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HomeTwo Sets of Books Require Two Sets of Accounting Standards
Posted by Larry Doyle on December 8th, 2009 2:43 PM |
What was at the core of the current economic crisis?
The financial transactions embedded in the SIVs (structured investment vehicles) located off-balance sheet within our major financial institutions brought our country to its knees. As the securities housed in these SIVs plunged in value, Uncle Sam was forced to ride to the rescue and bail out Wall Street.
Uncle Sam’s bailing required not only billions in dollars but also the coordination and complicity of the accounting industry. The Federal Accounting Standards Board (FASB) knows that Congress, supported by Wall Street, jammed revised accounting standards in place in order to facilitate Uncle Sam’s bailout.
The FASB, in an attempt to save face and a degree of integrity, has pushed back on Wall Street by passing FAS 166 and 167 which would require investments in off-balance sheet vehicles to be brought on-balance sheet. The implementation of FAS 166 and 167 is imminent and would require financial institutions to set aside increased capital against selected assets.
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UPDATE: FASB 166 and 167
Posted by Larry Doyle on December 4th, 2009 11:27 AM |
Is Wall Street getting a reprieve from the capital constraints that would be effected by the implementation of FASB 166 and 167? I first broached this topic a month ago in writing, “12th Street Capital Reviews FASB 166 and 167 and Tells Us Why Wall Street Will Need More Capital”:
In brief, FASB 166 and 167 will require hundreds of billions in assets to be moved from off-balance sheet vehicles onto the balance sheets of the financial institutions. As those assets, which are embedded in an array of securitization transactions, come on balance sheet, the banks and non-banks alike will have to raise more capital to support the growth in their balance sheets. Best guesstimate is that the institutions will need to raise capital in the tens of billions.
12th Street Capital provides us updated developments on this very important topic with the following release: (more…)
12th Street Capital Reviews FASB 166 and 167 and Tells Us Why Wall Street Will Need More Capital
Posted by Larry Doyle on November 4th, 2009 12:00 PM |
Money makes the world go round. Right now the world is not going around all that well because there is neither sufficient capital nor sufficient demand for capital from a global standpoint. That said, profits and bonuses are back on Wall Street so they must have sufficient capital, right? Not so fast.
While our wizards in Washington and on Wall Street are projecting an image of ‘come on in, the water’s fine,’ a crowd based in Norwalk, Connecticut has plans that hold major implications for our markets and economy. What crowd is this? The Financial Accounting Standards Board, otherwise known as FASB.
Recall that last spring Congress, supported by a heavy influence from Wall Street, rammed through a relaxation of the FASB’s accounting rule requiring fair value mark-to-market accounting. Regardless of what you think of that legislation, I think there is no doubt that the change allowed banks to mismark a wide array of assets and forestall losses. The need for the accounting rule change could be and will be debated ad nauseum. I believe the powers that be at FASB felt emasculated in the process.
Fast forward and let’s review the next major piece of accounting legislation emanating from FASB. That being FASB 166 and 167. I will admit I am no accountant, but I understand enough about the markets and accounting to know that the implementation of these rules, scheduled to go into effect in January of 2010 (in November 2009 for certain institutions depending on their fiscal calendar), will likely have a major impact on a wide array of financial institutions. (more…)
Financial Cooking
Posted by Larry Doyle on July 5th, 2009 8:46 AM |
When business operations make money, it is due to the brains and intellect of management, correct? When business operations lose money, it is some sort of nefarious measure at work in the marketplace which can be ‘corrected’ by changing the rules, correct? The implementation of the relaxation of the FASB’s (Federal Accounting Standard Board’s) mark-to-market utilizes that thought process. Make no mistake, it is flawed and simply allows financial institutions to ‘manage earnings,’ otherwise known as “cook the books.”
We receive a whiff of this recipe in a report by the Wall Street Journal, Home Loan Banks See Net Income Decline 51%. I have maintained that the basic business model of the FHLBs is flawed and we see evidence of this in the fact that outstanding advances (loans) by the FHLBs to their member banks actually decreased in the 1st quarter of this year:
Total advances outstanding from the banks declined to $817.41 billion as of March 31 from $928.64 billion three months earlier. After surging in 2007 and early 2008, demand for those advances has slackened, partly because of the recession and partly because the federal government has offered alternative funding programs for commercial banks.
Without even maintaining the level of advances, the FHLB system is coming under increasing pressure to generate earnings in the face of increasing delinquencies, defaults, and foreclosures on all of their holdings–advances, mortgage originations, and mortgage-backed securities purchased from Wall Street. (more…)
Citigroup’s Earnings: More Fuzzy Math
Posted by Larry Doyle on April 18th, 2009 9:21 AM |
In reviewing bank earnings this week, I truly get the sense with a number of institutions that they determine just how much they want or need to outperform analyst expectations and then they figure out how to “manage” the books in order to get there.
This “managed earnings” process can be played for an extended period, but ultimately the earnings – or more importantly “hidden losses” – come out in the wash.
