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

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

IBD wrong on bailout: Bill is too short, gives too much power to Treasury

“The market is waiting. The time to act is now.”  So said Investors Business Daily, yesterday.  In support of their call for Congress to just “sign off now” on Secretary Paulson’s plan to rescue U.S. banks, IBD’s editors point to the proposal’s brevity and “focus” and imagine — how is impossible to say — that it doesn’t give too much power to the Treasury: Continue reading