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Posts Tagged ‘FASB’

Freddie Mac, Fannie Mae Deja Vu?: Part II

Posted by Larry Doyle on April 8th, 2010 11:51 AM |

On Christmas Eve 2009, the Obama administration provided a blank check to the wards of the state known as Freddie Mac and Fannie Mae. (“Fannie and Freddie’s Huge Christmas Bonus”)

What other quasi-government institutions have a very similar business profile as Freddie and Fannie? The Federal Home Loan Bank system, acronym FHLBs, commonly referred to within the financial industry as FLUBs. I will reserve comment on that moniker. Ten months ago, I questioned whether the dynamics at work within the FHLB system would be the equivalent of what has transpired at Freddie and Fannie. I wrote “Freddie Mac, Fannie Mae Deja Vu?” and highlighted:

Can our economy absorb another financial hit of the magnitude of Freddie Mac and Fannie Mae? (more…)

Two 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.
(more…)

IASB at Odds with FASB on ‘Extend and Pretend’

Posted by Larry Doyle on November 5th, 2009 3:15 PM |

Extend and pretend!!

What is that? In large measure, accounting practices for financial institutions in the United States promote practices which ‘extend’ the terms of the loan or asset while ‘pretending’ as to the real value of that loan or asset.

Regardless of what one thinks about the integrity of these business and accounting practices, the fact of the matter is they are prevalent in our financial industry today.

As I referenced in writing about the Financial Accounting Standards Board (FASB) yesterday, I believe this board felt emasculated in having the relaxation of the fair value mark-to-market rammed down its throat by Wall Street and Congress.

There is another accounting board which has a decidedly different take on the accounting of financial assets. Who might that be? Let me introduce you to the International Accounting Standards Board, otherwise known as the IASB. (more…)

Banks Cooking a Second Course

Posted by Larry Doyle on June 4th, 2009 2:15 PM |

I am of the strong opinion that the relaxation of the FASB’s mark-to-market accounting standard is nothing short of an allowance for banks to “cook their books.” Well, it now appears that the banking chefs are whipping up a “second course.” The Wall Street Journal opens the door to the kitchen and reports, Banks Try to Stiff-Arm New Rule:  

The financial-services industry is taking steps to delay an accounting rule that would force banks and others to bring some of their off-balance-sheet vehicles back onto their books next year, which could force some to raise additional capital.

A group that includes the Chamber of Commerce, the Mortgage Bankers Association, and the American Council of Life Insurers and others sent a letter on June 1 to Treasury Secretary Timothy Geithner, regarding the off-balance-sheet accounting-rule change, saying it should be adopted “cautiously and seek to minimize any chilling effect on our frozen credit markets.”

The letter was signed by 16 industry associations, many of which were part of a group known as the “Fair Value Coalition,” which was formed earlier this year with the goal of changing mark-to-market accounting rules. Mark-to-market accounting rules set guidelines for banks on when they are required to reflect market prices in the values they assign to hard-to-value securities and other assets.

Please recall that the massive leverage within the banking industry was largely housed within these off-balance sheet vehicles (SPVs, special purpose vehicles). The lack of transparency of these vehicles allowed banks to leverage their assets to greater than a 30:1 ratio. Regulators and rating agencies were totally remiss in fully exposing these vehicles and protecting investors.  We have all paid for it. 

The banks and Washington jointly conspired to pressure FASB to relax the mark-to-market accounting rule so the industry could alleviate the pressure of raising capital. I detailed that “course” just yesterday in writing Wall Street-Washington: “Pay to Play.”

We hardly had time to digest that “inedible” piece of meat and now understand our chefs are working to continue the lack of transparency within the industry. Regrettably, our Congressional watchdogs have been more than happy to accept perfunctory campaign contributions and lobbying dollars to facilitate this charade.

The WSJ takes a whiff of what is simmering and reports:

Some accounting experts say they aren’t surprised by the banking industry’s latest effort. “Here we go again. They will get out their checkbooks and go to the Hill,” says Lynn Turner, the Securities and Exchange Commission’s former chief accountant. 

At what point do the patrons get some representation, drop these meals in the garbage, fire the chefs and staff, and hang out the “Condemned: Department of Health” sign?

LD

Wall Street – Washington: “Pay to Play”

Posted by Larry Doyle on June 3rd, 2009 7:46 AM |

In my opinion, the relaxation of the FASB’s (Federal Accouting Standards Board) mark-to-market rule was nothing more than a vehicle to allow banks to “cook their books.”  The “cooking” of the books put the burner on a low simmer in order to allow the banks sufficient time to generate earnings. Those new earnings can and will be used to offset the currently embedded losses on the toxic assets still residing in the banking industry.  

