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SEC To Demand Loan Loss Clarity In MD&A Disclosure
After failing as a regulator, the SEC is now officially an accountant. In a letter disseminated to "certain public companies", the SEC's Senior Assistant Chief Accountant is providing a gentle yet firm request that companies provide substantially more clarity and transparency when it comes to provisions and allowances for loan losses. For now, the SEC appears focused on option ARM products, junior lien mortgages, high loan-to-value ratio mortgages, interest only loans, subprime loans, and loans with initial teaser rates.
The question arises: does the SEC realize that if the TBTFs all follow the guidelines of this aggressively worded missive, the entire financial system would be back at ground 0, and Paulson would be brought back from retirement, doing show tunes in front of Congress while getting fast track approval of a 3 page waiver for a $1 quadrillion TARP 2-inifity.
It also puts the tenuous relationship between the regulators and the accountants in a whole new light, as this could potentially be the preamble of a whole new kind of turf war.
Nonetheless, as the banks now have nothing to hide (or so Geithner and Bair have claimed repeatedly), this should be merely a token exercise for them in justifying that those CRE loans still carried on the books at 99 cents on the dollar will never ever see more than 1 cent impairment. That being said, we eagerly await Citi and BofA's latest 10-Q's.
From the Sample Letter sent by the SEC
August 2009
Name
Chief Financial Officer
XYZ Bank
Address
Dear Chief Financial Officer:
Clear and transparent disclosure about how you account for your provision and allowance for loan losses has always been critically important to an investor’s understanding of your financial statements. While generally accepted accounting principles regarding how to account for these items have not changed in recent years, the current economic environment may require you to reassess whether the information upon which you base your accounting decisions remains accurate, reconfirm or reevaluate your accounting for these items, and reevaluate your Management’s Discussion and Analysis disclosure.
Item 303 of Regulation S-K requires you to discuss, in your Management’s Discussion and Analysis, any known trends, demands, commitments, events or uncertainties you reasonably expect to have a material favorable or unfavorable impact on your results of operations, liquidity, and capital resources. Set forth below are a number of common Management’s Discussion and Analysis disclosure suggestions we have provided to financial institutions that you should consider if they are relevant and material to you.
Higher-Risk Loans
Certain types of loans, such as option ARM products, junior lien mortgages, high loan-to-value ratio mortgages, interest only loans, subprime loans, and loans with initial teaser rates, can have a greater risk of non-collection than other loans. Additional information about higher-risk loans may be useful to an understanding of the risks associated with your loan portfolio and to evaluating any known trends or uncertainties that could have a material impact on your result of operations. With regard to your higher-risk loans, consider disclosing:
- the carrying value of your higher-risk loans by loan type, for example, junior lien mortgages, and, to the extent feasible, allowance data for these loans;
- current loan-to-value ratios by higher-risk loan type, further segregated by geographic location to the extent the loans are concentrated in any areas. Disclose how you calculated the ratios and identify the source of the underlying data you used;
- the amount and percentage of refinanced or modified loans by higher-risk loan type;
- asset quality information and measurements, such as delinquency statistics and charge-off ratios by higher-risk loan type;
- your policy for placing loans on non-accrual status when a loan’s terms allow for a minimum monthly payment that is less than interest accrued on the loan. Discuss how this policy impacts your non-performing loan statistics;
- the expected timing of adjustment of option ARM loans and the effect of the adjustment on future cash flows and liquidity, taking into consideration current trends of increased delinquency rates of ARM loans and reduced collateral values due to declining home prices; and
- the amount and percentage of customers that are making the minimum payment on their option ARM loans.
Changes in Practices
Changes in the practices you follow to determine your allowance for loan losses can impact that amount and an understanding of the credit quality information you present. If you changed your practices, please discuss why you made the change and, to the extent possible, quantify the effect of those changes. Also, consider disclosing and discussing changes in:
the historical loss data you used as a starting point for estimating current losses;
- how you incorporated economic factors affecting loan quality into your allowance estimate;
- the level of specificity you used to group loans for purposes of estimating losses;
- your non-accrual and charge-off policies;
- your application of loss factors to graded loans; and
- any other estimation methods and assumptions you used.
Declines in Collateral Value
A decline in the value of assets serving as collateral for your loans may impact your ability to collect on those loans. Consider disclosing:
- the approximate amount (or percentage) of residential mortgage loans as of the end of the reporting period with loan-to-value ratios above 100%;
- how you take into consideration housing price depreciation, and the homeowners’ loss of equity in the collateral, in your allowance for loan losses for residential mortgages. Discuss the basis for your assumptions about housing price depreciation; and
- discuss the timing and frequency of appraisals and identify the sources of those appraisals for collateral-dependent loans.
