Barney Frank to FASB: Quit pretending to so much reality and certainty in fair value accounting!

Today, in congressional action sure to give every internal auditor and financial analyst recurring nightmares, members of the U.S. House Capital Markets Subcommittee demanded that the Financial Accounting Standards Board (FASB) demonstrate greater flexibility and speed in changing market-to-market (or “fair value”) accounting rules in the face of today’s financial industry crisis, or else. Much of the commentary came across as a congressional call for an IASB-like principles approach in place of the FASB’s detailed rules-based approach.

House Financial Services Committee Chair Barney Frank (D-Mass) and Capital Markets Subcommittee Chair Paul Kanjorski (D-Pa), each in his own way, stated that mark-to-market accounting must be applied differently to different companies and industries based on their respective circumstances that changed must happen now, not later after more “academic” study. In his opening statement, Kanjorski declared:
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Everybody cheer! KBR & Halliburton settle bribery case . . . what about Bernie Madoff?

Yesterday, the SEC announced that KBR and Halliburton have settled their Foreign Corrupt Practices Act case with the SEC and Department of Justice for total fines and disgorgement of $579 million.   The underlying bribes apparently totalled far less: a mere $5 million paid to a Nigerian political party for a train contract.

At this point, a voice inside my head keeps screaming, “What about Madoff?!”  The FCPA violation alleged here is essentially a victimless crime, functionally a penny-ante “bailout” of a few Nigerians that actually helped the companies’ shareholders.  Yet, this SEC complaint is undersigned by no fewer than six SEC attorneys who, judging from the factual timeline, were busily engaged on this case — together with uncounted DOJ counterparts — over at least the past five years while Bernie Madoff made off with $30-50 billion belonging to investorsContinue reading

Harry Markopolos undresses the SEC: Is Mary Schapiro the right one for this job?

On Wednesday last week, while most of the nation was transfixed by “stimulus plan” negotiations, the U.S. House Capital Markets Subcommittee held a little-noticed hearing, featuring uber securities sleuth Harry Markopolos, that could rock U.S. securities regulation to its core.  As a financial markets player, attorney and professor for over twenty years, I have seen some amazing things in domestic and international financial markets. However . . .

Nothing in my recollection quite equals the drubbing that Markopolos unleashed on the SEC last Wednesday morning.  The first 64 pages of Markopolos’ written testimony should be required reading for every financial markets professional and, drumroll, every U.S. senator and representative with a hand in upcoming securities-market legislation.  To hear Markopolos tell it, what we need at the SEC is not more money but more brains and fewer arrogant attorneys.

Among the long list of disturbing revelations at pages 62-64 of the 375-page submission: Continue reading

Bernie Madoff, James Madison and public virtue

James Madison saw Bernie Madoff 220 years in advance. That so many supposedly bright people were duped by Madoff testifies to their ignorance or disregard of history and to what may be an approaching nadir in the cycle of American public virtue.

At the Convention called by the Commonwealth of Virginia to debate the newly proposed U.S. Constitution, Madison declared, in support of the Constitution:

But I go on this great republican principle, that the people will have virtue and intelligence to select men of virtue and wisdom. Is there no virtue among us? If there be not, we are in a wretched situation. No theoretical checks, no form of government, can render us secure. To suppose that any form of government will secure liberty or happiness without any virtue in the people, is a chimerical idea. Continue reading

Bernie Madoff’s Ponzi play: If it’s too good to be true, it isn’t true

Every time I think I’ve seen the biggest scam ever, a bigger one comes galloping over the horizon.  Well, I take it back.  Bernie Madoff’s is dwarfed by TARP.  Let’s call Bernie’s the biggest scam by a single individual.  Fifty billion dollars is enough to put a dent in almost anyone’s checking account.

For lay readers, the document currently circulating as Madoff’s “indictment” is not an indictment in technical legal terms.  Indictments are handed down by grand juries.  This document is a criminal complaint filed with the court by a single complainant who, in Madoff’s case, happens to be an FBI agent.  An indictment may follow.  Whatever the nature of the document, the key lesson for readers is one that American investors, especially, seem reluctant to internalize. Continue reading

Not so fast, Johnathan Weil: Citigroup & the fair value illusion

Johnathan Weil called on Citigroup today to “properly confess” the “rot on Citigroup’s $2.1 trillion balance sheet.”  Weil is sure the rot is there because if it weren’t Citigroup “wouldn’t have needed last week’s government rescue [including] a new $20 billion investment by the Treasury Department, plus a guarantee covering about $306 billion of the bank’s assets against most losses.” I beg to differ.

The “rot” may well be an illusion created by poorly-drafted accounting principles applied in draconian fashion by auditors spooked by the specter of ruinous lawsuits.  Citigroup’s request for government assistance may well be an appropriate strategic response to the illusion.  In the market place, a good illusion beats a bad reality most any day.

Weil assumes facts not in evidence and arguably misapplies SEC regulations in demanding the Citi book losses now.  Under SEC rules, Citigroup would be obligated to “confess” losses on Form 8-K only if Citi’s board concludes that a material charge for impairment is required under generally accepted accounting principles.  If the board either has concluded that such a charge is not required or has not yet concluded that one is, no Form 8-K confession is called for. Continue reading

“A long history in distress”: Senator Schumer in Rule 10b-5 stock fraud scheme?

Many Americans think of stock fraud as a one-way street in which a seller tricks buyers by overstating the value of equity or debt. The reality is, fraud cuts both ways. Lying low is just as fraudulent as lying high. Senator Chuck Schumer (D-NY, pic right) should know. He is a member of the Senate Banking Committee and represents America’s financial capital.

Yet, evidence suggests that when Senator Schumer triggered the collapse of IndyMac Bancorp back in July, he may have been trying to manipulate downward the company’s value on behalf of campaign contributors who were looking to buy. If true, Schumer could be prosecuted or sued for securities fraud.

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For the good of investors, FASB should withdraw its loss contingencies disclosure draft

I have long suspected that “protecting” America’s financial statement users from “bad” financial statements is a futile task.  The FASB’s efforts at revamping its Statement 5, on loss contingencies, confirms the suspicion.  It’s not that we have too many bad financial statements.  It’s that the users — including some who hold advanced business degrees and certifications — lack common sense.  Common sense may also be in short supply at the FASB. Continue reading

Wachovia deal says “fair value” is higher when the government stays away

Great news just in from Wachovia: It’s “fair value” rose by an astonishing 750 percent overnight, to $15.1 billion from $2.16 billion. That’s right. Yesterday at this time, Wachovia was supposedly worth only $2.16 billion — in the eyes of government regulators who were trying to force it into an arranged marriage with Citigroup. Turns out that the regulators were wrong. The market had other ideas.

Congress take note: regulators can get it wrong on both ends — high and low. Lucky for Wachovia’s shareholders — and the financial markets — Wachovia’s board didn’t listen. Best to let the market do its work and get out of the way.

Speaking of which, what about U.S. GAAP’s “fair value” accounting regime? How much was Wachovia really worth 24 hours ago? Either U.S. GAAP was lying then or it’s lying now. What’s the point of having companies report assets at “fair value” when fair value is so context-dependent and fluctuates by 750% in a matter of hours? Fair value makes sense in some contexts, particularly in highly liquid markets. In others, it is likely to be materially misleading.