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Is Citi Back To Its Old Accounting Tricks; And Are Accountants Papering Over A $735 Billion Valuation Hole?
A piece today by Bloomberg's Jonathan Weil focuses on ongoing accounting gimmicks, this time in the realm of Fair Value definitions as determined by SFAS 107. Weil compares the difference of Book (Carrying) Value to Fair Value which several banks hold their assets at, primarily consisting of loans. As a reminder, "Fair value is supposed to represent the price at which an asset would change hands in an orderly, arm’s-length transaction." Weil has noticed that for several banks the accountants have stretched so much that they are in fact holding FV at a higher value than book value. How that is conceivable in the current loan-impaired environment is a major question mark, especially since Weil goes off June 30th balance sheets, before the stock market bubble bonanza was in full force.
In the article, the primary focus is on banks such as Midwest Banc Holdings, which despite being unable to pay scheduled TARP dividends, somehow marked its loan FV at $2.53 billion, $35 million more than the book value of these loans. Other banks highlighted by Weil include Seacost Banking Corp, First Bancorp, BB&T as well as Commerce Bancshares, all of whom seems to suffer from accountants who have yet to be introduced with the concept of a calculator. Conveniently, Weil provides just who these accountants are: PWC in the case of Midwest, BB&T, and First Bancorp, and KPMG in the case of Seacoast and Commerce.
Yet what caught our attention is the FV action at the big 4 banks: Citi, BofA, Wells and JPM. What is most notable is that while the three firms ex Citi have taken a decent haircut to their Book-to-FV margin, Citi is now down to a mere 0.2% difference between loan Carrying Value at Q2 ($602.6 billion) and loan Fair Value ($601.3 billion). What is more notable is that on average the margin has increased over the past 2 quarters: while the average FV-to-Book spread was 3.2% at year end 2008 for the non-Citi banks, it grew by 1.5% to 4.7% at Q2 (non weighted). And in this environment where banks have been getting more cautious and applying an increasing discount to their loan book values, Citi has collapsed the differential from 2.8% to 0.2%!
Just what about the economic environment has given Citi auditors KPMG the flawed idea that the bank's loan can be easily offloaded with virtually no discount? And just how much managerial whispering has gone into this particular decision.
If one assumes a comparable deterioration for the Citi loan book as for the other big 4 firms, and extrapolates the 2.8% getting worse by the average 1.5% decline, one would end up with a 4.2% Book-to-FV deterioration. On $602 billion of loan at Q2, this implies a major $25 billion haircut. Yet this much more realistic number is completely ignored courtesy of some very flexible interpretation of fair value accounting rules at KPMG. Maybe Citi and its accountants should take a hint from Regions Financial CEO Dowd Ritter who carries the FV of his $90.9 billion loan book value at a 25% discount.
“We and our accountants interpreted that in the strictest manner,” Ritter said at a Sept. 15 investor conference, referring to the FASB fair-value rules. “I don’t think we’ll hear anything probably from the SEC. But I’d be surprised if some other banks don’t, or else we and our accountants missed something.”
And as usual the SEC is completely out of yet another regulatory picture. What is very frightening if Ritter is the correct one of all bank execs: if a 25% discount to the combined carrying loan value at just the Big 4 banks is truly appropriate, it would mean that the nearly $3 trillion in loans on the "asset" side of the big banks deserves a whopping $734 billion haircut! This is almost the size of the entire TARP rescue package. And, unfortunately, a 25% discount is probably right in line with where banks should be calculating "Fair Values" for their holdings which likely include massive amounts of CRE exposure, which as everyone knows is the next big shoe to drop, and will likely flood the banks' balance sheets once refi time comes around.
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This is a classic memo to Mary Schapiro, that will be ignored..
I loved Mr. Weil's question to Mary Schapiro if she caught it?
I hope President Obama has the good sense to suggest to Mary that she move on to other career opportunities.
I would like to compliment Mr. Weil for his investigative work.
I would like to scream out at the top of my lungs, how about more coverage from anybody on the impending FASB FAS 166, 167 matter? For those of you that watch the banking sector, this is going to be an interesting matter.
C is THE toxic grail...along with AIG
Someone can start writing the case study:
"Greatest Government Sanctioned Fraud Ever"
Mandatory reading for future Ethics classes.
DXY in the low 50's should help sort this "little" problem out ....:-)
True, that. Although you may have some competition from the Federal Reserve Act of 1913.
Hear-Hear Fritz!!!
We'll never know how bad it was till 2020
I agree, Max. They'll sit on their baskets of voodoo shit forever or until Uncle Sugar finally absorbs it off their balance sheets for good. For now, the banksters need to do their part by advancing the recovery propoganda, while picking up fat bonus checks along the way.
The Boyz think this is RTC redux.......except to the magnitude of 100x.
It'll never work. Uncle Slam's getting really broke this time . And the clock is ticking on the 2010 elections.
