I often see eye-to-eye with Bill Fleckenstein. Hell, he is the one who urged me to write Bailout Nation; He even wrote the forward to it.

We may disagree on the perceived strength of the SEC vs GS case — but what we don’t disagree about is what the Financial Accounting Standards Board (FASB) has done to accounting standards.

As far as investors are concerned, they have eliminated them. There is essentially no oversight of companies by accountants any longer. Accounting statements are all but worthless.  Frauds like Enron, Lehman Brothers and Overstock.com are everywhere. Companies can hide risk from investors, misstate earnings without fear of reprisal, engage in any manner of deceptive gamesmanship.

There are many reasons to buy various publicly traded companies — but what they report in their balance sheets ain’t one of them.

Here’s Fleck:

The FASB and the dog that ate due diligence
The SEC also ought to consider pursuing the Financial Accounting Standards Board for helping denigrate accounting standards to the point that so much smoke and mirrors could pass for legitimacy.

Had real accounting standards been at work, they likely would have prevented the banksters from walking away with fortunes while they built financial instruments of mass destruction.

All too true . . .

>
Source:
Goldman-deal gamblers knew the score
Bill Fleckenstein
MSN Money, 4/23/2010
http://articles.moneycentral.msn.com/Investing/ContrarianChronicles/goldman-deal-gamblers-knew-the-score.aspx

Category: Legal, Valuation

Please use the comments to demonstrate your own ignorance, unfamiliarity with empirical data and lack of respect for scientific knowledge. Be sure to create straw men and argue against things I have neither said nor implied. If you could repeat previously discredited memes or steer the conversation into irrelevant, off topic discussions, it would be appreciated. Lastly, kindly forgo all civility in your discourse . . . you are, after all, anonymous.

39 Responses to “Fleck: SEC Should Sue FASB”

  1. Pat G. says:

    The SEC is too busy watching porn. If “accounting statements are all but worthless, there is essentially no oversight and companies can misstate earnings without fear of reprisal, engage in any manner of deceptive gamesmanship” …then how does an investor perform due diligence and have any confidence of being even remotely correct in their selections? Oh, and let’s not even mention the ratings agency. What is the point of playing this game?

  2. drewburn says:

    What a great idea! Could they do that? Could shareholders? I’m in for a big class action suit.

  3. ubnutsagain says:

    Let’s see here, Fleckenstein opined about accounting standards using the following terms:

    “… denigrate accounting standards to the point that so much smoke and mirrors could pass for legitimacy …”

    and

    “Had real accounting standards been at work…”

    Did he (or his cheerleader BR, who agrees) elaborate upon precisely what he refers to in each case, giving examples of denigrated standards on the one hand and real standards on the other?

    Absent that, this particular TBP blog entry is nothing but words.

  4. jjay says:

    The entire system is corrupt, top to bottom.
    You have to live in that world, so be aware it as all one big Argentina/Brazil/Zimbabwe.
    Just trust no one for too long, and figure everyone is a thief at heart.
    The system is much more likely to collapse than it ever is to be reformed.
    Madoff, Sanford, and their ilk were known for what they were, and TPTB just let it happen.
    Ditto for Fannie, Freddie, NAFTA, CAFTA, Open Borders and Free Trade.
    Bedford Falls and Jimmy Stewart are only in the movies.
    Mr Potter and Potterville rule, now and forever!

  5. stevelaake says:

    ubnutsagain, start with an easy one:

    the suspension of mark-to-market accounting rules under FAS 157 in 2009.

  6. ubnutsagain,

    If doing your own Homework is to difficult, try: http://www.cfo.com/article.cfm/14491629?f=insidecfo

    and, http://www.google.com/search?hl=en&q=new+FASB+rules+oil+reserves&aq=f&aqi=&aql=&oq=&gs_rfai= for starters..

    forgetting, of course, all about this: “…The U.S. Financial Accounting Standards Board Rule 157, which is effective for fiscal years that begin after November 15, 2007, will make it harder for companies to avoid putting market prices on securities considered hardest to value, known as Level 3 assets, the wire service reported.

    ”The heat is on and it is inevitable that more players will have to revalue at least a decent portion” of assets they currently value using ”mark-to-make believe,” Bob Janjuah, Royal Bank’s chief credit strategist, reportedly wrote in a note published Wednesday.

