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About the Politically Malleable FASB, Paid for Politicians, and Mark to My A$$ Accounting Rules
Johnathan Weill has an excellent article on Bloomberg today illustrating
just how BS the BS FASB accounting changes regarding mark-to-market
really were. For all of those who wondered why I have stayed so bearish
on the banks, stay tuned, but before we read this oh so interesting
story, let me provide you with a graphical recollection of recent history
via this chart sourced from Bloomberg:
If the engineered bear market rally is running off of the FASB generated
lies, then we certainly do have another crash coming, don't we?
Suing Wall Street Banks Never Looked So Shady
Feb. 25 (Bloomberg) -- Next time you see some company complain its
“mark-to-market” losses aren’t real, remember this name: the Federal
Home Loan Bank of Seattle. It used to claim that, too. And it couldn’t
have been more wrong.About a year ago, the government-chartered lender blamed
accounting rules after it wrote down its portfolio of mortgage- backed
securities by $304.2 million to reflect how much their fair-market
values had fallen. While those declines counted against its earnings and
regulatory capital, the bank said they were “well beyond any expected economic
loss.”The bank’s executives said they expected to lose a mere $12 million of
principal over the life of the securities. That estimate proved far too
hopeful, though.The bank, one of 12
regional Federal Home Loan Banks that supply low-cost loans to about
8,000 member banks and finance companies, now says itexpects about
$311.2 million of credit losses on its portfolio. And in December, it
filed lawsuits against 11 Wall Street underwriters, including Goldman
Sachs Group Inc. and Morgan Stanley, seeking more than $3.9 billion of
refunds on the securities, plus interest. You know the losses are real
when the bank is suing to get its money back.
As you can see from my table below, FHLB Seattle execs were obviously
enganged in one of those wicked sensimilia sessions when they came up
with that $12 million dollar loss figure, and over the entire loss of
the securities may I add, not even for just one quarter.
This
is the question of the day. How in the hell can FHLB Seattle accuse GS,
MS, et. al. of wrongdoing when they themselves stated that they
expected minimal losses on these securities/loans and the blame for the
losses belong to mark-to-market accounting and not to buying leveraged
real estate products at the top of a bursting real estate and credit
bubble???!!!! Hey, if you allege that the investment banks lied, that
probably means you lied as well - and we all know you LIED! Of course,
you could have just made an error, but then again so did the crooks
banks that sold the trash products to you.
Back to the article, because it gets better...
Yet there’s a far greater outrage here than this one bank’s
unpleasant surprise. That would be what transpired in Congress and at
the Financial Accounting Standards Board last year after the Seattle
bank disclosed its rosy $12 million estimate, which soon took on a life
of its own.‘Disturbing’ Example
The bank became a poster child for everything supposedly wrong
with mark-to-market accounting. At a March 12, 2009, congressional
hearing, U.S. Representative Ed
Perlmutter of Colorado
cited the disparity between the bank’s writedown and its much smaller anticipated
[emphasis added] loss as “an example that really was disturbing.”The congressman leading the hearing, Paul
Kanjorski of
Pennsylvania, pointed to
a similar instance at the Federal Home Loan Bank of Atlanta. The bank
reported an $87.3 million writedown on its mortgage-backed securities
for the 2008 third quarter; however, it said it expected its actual
losses would be only $44,000.While that’s roughly equivalent to the losses from a modest
studio condo foreclosure, Kanjorski didn’t question the tiny number,
saying: “I find that accounting result to be absurd.”“It fails to reflect the economic reality,” he said. “We must correct the rules to prevent such
gross distortions.” Kanjorski, Perlmutter and other lawmakers told Bob
Herz, the chairman of the FASB, that it needed to change its rules
immediately so banks could show stronger earnings. The board, which
fancies itself as an independent standard setter, complied a few weeks
later.Changing the Rules
The rest of the story: Last year when the Atlanta bank released
its financial results for the third quarter, it said it had raised the
credit-loss estimate to $263.1 million. (Here’s the math in case you
missed it: $263.1 million > $44,000.)