The FASB did not relax their accounting rule without enormous pressure applied by both the Wall Street and Washington chefs.  The Wall Street Journal reports, Congress Helped Banks Defang Key Rule:

Not long after the bottom fell out of the market for mortgage securities last fall, a group of financial firms took aim at an accounting rule that forced them to report billions of dollars of losses on those assets.

Marshalling a multimillion-dollar lobbying campaign, these firms persuaded key members of Congress to pressure the accounting industry to change the rule in April. The payoff is likely to be fatter bottom lines in the second quarter.   

I have numerous questions and comments on this topic, including:

1. If this accounting rule was so insidious, why was “mark-to- market” accounting ever enacted in the first place?  

Sense on Cents: As with any accounting rule, the “mark-to-market” was implemented to create transparency.

2. Are the toxic assets still on the bank books?

Sense on Cents: Most definitely. They are merely being masked via this relaxation.

3. Banks maintain the toxic assets don’t actively trade and, when they do, they trade at levels not reflective of their true values.

Sense on Cents:  These assets have traded everyday and at levels assuming a heightened level of future defaults on the underlying mortgages. If the banks believe the market levels are not reflective of true value, then why haven’t they and global investors raised the funds to purchase these massively undervalued securities? Investors trust the market assumption of future defaults.  

The WSJ reports:

Earlier this year, financial-services organizations put their lobbyists on the case. Thirty-one financial firms and trade groups formed a coalition and spent $27.6 million in the first quarter lobbying Washington about the rule and other issues, according to a Wall Street Journal analysis of public filings. They also directed campaign contributions totaling $286,000 to legislators on a key committee, many of whom pushed for the rule change, the filings indicate. 

4. Wall Street paid approximately $28 million in contributions and lobbying to effect this accounting change. The banks made these payments while in receipt of billions of dollars of TARP funds (taxpayer/ government assistance). Did Wall Street effectively utilize taxpayer funds in order to “pay” Washington so the banks could continue “to play” their game?

Sense on Cents: In my opinion, most definitely!!

5. How long had the “mark-to-market” been in effect prior to its relaxation?

Sense on Cents: Decades. It worked just fine.

6. Why didn’t banks lobby in the 2000-2006 era that assets were being overvalued via this accounting standard?

Sense on Cents: Bank executives were being “paid” from those inflated valuations. 

7. Given that the banks now utilize internal pricing models to value the toxic securities, are those models and their embedded assumptions made public so investors can have some degree of transparency?

Sense on Cents: NO!! Why would the banks want the “cooking” exposed?

In summary, this version of “pay to play” will be seen as a watershed event in the Brave New World of the Uncle Sam economy. Why will future economic growth underperform? The banking industry will be forced to continue to set aside reserves against the embedded toxic assets. In so doing, the banks will have less credit to extend to consumers and business.

LD

For more on this topic, I submit:

Putting Perfume on a Pig
April 2nd; post written the day FASB relaxed the mark-to-market standard

Freddie Mac, Fannie Mae Deja Vu?
May 28th; post highlighting the massive embedded losses in the Federal Home Loan Bank system. These losses are masked by the relaxation of the mark-to-market.

Legalized Bribery
February 16th; post highlighting Chuck Hagel and Leon Panetta implicating Washington politicians’ endless pursuit of money. 

How Wall Street Bought Washington
March 9: post highlighting the massive money spent by Wall Street to curry influence in Washington.

Will Bank Stress Tests Be “Put on a Curve?”

Posted by Larry Doyle on April 22nd, 2009 9:10 AM |

Will the soon to be released Bank Stress Tests provide real clarity on the health of our banking industry or will the tests be “curved?” Meredith Whitney, highly regarded bank analyst, has indicated that the tests will provide plenty of wiggle room for the banks. Just yesterday Secretary Geithner “goosed” the market by indicating the majority of banks have sufficient capital. To what degree can we trust what Turbo-Tim is telling us?

Mohamed El-Erian, CEO of PIMCO (Pacific Investment Management Company) provides a blueprint for an honest review of the Stress Tests. Mr. El-Erian highlights the following in a Financial Times article:

First, transparency is key. Whether the government likes it or not, hundreds of analysts around the world will reverse engineer the stress tests. The government would be well advised to assist the process through clarity. Obfuscation would result in damaging market noise and further derail the real economy. At the minimum, policymakers need to provide credible details on the methodology, the underlying assumptions and scenario analyses.

