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

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

Troubled Senate bailout plan: What’s a troubled asset?

109 pages were not enough to drown dissent in the U.S. House, but maybe an entire ream will be. The latest Senate bank bailout bill fills 451 pages. Despite its length, it features stunning gaps in logic. What else should we expect from roughly 350 pages of legalese written between Sunday and Wednesday afternoon?

Example: The entire bill is aimed at empowering the Secretary of the Treasury to buy “troubled assets,” defined in the excerpt reproduced below. Included among these poor creatures are things they call “other financial instruments” which the drafters forgot to define. Maybe it was intentional? Observe: Continue reading

Memo to Congress: SEC already has power to abolish mark-to-market

Fair value accounting is coming under fire, now, from various directions including Newt Gingrich and a number of banks and economists. Apparently, some banks (though not all) think it unfair that Wachovia should be bought for $2.16 billion when it’s balance sheet reports $75.1 billion in net assets. Continue reading

Bank bailout commentary: Not so fast!

Haste makes waste. Any time 535 people reach an agreement this quickly, you know most of them did not even read it before signing off. That, sports fans, is how we got into this mess to begin with.

What remains to be seen is whether the measure will pass (probably) and whether the markets will be fooled (possibly). Early signs are not good with the Dow off 300 points, as I write. However, one should never overestimate the intelligence of investors who, after all, bought all of those mortgage-backed securities in the first place.

From a starting point of three pages last week, what appears to be the agreed bank bailout legislation runs to 109 pages of text that will generate millions if not billions in legal fees over the next five or ten years. My preliminary observations are as follows: Continue reading

Lynn Turner: Fair value accounting didn’t cause banking crisis

As fur flies in Washington over technicalities of the government’s proposed bank bailout, ordinary mortals may feel left out of the conversation if for no other reason than the rarified vocabulary of the debate. What, for example, is this thing called “fair value accounting”? Why should anyone but accounting geeks care?

One answer comes courtesy of Lynn Turner, former SEC Chief Accountant, who today circulated a message reproduced below with his permission: Continue reading