No, I didn't miss it. As a matter of fact, I feel the need to
elaborate...
Even
before the estimate, it was evident that the bank felt the need to
declare more losses permanent and to recognize more losses in earnings.
Translation, even they realized the jig was up. But what happened to
the $44,000 loss estimate? They only expected ONE house to be
foreclosed upon, right???!!!
The FASB rule change gave
companies a new way to avoid counting paper losses from toxic debt
securities in their earnings. Before 2009, whenever companies recorded
writedowns on impaired securities that they labeled as
held-to-maturity or available-for-sale, they had to run the full
amounts through net income for any losses deemed to be “other than
temporary.”Now they get to separate the impairments into two parts:
estimated future credit losses and everything else. The first kind
reduces earnings and regulatory capital. The other doesn’t....
Here’s how it works in practice. When the Atlanta bank reported its results for the first nine
months of 2009, it showed net income of $201.3 million. That included
the $263.1 million of credit-related charges. However, it excluded
$943.4 million of other mark-to-market writedowns on its securities
portfolio. Those got dumped into a line item on the equity statement
that banking regulators don’t count....
That’s how the rules work now, though. The banking lobby got
most of the accounting forbearance it
was looking for
at a critical point in the financial crisis. It didn’t seem to matter
if the new standard made
sense.For their part, when I asked officials at the Atlanta and Seattle
banks why their credit-loss estimates last year were so low, they said
the new FASB rules introduced a more stringent test for determining
if a security is impaired. Additionally, they said the increases in
their credit-loss estimates reflected changes in market conditions,
including the performance of loans underlying their securities....
Those explanations aside, what happened here is that a few members
of Congress bum-rushed the FASB into action based on a premise that
was false, in a misguided effort to boost public confidence in the
financial system through smoke and mirrors. It’s an open question if
the board’s standard-setting process can regain its credibility
someday. Undoing this disaster of a rule change would be a good start.
So, I had the team pull the data for other than temporary impairments
for FHLB and other banks from 1Q08 till there latest reported results.
Since the accounting change was applicable for periods after March 2009,
we have information for first three quarters of 2009 and the
corresponding quarters in 2008. Since many of the banks have not
reported 4Q09 figures, we don’t have figures for 4Q09 and corresponding
figures for 4Q08.
In April 2009, the FASB issued guidance revising the recognition and
reporting requirements for other-than-temporary impairments of debt
securities classified as available-for-sale and held-to-maturity. As
explained in Mr. Weill's article above, the FAS gives significant
discretion to the banks in bifurcating other than temporary impairments
(OTTI) in the investment value into a) related to the credit loss
(charged to the income statement) and b) related to other factors
(charged to other comprehensive income). Equipped with the new rule
which was effective for periods ending after March 15, 2009, the banks
have appropriated significant portions of other than temporary
impairments to other comprehensive income which prior to the rule, was
entirely charged to the income statement. However, the trends are
showing that the proportion that was being transferred to the
comprehensive income is declining with many banks and insurers forcibly
through fear of being accused of fraud voluntarily reversing
the accounting entries made in the previous periods. The same shows how
the banks' assumptions about the credit losses on these securities have
been changing off late. Do you wonder why? Let me explain it to you
with a few pictures from
A Fundamantal Investor's Peek into the Alt-A Market...
See"If
Anybody Bothered to Take a Close Look at the Latest Housing Numbers...",
and in particular the shape of the bubble peak.
The average origination of the Alt-A loan in the use sits right atop
that crest. You see where we have went from there...
As if the Case Shiller graph doesn't drive this point home hard
enough, the average and mean CLTVs for Alt-A loans AT ORIGINATION hover
around 82% to 93%. Those are loans written at the top of the bubble.
What do you think happened a few years later???
