital tool for investors to a vehicle catering to managers, regulators and employees.

The practical result of such approaches would be to allow banks to report smoother results that supposedly reflect their long-term prospects. For banks, smoother profits would presumably lead to higher share prices. For regulators, less volatile results would supposedly make it easier to maintain financial stability.

Make no mistake, these accounting procedures are merely a formula for the continuation of a ‘heads we win, tails you lose’ approach which was so prevalent in causing this crisis in the first place.

Investors should not be so naive as to think otherwise. If these procedures are fully implemented, then rigorous risk management will go right out the window and prospects for real, long term economic prosperity along with it.

Regrettably, I have little confidence that the ‘wizards in Washington’ have the intellectual capacity, the moral fortitude and unquestioned integrity to take this issue on and truly protect the American public.

LD

Let’s Give Barack Some Sense on Cents

Posted by Larry Doyle on June 16th, 2009 9:16 AM |

In true Washington fashion, Obama’s proposed regulatory reforms have been “leaked” to the market. Let’s review, analyze, and critique. The Wall Street Journal provides a very helpful overview of these reforms via Blueprint to Avoid Market Meltdowns:

President Barack Obama spent the first five months of his presidency trying to make sure the worst financial shock in 70 years didn’t push the U.S. economy into a depression. He will spend the next five months or so trying to redo the rules of finance so we don’t go through this again.

Enough of the Obama plan has leaked to see how Treasury Secretary Timothy Geithner and chief White House economist Lawrence Summers propose to protect the economy from the vulnerabilities now so painfully evident: Plug the gaps; don’t redo the organization chart. Rely heavily on the sagacity of the Federal Reserve; the alternatives are inferior. Craft a plan that has a chance of getting through Congress.

Will there be real “change” involved in Obama’s plans or a mere reshuffling of the deck chairs along with a healthy dose of Monday morning quarterbacking? Will the Wall Street-Washington cabal be exposed or solidified? Let’s navigate the landscape of Obama’s proposed reforms using the WSJ’s blueprint:

Problem: Several financial firms were so big and intertwined that their failure threatened the entire system, and they weren’t all banks.

Solution: Pump up the Fed’s role in overseeing all big “financial holding companies,” giving it explicit authority to match its responsibility. Tell it to protect the system, not only the sturdiness of the banking units of these firms. Brace for controversy: Some in Congress already think the Fed is too powerful.

So propose a “council” of regulators to share some duties, but make the Fed the heavy. (Retain the Fed’s ability to lend to anyone in a crisis, as it did to Bear Stearns and American International Group, but require it to get the formal OK of the Treasury secretary.)

Sense on ¢ents: the Fed is already charged with these responsibilities within the banking industry. I highlighted these points the other day in my post “The All Powerful Federal Reserve”:

What are the Federal Reserve’s responsibilities?

-supervising and regulating banking institutions to ensure the safety and soundness of the nation’s banking and financial system and to protect the credit rights of consumers

-maintaining the stability of the financial system and containing systemic risk that may arise in financial markets

The Fed failed to perform. Why give it more power? Obama is specifically addressing the risks within the insurance industry in designating the Fed as the authority in overseeing the entire economic system.

I believe our risks are increasing dramatically via this move. Why? Not enough checks and balances. Not enough eyes and ears and “teeth” to monitor and promote accountability. Merely because the Fed is “all powerful” does not mean that it is “all knowing,” “all capable,” and “all encompassing.” (more…)






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