Other
To the extent relevant and material, consider whether investors would benefit from disclosure in your Management’s Discussion and Analysis regarding:
- any risk mitigation transactions you used to reduce credit risk exposure, such as insurance arrangements, participation in the U.S. Treasury Home Affordable Modification Program, credit default agreements or credit derivatives. Discuss how these transactions impact your financial statements;
- the reasons why key ratios (such as your non-performing loan ratio) changed from period to period, and how you considered this information and other relevant credit statistics in determining whether your allowance for loan losses was appropriate; and
- how your accounting for an acquisition under SFAS 141R or your accounting for loans under SOP 03-3 affects trends in your allowance for loan losses, including non-performing asset statistics, charge-off ratios, and allowance for loan loss to total loans.
Finally, although determining your allowance for loan losses requires you to exercise judgment, it would be inconsistent with generally accepted accounting principles if you were to delay recognizing credit losses that you can estimate based on current information and events. Where we believe a financial institution’s financial statements are inconsistent with GAAP, we will take appropriate action.
Please contact me if you have any questions.
Sincerely,
Senior Assistant Chief Accountant
het tip Richard
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I assume the FDIC and Treasury were cc'd on this.
Damn you Mr. Durden, why do you have to keep stirring things up? This kind of information is not supposed to get out to "idiot bloggers" like you! I can confirm that we've started receiving some of these types of letters at UBS. You want to know what we do with them? We shred them and pretend they never existed.
That is what you should be doing Tyler, ignore the existence of this information. Please go out and stick your head in the sand somewhere and do us all a favor! Our economy is trying to recover from a recession driven by a bunch of whiners like you, and posting this kind of stuff only hurts the recovery.
Don't you want this economy to succeed? It must succeed by regaining and maintaining confidence, no matter what the hidden balance sheets show. Full disclosure of information would be fatal our our recovery and possibly cause this economy to go into a depression. Is that what you want Mr. Durden, a depression?
Let me warn you that foreign investors, including the Chinese may be reading your blog. They are already skittish enough without having internal documents such as this available to their eyes. Once the foreign investors pull out of financing our debts, it's game over. Trust me Mr. Durden, you want this game to continue no matter how rigged it may be.
-- Phil
Ha HA HA,,,,,, too late.
Classic.
Dear Phil:
Obama is blowing it big time as you and your good friend John McCain must be reminiscing (snickering, tee hee...) about. Let's cut to the chase: can you please announce your candidacy for President on Zero Hedge?
Sound advice Phil. The Fed needs to operate unfettered with no restrictions or accounting to save us from ourselves. Their decisions need to be made in dark smokey rooms lit by the soft glow of sponge bob screen savers. Should all measures fail, it is imperative that the banking sector and those running it with the Fed survive. They can then repopulate the earth with women chosen to look like Robo's fembots (and who can handle a whip).
Tyler, please do not stick you head in the sand, for that leaves your ass way up in the air. Any ass left way up in the air will surely be fucked by the government, especially if you're not looking.
Those who lie, cheat and steal are disproportionately the ones writing the rules. The rules are written so they win. Then, when events quickly turn and the rules cannot be adjusted fast enough or the rules no longer satisfy them, they expect the rules to be set aside. This is further influenced through lobbying and other forms of payoffs (can you say “special job at our firm after your regulatory tenure?”). Or consider another perspective illustrated well through the Danny Dalton speech from Syriana:
Some trust fund prosecutor, got off-message at Brown, thinks he's gonna run this up the flagpole, make a name for himself, maybe get elected some two-bit, no-name congressman from nowhere, with the result that Russia or China can suddenly start having, at our expense, all the advantages we enjoy here. No, I tell you. No, sir. (mimics prosecutor) "But, Danny, these are sovereign nations." Sovereign nations! What is a sovereign nation, but a collective of greed run by one individual? "But, Danny, they're codified by the U.N. charter!" Legitimized gangsterism on a global basis that has no more validity than an agreement between the Crips and the Bloods! (Beat) ... Corruption charges. Corruption? Corruption ain't nothing more than government intrusion into market efficiencies in the form of regulation. That's Milton Friedman. He got a goddamn Nobel Prize. We have laws against it precisely so we can get away with it. Corruption is our protection. Corruption is what keeps us safe and warm. Corruption is why you and I are prancing around here instead of fighting each other for scraps of meat out in the streets. (Beat) Corruption ... is how we win.