This is the state of Alt-A loans as of November! Nearly all of them are
underwater. Some are totally sunk! We're talking 150%, 175% LTVs. and
that is statewide, not anecdotal high end cases!!! If you are not familiar with Alt-A loans, they have a
subset known as option ARMs that allow you to pay less than the
amount necessary to amortize the loan, resulting in negative
amortization. That means as time goes on, your outstanding principal
gets bigger, not smaller. Many loans have a cap on this neg am amount
wherein if it hits a certain level, the loan goes fully amortizing.
What are the chances of this happening??? Well, you tell me.
Current reporting trends show that:
1. All FHLB banks reported the majority of their credit losses (more
than 70%) for 9M09 to comprehensive income, with only less than 30%
being charged to income statement.
2. Fed Home Loan Bank of Seattle, Federal Home Loan Bank of Atlanta and
Federal Home Loan Bank of Chicago transferred majority of their credit
losses to comprehensive income during 1Q09 and 2Q09. However, they made
a reverse transaction by charging more than 100% of their credit losses
to income statement in 3Q09.
3. Fannie Mae only charged 5.4% ($423 million) of its total credit
losses for 9M09 to comprehensive income, while Freddie Mae charged 51.6%
($11,928 million) to its comprehensive income for 2009.
4. MBIA transferred 44.4% of its total credit losses ($349.6 million) to
its comprehensive income, while AMBAC did not transfer any of its
credit losses to comprehensive income over the same period. For those
of you who have been following me for a while, I clearly demonstrated
how MBIA and Ambace were done for. See
-
Are the Mortgage Insurers in Serious Trouble? 9/3/2007
-
A Super Scary Halloween Tale of 104 Basis Points Pt I & II, by
Reggie Middleton -11/13/2007 -
Tie-in to the Halloween Story11/21/2007
Ambac is Effectively Insolvent & Will See More than $8 Billion of
Losses with Just a $2.26 Billion in Equity 11/29/2007- Follow up to the Ambac Analysis 12/4/2007
There is absolutely no way in the world they shouldn't have recognized
severe losses early on. The insurers are suing the originating banks for
fraud and misrepresentation too. Why? After all, it was mark to market
accounting that was causing all of your problems, right?
For the record, FHLB Cincinatti and Des Moines feel that all of
the mark downs on their available for sale securities ar temporary
thus, there were no other than temporary impairments. Sure
fellas. As soon we climb right back up to the peak in the graph below...The bubble peak, all will revert back
to normal.
One would think the word fraud should come into play here. For all of
those that think I was simply lucky for two years in a row on the banks
(unlikely) apparently easily believe what you are told by your dear
government or are severely balance sheet challenged when it comes to
reading said statements. Do any of you really think that the loans
sitting on PNC's, Wells Fargo's or JP Morgan's balance sheets are
somehow magically different than that of Fannie's or Freddie's?
It appears as if the truth may be forced out at a time when credit
makets may be roiled by sovereign debt issues. If so, maybe FASB and
certain elected officials should have decided to stop selling their
asses to the highest financial bidder and mayhap do the right thing. If
losses bust out when the world's credit markets lock up, then we have
some serious issues that just weren't worth that damn campaign
contribution.
Reguired reading:
WFC 4Q09_Review - Public edition (free)
- JPM 1Q 2010 Valuation Review
- WFC Q1-2010 Valuation Update
- GS 4Q09 Final Review and Updated Valuation
- STI 4Q09_Review
- MS 4Q09 results
- WFC 4Q09_Review- subscriber edition
For more free reading on the Pan-European Sovereign Debt Crisis series,
see:
- Can
China Control the "Side-Effects" of its Stimulus-Led Growth? Let's
Look at the Facts - Explains the potential fallout of the excessive
fiscal stimulus in China. While not European, it is quite likely to
kick off the daisy chain effect. - The
Coming Pan-European Sovereign Debt Crisis - introduces the crisis
and identified it as a pan-European problem, not a localized one. - What
Country is Next in the Coming Pan-European Sovereign Debt Crisis? -
illustrates the potential for the domino effect - The
Pan-European Sovereign Debt Crisis: If I Were to Short Any Country,
What Country Would That Be.. - attempts to illustrate the highly
interdependent weaknesses in Europe's sovereign nations can effect even
the perceived "stronger" nations. - The
Coming Pan-European Soverign Debt Crisis, Pt 4: The Spread to
Western European Countries -
The
Depression is Already Here for Some Members of Europe, and It Just
Might Be Contagious!