For what its worth, a few years ago in college I new several accounting majors. The word widely circulated around was that KPMG was the most corrupt and shady of all the firms recruiting on campus. The only folks I knew who decided to go with KMPG openly boasted about how they would reach their "number" quicker than their peers thanks to the more corrupt business practices.
Yeah I know, where's the beef. Well in this case perception was reality because the view of KMPG led to some pretty ugly self-selection.
Thanks for the real life experience as confirmation that the corruptible among us will pick a firm that is corrupt. Like two peas in a pod, mother nature wouldn't have it any other way.
Since the government can't be sued as a result of all these shenanigans you know who will be. While KPMG may have some deep pockets now, they may not after all is said and done.
Geez, why don't we just get the next bailout package out of the way (lets make it $900B) and say it will go directly to the Top 5 banks?
Sadly, it wouldn't make those banks any more likely to hide behind iffy accounting practices and preference to create off balance sheet entities on a whim.
Some people (or collection thereof) in or government just don't "get it".
Either that, or they "get it"... but just don't care.
I was the SOX404 compliance director at a small, publicly traded utility. I can tell you from first hand experience that SOX, as implemented, was a hand-out to the Big 4 accounting firms. It allowed them to triple and quadruple their billings for the audit fee and it gave them a second source of income since they could solicit consulting business at other firms, as long as they didn't audit those same clients. So, big deal, all it did was to allow the Big 4 to grow their businesses. If PwC was the audit firm at Client A, then KPMG would be the SOX consultant at Client A; if KPMG was the audit firm at Client B, then PwC would be the SOX consultant at Client B. It was absolutely worthless. These guys audit nothing, no investor should put ANY faith on their "opinion" letters. Oddly enough, they do fight management on a few issues, but these are only for show; it's generally something that the particular engagement partner studied and has a hang-up about. A few years back, KPMG was implicated in a multi-billion dollar tax fraud scheme. Do anybody go to jail? Nooooooooo. KPMG paid a billion dollar fine and went about their merry ways.
Now, Ms. Shapiro, TD et al have paged you once again. Why don't you get your normally worthless self off of your knees and get to work....
Yep... as someone who's worked with large companies on SOX, I can attest that all you say is correct.
The accounting industry is ALL about appearances. They basically run a protection racket. No large company is allowed to take competitive bids for fear that it will look (to regulators) as if they are trying to evade complying with the interpretation of their auditor. SOX was an enormous windfall for these bloodsuckers because it is so impossibly vague and non-specific. As such, it is impossible to argue with auditors on any solid ground.
Imagine a politician passes a law that says citizens must "do good" or they will go to jail. Of course you'd ask "what do you mean 'do good'". The politician, who created the legislation to appease his constituents, who were hurt by someone not "doing good," will of course evade answering with any substance. Assume there are people called the Do Good Auditors. Generally, they've acquired their positions through political influence. Anyway, assume you want to do something, and they, remembering that they need to appear to be antagonistic to your "evil" intents, tell you you need to do it differently. How do you argue with them? On what basis? Of course you can't "shop" for another Do Good Auditor, since that appears like you're evading the law. SOX works in exactly the same way
I have listened to many conference calls where the heads of one or other of the big four explain their SOX paradigm.... not ONE WORD has any substance! It is a complete fabricated maze of hackneyed phrases and repetition of new PCAOB "guidance". Without anything to attack, how could corporate controllers or chief accounting officers make the case that their interpretation of the standard is correct? They can't.
Once there is no RATIONAL discussion permitted, all that is left is AUTHORITY. The regulators, who can't make any sense of the guidances either, cannot rule in favor of a controller or treasurer who wants to interpret something differently.... so the companies have absolutely no basis to defend themselves - and instead must pay ridiculous fees to accoutants who are pure and simply parasites on society. It's pure power politics, and the BIG FOUR are the major beneficiaries - not investors!
ThIs Is stAndard operating proCeduRE For financial firms, where I work we hold out mortgage related securities at an average of 96 cents on the dollar. Complete insanity. But to realize their losses means everyone in their pension plans and mutual funds would pull their money in a heartbeat, completely gutting the company. Not that such a phenomena would be unique to my company should losses be realized, but I digress, the ponzi scheme must go on.
wow, Mr. Weil, TD, somebody...how about digging into how TIAA CREF to see how they are marking securities...
96 cents on the dollar...shocking.
The three best words for investment firms are "Held to Maturity", they can then avoid any sort of market to market or realistic price on their securities and use various assumptions (historical cash flows, models, skittle crapping unicorns, hope and change) to value their investments. I forget the exact FASB that allows them to do this though, something about the securities not being part of the actively traded portfolios or some such loophole.
Too bad all those MBS and CMO are worthless and their underlying loans are never ever going to be paid off.
It shouldn't surprise you (or anyone) that this accounting guidance (FSP FAS 115-a, FAS 124-a, and EITF 99-20-b) was changed last year around the same time the FASB revisited SFAS 157.
Thanks for the Interesting And informAtive pieCe, which REally shows how F**ked up we are.
Have at it, Leo.