To this point, neither the banks nor the government have provided real transparency. What are we to expect when Congress pressures the FASB to relax mark-to-market accounting thus forever clouding real transparency?

Second, the results of the stress tests must be part of a comprehensive, forward-looking package to resolve problems at banks. Out-performing banks should be provided with exit mechanisms from the exceptional government support that they have been receiving and, presumably, no longer need. At the other end, there must be clarity as to how capital-deficient banks that no longer have access to private capital will be handled. (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…)

Putting Perfume on a Pig!!

Posted by Larry Doyle on April 2nd, 2009 9:45 AM |

***Bumped up from original publication time of 7:30AM. The FASB has now just voted its approval of the change in mark-to-market accounting.

It is speculated that the FASB (Federal Accounting Standards Board) will today relax its rule known as the mark-to-market. This rule requires firms under the FASB’s purview to mark their assets to changing market prices on an ongoing basis. The institutions subject to this rule have been lobbying FASB and Congress for a change because the markets for these assets have imploded and in certain cases totally dried up.

What does the FASB plan to do? The FASB is going to cave to the lobbying pressure and will allow institutions to use their own internal models based upon cash flow analysis to price these assets. This change in the mark-to-market will not only allow institutions the flexibility to not mark down certain assets, but simultaneously mark up other assets.

The media only presents the impacted assets as “hard to value” or the dreaded “mortgage-backed securities” or “securitized assets”.  In fact, many of these assets are very simple and plain vanilla. Let’s enter the world of the Federal Home Loan Banks.

The FHLB system consists of 12 regional banks and it provides liquidity (capital) for its respective members to operate. The FHLB system invests its own capital, primarily in plain vanilla conventional mortgages (Freddie Mac, Fannie Mae, Ginnie Mae) and Jumbo ARMS (adjustable rate mortgages) and fixed-rate pass-thrus. Certain banks within the FHLB system may have moved slightly off the plain vanilla path to purchase a small percentage of sub-prime assets, but that was much more the exception than the norm.  (more…)

Market Fades on the Close

Posted by Larry Doyle on March 16th, 2009 6:30 PM |

Monday’s price action in the equity markets was particularly interesting. The market opened firm, up approximately 1%, and continued to trade with a very firm tone all day. What precipitated the strong tone? Fed chair Ben Bernanke was interviewed on 60 Minutes last evening. On that show, Bernanke Defends Recovery Efforts in Rare TV Interview.

First and foremost, it is very uncharacteristic for anybody from the Fed to consent to an interview targeted at a general audience. I view this as Bernanke trying to make the case for himself, the Fed, and the economy during these challenging times. In fairly short order, Bernanke has gained significantly greater credibility than his colleague, Secretary Geithner. Bernanke also spoke well of the economy turning around later this year IF the financial system recovers. That is a mighty big IF!! (more…)

Change The Rules of The Game

Posted by Larry Doyle on March 13th, 2009 8:07 AM |

Well, when you do not like how a game is going, change the rules.

The primary reason for the market rally yesterday was a Congressional hearing pressuring FASB (Financial Accounting Standards Board) to revise its rule known as the “mark-to-market.”  Thank you FL for providing a heads up on this hearing.

In layman’s terms, the mark-to-market is the equivalent of inventory valuation.  Nobody likes when inventory declines in value but if that is the reality, then so be it. Would your banker laugh at you if you told him you weren’t going to properly mark inventory? Do you think he’d continue to offer you a line of credit? Are we supposed to invest in banks without a credible mark-to-market?

I have VERY mixed feelings about changing this rule. I do think there are merits in never having imposed this rule for certain less liquid assets, such as commercial real estate. However, the pressure banks are applying on Congress and Congress, in turn, on FASB is for a suspension of the mark-to-market on so called super-senior classes of CDOs.

Make no mistake, if this rule is changed it will provide capital relief because the “inventory will not have to be marked down.” However, it comes at the price of a lack of transparency and full understanding as to a bank’s true capital position. I recall writing in my very first piece on October 14th:  

if the government accedes to the pressure being applied to suspend the mark to market accounting principle, I would expect that move would only prolong the underperformance of the economy . . . I view a suspension of the mark to market as the equivalent of an agreement to officially allow one to “cook their books”

I hold the same opinion today.  We will see a lot more on this topic over the next few weeks as FASB Pledges Mark-to-Market Guidance Soon.

LD






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