- advertisements -
Reggie, Here is a actual sale that lets us know how much air there is in the system.
http://www.startribune.com/local/north/85501627.html?elr=KArksUUUoDEy3LGDiO7aiU
Brookdale Center went on the auction block at a sheriff's foreclosure sale Friday, netting just one bid of $12.5 million from the shopping mall's lenders.
The bid from Brookdale Mall HH LLC was well below the $51.8 million owed on a $54.2 million mortgage by the property's owners, Brooks Mall Properties of Coral Gables, Fla
Thanks again Reggie!
Little by little, the fact based conclusions posted by the "bad news bears" appear to be seeping into the mainstream media. You and Zero Hedge (and a few others) have been ahead of "the crowd" for most of the two years of the "systemic" event.
Realistically, freedom has never been totally free. Somebody winds up stuck with the work. At least, in our time, it is hard to keep monkey business secret.
Good Luck, God Bless.
Reggie, Luckily it will not take long for assets to hit their Mark-To-Market prices. Americans are foreclosing in record numbers and any sales that are happening are taking deep price cuts even in cities like Chicago that did not see a huge bubble.
Earnings will get smashed at the big banks (even more so if the market gets stuck in a range since banks have been getting a large portion from investment divisions). But that does not mean that markets will crash......
I don't see how a 70% unfundamentally justified rally combined with what looks to be an absolute dearth of credit, the inability to drop interest rates (already at effective zero), extreme unemployment, the return of isolationism and the collapsing of what little collateral behind still overleveraged assets can result in anything but a crash.
We are floating on air, thin air. Fundamentals have nothing to do with this 2009-2010 market thus far.
The entire United States is mark to your ass, Reggie.
It's the reason I won't touch your ass with dnarbys hand and blame it on Chumba.
The US can eat shit as far as I'm concerned - we've earned it!
Stealing in broad daylight continues absolutely unabated.
Superb bit of analysis and explanation. The accounting profession in general and the standard setters in particular have (a) created the opportunities for pumping non existent 'profits' by allowing fair values and mark to myth level 3 valuations; then (b) compounded their stupidity, gullibility, professional incompetence and utter lack of intestinal fortitude by caving in to Congress by suspending it.
If the FASB had stood up to the Congressional threat, I wonder if, faced by a united FASB professional opinion to stick to the rules, in the end it would have shut the FASB down? Maybe I'm a dreamer, but I think the FASB chickened out.
Still, cynics say I should not be surprised as they hold that the big accounting firms were bought and paid for long ago...
This would exclude the excess profit centers of a whole host of industries, causing lobbyists to sic their congressmen after anyone who proposed such.
Reggie....
Here it is....
..........................
All instruments should trade on a public direct access electronic exchange....
The units should be constructed such that any interested party...retail or institutional could participate....
This would also require that the exchanges have to be defragmented....and monitored electronically....
Also it should cost the same .....ie 20 cents per 100 units....to make a name label change....
.............................
Secondly.....the rating agencies would be replaced by a fact based description about the security....wiki format....
It will be totally up to the participant to decide.....Failure to post timely accurate relevent information would subject the security to lose its listing and would mean criminal penalties for failure to report information....
....................................
Thus the market...not accounting rules ...would decide value....
....................................
What would this do ?
It would offer a more reliable marketplace...which in turn would be a far more healthy one....
Furthermore....no more dark pools or outside crosses...."all on the exchange"....
..................................
Any public company cannot participate in securities that are not on a public exchange....
Public to public....and 100% visible....