Citigroup played this game yesterday. The NY Times reports, After Year of Losses, Citigroup Finds a Profit. I give the Times credit; they did not report that Citigroup generated a profit, but that they found it. Where did they find it? The Times offers:
Like several other banks that reported surprisingly strong results this week, Citigroup used some creative accounting, all of it legal, to bolster its bottom line at a pivotal moment.
Citi utilized creative accounting supported by the pressure applied by Congress on the FASB. Where is the pressure applied by the SEC and FINRA on behalf of investors? Isn’t it only fair that somebody speaks up for investors? Is the SEC and FINRA in bed with Congress to “play the game?” Let’s move on.
The top rated banking analyst on the street chimes in: (more…)
Mum’s the Word
Posted by Larry Doyle on April 10th, 2009 12:40 PM |
The movie Goodfellas provides a wealth of material for comparative analysis of the markets. The “insider activity,” the “fooling around,” “the payoffs,” and “the gambling” all make for great drama on the screen. Truth be told, one does not have to look all that hard to find striking similarities to certain activities in the world of Wall Street, and for that matter, Washington.
One of my favorite scenes in the movie occurs after the boys make the big heist. Immediately, the word is put out to keep your mouths shut and no indications of newfound wealth.
Back to reality. In terms of “putting the fix” into the world of our major money center banks, isn’t the relaxation of the mark-to- market the “newfound wealth”? Isn’t the “keep your mouths shut” the equivalent of the Treasury telling the banks not to comment on results of the Bank Stress Test? Speaking of the Bank Stress Tests, Bloomberg reports:
The U.S. Federal Reserve has told Goldman Sachs Group Inc., Citigroup Inc. and other banks to keep mum on the results of “stress tests” that will gauge their ability to weather the recession, people familiar with the matter said.
The Fed wants to ensure that the report cards don’t leak during earnings conference calls scheduled for this month. Such a scenario might push stock prices lower for banks perceived as weak and interfere with the government’s plan to release the results in an orderly fashion later this month.
Clearly the Fed and Treasury are trying to keep their “boys” quiet and lay low while the real regulators of the market, that being honest investors, are walking the beat.
If any of the boys talk, then the leaders of the family won’t be able to coordinate the stories and hoodwink the public.
Whatever happened to, “as long as you tell the truth, you don’t have to worry about having a bad memory”?
It seems we are operating much more in the realm of, “well, I can tell you but . . . ”
The Goodfellas: Henry Hill, Jimmy Conway, Paul Cicero, and Tommy DeVito
Henry . . . Jimmy . . . Paulie . . . Tommy . . .
Please let me know who in our government and world of finance are most appropriate to play each of these individuals? Let’s have some fun.
Let’s Review the Wells Fargo Earnings
Posted by Larry Doyle on April 9th, 2009 12:02 PM |
A quick review of Wells Fargo’s earnings numbers this morning leaves us with as many questions as answers.
Wells posted record earnings of $3 billion largely driven by a significant increase in refinancing activity in their mortgage origination business. Their acquisition of Wachovia in the 4th quarter supported the origination business.
Analysts on the street are questioning the depth of detail provided along with the level of reserves taken against future losses. Highly regarded bank analyst Chris Whalen offerered that bank executives and regulators will present a rosy picture while not providing the support material to back it up.
In regard to the FASB relaxation of the mark-to-market and its impact on bank earnings, Whalen said, “accounting is a wonderful thing.”
Even after a Wells executive commented that the FASB relaxation had no impact on the banks’ earnings, Bloomberg reporters raised questions about that assertion. Bloomberg asked, “do we believe that?”
I don’t know…do we? Without total transparency it gets very difficult to read the charts and plot the appropriate course of action.
LD
Games of Chance: TALF, PPIP, TARP, FDIC, FASB
Posted by Larry Doyle on April 7th, 2009 2:40 PM |
In thinking about the economy, markets, and our banking system, my memory brings me back to my early days in New York. While working my way along 8th Avenue back to my apartment in Hell’s Kitchen, I would happen upon numerous versions of the classic NYC “hustle.” The shell game (also 3 card monte) was rampant in NYC in the ’80s. Mayor Giuliani cleared out this game, along with a host of other street scenes. For those not familiar with this game, there was a constant need for new players with new money to keep the game alive.
Why do these games remind me of our current banking system? The similarities are scary. Let’s access the most recent piece from John Mauldin’s site to “view the games.”
Mauldin’s guest, John Hussman, comments on these various “games” (TALF, PPIP, TARP, FDIC, FASB), in which taxpayers bear the brunt of the risk in the government’s engagement with financial institutions. Hussman writes of the PPIP:
this is a recipe for the insolvency of the FDIC and an attempt to bail out bank bondholders using funds that have not even been allocated by Congress. The whole plan is a bureaucratic abuse of the FDIC’s balance sheet, which exists to protect ordinary depositors, not bank bondholders.