Those who lie, cheat and steal are disproportionately the ones writing the rules. The rules are written so they win. Then, when events quickly turn and the rules cannot be adjusted fast enough or the rules no longer satisfy them, they expect the rules to be set aside. This is further influenced through lobbying and other forms of payoffs (can you say “special job at our firm after your regulatory tenure?”). Or consider another perspective illustrated well through the Danny Dalton speech from Syriana:
Some trust fund prosecutor, got off-message at Brown, thinks he's gonna run this up the flagpole, make a name for himself, maybe get elected some two-bit, no-name congressman from nowhere, with the result that Russia or China can suddenly start having, at our expense, all the advantages we enjoy here. No, I tell you. No, sir. (mimics prosecutor) "But, Danny, these are sovereign nations." Sovereign nations! What is a sovereign nation, but a collective of greed run by one individual? "But, Danny, they're codified by the U.N. charter!" Legitimized gangsterism on a global basis that has no more validity than an agreement between the Crips and the Bloods! (Beat) ... Corruption charges. Corruption? Corruption ain't nothing more than government intrusion into market efficiencies in the form of regulation. That's Milton Friedman. He got a goddamn Nobel Prize. We have laws against it precisely so we can get away with it. Corruption is our protection. Corruption is what keeps us safe and warm. Corruption is why you and I are prancing around here instead of fighting each other for scraps of meat out in the streets. (Beat) Corruption ... is how we win.
whats the point of hanging from the guillotine? Can you even get physically hanged after being through the guillotine?
Goldman and Bank of Amerika run the markets along with Geithner, and beagle boy Ben. There is no free markets, only welfare capitalism and socialism for capitalism.
good articles; good articles 4 slow news day ..http://www..
hat tip: finance news & finance opinions
"...consider disclosing..." WTF is this crap? This would be like training police officers to approach known thugs and asking them to " please consider not stabbing someone to death this evening". WTF...
Exactly.
They are posturing, nothing more. The SEC has all the bargaining chips in this deal. If they want more accurate financial reporting, then they can implement it at their convenience.
In other words, let's send out this letter and maybe get some of the bloggers, town hall persons, etc. off our backs, while at the same time not enforcing anything.
Of course, on the flip side, it may be a warning shot... get ready, this stuff is coming, and the training wheels are being removed because we've lost the political appetite to continue dumping tax dollars and our future into your organization...
Smart money is on the former.
damn time! (and why i love ZH!)
Wow! Fantastic work Tyler.
Does this imply a growing recognition of possible lynch mobs if the SEC continues to participate in fraud?
the level of stupidity you used to group loans for purposes of estimating losses?
had to read that twice..
sometimes you just can't even make $hit up this good... priceless.
Goldman and Bank of Amerika run the markets along with Geithner, and beagle boy Ben. There is no free markets, only welfare capitalism and socialism for capitalism.
good articles; good articles 4 slow news day ..http://www..
hat tip: finance news & finance opinions
I read this and foresee a quick retraction forthcoming. I don't see this as helping the banks, nor the administration.
Can the same old "system is collapsing" trick work again, and to what gain for the government? If they stick to their guns as indicated in this letter, we are back to stress tests and Tarp2 for certain... and I don't know how Obama profits from that.
By the way, havn't read anything from TD about the porsche issue. I read somwhere that they had about 3-5 billions more than previously thought when they showed their books to vw. Now if this is true, and if the ermans who are known for their perfectionism can do that when it comes to finance(probably with help of db and other bankers),then what does that tell us about their comrades here?and what about the likes of Immelt who was selling his shares before the decision to cut the dividends and the immenet collapse of the stock back in Jan(of course after gs had access to their books as they were the bookrunners for their fdic bond offering)
"TARP 2-inifity"
I'm guessing an intentional mash-up of "nifty" and "infinity"? Makes sense to me!
Wondering how Credit Suisse Barclay s and others are going to react.
Thought as well they could have been reminded,doubtful loans start with 90 days unpaid interest.
Several debt restructuring without interest payments fall in above category.
Would be informative to shareholders to be provided with detailed informationon this subject Why not ?
Wankers Stress Test??? UFB...
a great snark.
Phil G. said what is likely to happen--shred and pretend it never happened...and anyway, we all know that the TBTF don't answer to anybody, and our government is the lackey to the privately held Federal Reserve corp and it's agents, the TBTF--we all have to bow down, and worship these sacrosanct entities, and accept, our future depends on supporting these monstrosities, and they, and nothing else, matter--just print the money to send over to fill the black hole, and make sure all citizens pay their tax bill to keep the money train flowing into the black hole.
Yes Phill,..let´s lie our way to recovery,..they will write phd´s on that when all this is over!
It has become a joke how the cheerleaders at CNBC can only see "green shoots".
Goldman and Bank of Amerika run the markets along with Geithner, and beagle boy Ben. There is no free markets, only welfare capitalism and socialism for capitalism.
good articles; good articles 4 slow news day ..http://www..
hat tip: finance news & finance opinions
How does this affect the loan consumer? I would really like to hear some clear directions. I only have a payday loan and I plan to get another after I pay the current loan. Would you consider the second loan a high risk loan?