I suppose this is why Roubini and others freely used the Zombie Bank analysis back in the more realistic days before it was decided the Big Banks had to survive after all, and were no doubt encouraged to mark to fantasy as part of that effort. I would be surprised if the haircut, for the big banks, was as little as 25%; the analogy with the more responsible smaller bank is probably their best case.
http://tpmmuckraker.talkingpointsmemo.com/2009/10/where_are_they_now_sec.php
http://www.youtube.com/watch?v=HNTxr2NJHa0
Cheers :-)
Yes, and now Madoff victims file suite against SEC, more wasted money as the SEC has goverment immunity!
The ever creeping concept of judicial exclusion.
"We are here to serve the public, but if we fail and screw the public the public has no form of redress."
But...but...but I thought I learned in high school Amercian History that America the beautiful, home of the brave and land of the free, would never treat it's own citizens like that.
I'm an American citizen. I demand my right to redress. I'm calling my Senator. I'll write a letter to the editor.
What's going on here? Who are you guys? Why do you have handcuffs? No, stop, what're ya doing? Wait, I was only kidding. No, don't. Stop!
Mommmmmmmy!
Members of Congress and various mid level executive branch folks still are wed to the concept of the sternly worded letter as well. As if those are good for anything including wiping your ass since they are all written on glossy.
Is it at all surprising that we've been conditioned to believe that the least effective method of resistance (letter writing) is the only one acceptable to those in power, the very same people we are trying to topple?
Where is that Easter bunny when you need him?
Collecting rent.
most EXCELLENT point Cognitive Dissonance!
Because these are ratios, for completeness shouldn't you consider what has happened to the numerators (Book Value) and denominators (Fair Value)?
In the Citi case, if in the time period between the snapshots they took big writedowns on the book, but left FMV roughly where it was (and if it's remained there) -- you wouldn't be quite as alarmed.
Or in the BoA case, if they determined they'd over-reserved and wrote up some the book... or if they greatly grew the size of their book and were holding all the new loans at par... then their growing Book / FMV ratio might actually be alarming.
My point is that there's nuance behind those numbers and they can't be taken at face value without a LOT of assumptions, none of which are probably valid. It isn't that this headline/analysis is necessarily wrong, but it is far from rigorous and feels like reaching.
The sad fact is that banks will be able to offload these assets at full value. The Fed will be buying them, in an effort to "stabilize" the economy.
I love this website, and I go for here for my supplemental knowledge about the economy, finance, financial scoundels etc. However, I note that the authors have a bone to pick with the SEC, and Mary Shapiro, both justifiably so, might I add. However, we both know that the President doesn't know finance and business (except for "Wealthy" people to pay for his programs), and that he would never fire Mary Shapiro, unless she did something really outrageous.
Interns, robbing a political party's headquarters, "traceable" bribery, etc-real juicy stuff that readers of the Washington Post could understand.
I wonder if that Commerce Bancshares is the one in St. Louis/KC.
I worked for them up until 2 years ago. They were so conservative.
I would provide reports for the retail marketing division. They would book so few 1st mortgages they didn't even want it as a line item. We are talking a 750,000 retail HH customer base and they originated < 10 first mortgages a month.
How many sets of books do these scumbags keep?
I figure one for the taxman, one for investors, one for the Fed?
Probably a few more just in case they are ever called to task on something.
From the WSJ
http://online.wsj.com/article/BT-CO-20091015-711571.html
'Gerspach also said that Citi has started to invest in some businesses again. "Specifically in Asia and in Latin America, we're looking at growing" credit card customers "and actually investing in new branches," he said. "So that should tend to add some earnings assets into next year."'
The locusts have devoured the American middle class, and are now heading south and west.
Either we ignore the law and proper accounting or we lose some valuable GDP. And everyone knows that GDP is an important number. With a billion GDP we can get enough mana to do one of our special moves like "stimulus" or "bailout". So we can't do that; we need the mana guys!
CLASSIC!
The second chapter in G. Edward Griffin's book The Creature from Jekyll Island: A Second Look at the Federal Reserve is, "The name of the game is bailout."
Everyone should consider it their patriotic duty to read that book, and place it with at least one, or as many people as possible in effort to spread the truth of the scam that the privately held federal reserve is and has always been. Even the advocates (shills) of the fed, use the boom and bust as the excuse as to why to keep the fed--that is a real laugh!!! Our monetary system is such a ponzi scheme, it is just heartbreaking.... but once you know the truth, you realize that coming clean is the only right thing to do, for we the people and for the world who expects us to have integrity as a nation (the stuff of valuable currency.)
Ha, Ha - good timing. I was in a meeting with one of the execs at Citi a few weeks ago and in speaking about the Citi Holdings assets (bad bank side of the balance sheet) he referred to a pool of about $200bn in mortgage securities that sit in there. He used these words..."I know I could probably sell those for 50 to 60 cents on the dollar right now....but fortunately we can hold them at accrual accounting...we're not a distressed seller". Extend and pretend, delay and pray, mark-to-make-believe. Ah yes, this is the US financial system.