    Janjuah noted that, for example, Morgan Stanley has the equivalent of 251 percent of its equity in Level 3 assets, Goldman Sachs has 185 percent, Lehman Brothers has 159 percent and Citigroup has 105 percent, according to Bloomberg…”–aspect of the diorama..
    http://www.cfo.com/article.cfm/10097878

  7. It was said that the battles with Clinton were what built the right wing media.

    I think the last ten years of financial chicanery are the catalyst for what is a sharp, flanking, effective financial blogosphere. It would have been built eventually but the current econ battles are the galvanizing force.

    In great times of turbulence and upheaval great foils are built

    You guys are laying the foundations of a revolutionary legacy and I can only thank God for that.

    Truth has found a way again

  8. bsneath says:

    Why did every organization with some facet of responsibility in assuring integrity within the financial system seemingly fail at their designated task?

    A failed experiment in self regulation?
    A change for the worse in basic values and ethics?
    Technology driven complexity that they could not keep up with?

  9. Sircornflakes says:

    The day they relaxed the whole mark to market requirements, the inmates were once again in charge of the asylum.

  10. Forbes says:

    April 2 (2009) (Bloomberg) — The Financial Accounting Standards Board, pressured by U.S. lawmakers and financial companies, voted to relax fair-value accounting rules that Citigroup Inc. and Wells Fargo & Co. say don’t work when markets are inactive.

    http://www.bloomberg.com/apps/news?pid=20601087&sid=agfrKseJ94jc

    FASB is guilty of caving in the face of congress threatening to legislate the changes to FASB 157 and as I understand it you cannot sue congress.

  11. I thought every TBP was nothing byt words — excepr for the ones with charts or video.

    But this one? Northing but words…

  12. super_trooper says:

    Let’s get specific, rather than just wishful thinking.
    Which SEC rule did FASB break?

  13. Mannwich says:

    This chart says all you need to know about the legitimacy of the so-called “markets”. It’s all about the bubbles, folks. That’s all we have left because the Fed can’t stop tinkering and causing bubbles and busts.

    http://www.zerohedge.com/sites/default/files/images/user5/imageroot/spx_bubbles_3.png

  14. greg says:

    Could someone here give an actual example of a level 3 asset? From the link Mr Hoffer provided earlier it would appear these assets are worthless at any given time.

  15. constantnormal says:

    @Mannwich 6:05 pm

    I found that chart a bit simplistic, as I believe the origins of the housing+credit bubble extend back to the dawn of home equity loan popularity in the 1980s, a tendril of evil creeping out of the S&L destruction and growing until it became threatening, consuming home equity that provided economic stability along the way.

    The world is not as simple as the serial bubble model, it’s closer to a percolating coffee pot, with multiple bubbles being created all the time.

    Perhaps this is the way that capitalism is supposed to work, and our problem lies in the reinforcement of bubbles by the Fed, other regulators, and industry, allowing them to expand to dangerous size and scope before imploding.

    If there were no bubbles, the economy would be a pretty tepid place, with less creative destruction to spur progress along.

    Please note that I am not an advocate of bubble economies, but I think that it’s possible that (small) bubbles may be necessary agents of change. Huge bubbles, like the ones indicated in that chart, are a bit of too much of a good thing.

    The problem, as you (and others) have indicated, is that the regulatory agencies (Fed, Treasury, SEC, CFTC) and Congress are rewarded by having bubbles grow to pernicious size, mostly by the corrosive and corrupt practices of money-fueled lobbying by the bubble industries themselves.

    Unfortunately, until we have soul-searing punishment at the level of the Great Depression or societal breakdown, people will not be motivated sufficiently strongly to do anything about it.

    Enjoy our descent into Hell.

  16. bill750 says:

    Uh, it’s “foreword”, not “forward”. I know that and I didn’t even write a book…

  17. VennData says:

    The idea of suing FASB presents fairly the representations of this blog in accordance with generally accepted moral principles.

  18. Mannwich says:

    @constant: I agree, but I think it’s clear the last 15 years or so there has been constant bubble blowing that has coincided with the Fed stepping in since the crash of ’87 to lower interest rates every time things got wobbly in the markets. This has served to help prop up assets at all costs and thus distort behavior more so than prior time periods since the ending of WW II. Combine this with the whole anything-goes deregulation mantra/mania, cultural, ethical, moral rot, and void of true leadership everywhere in business and government, and you get a constant roller coaster and recipe for disaster.

  19. greg says:

    So nobody knows what a level 3 asset is?

  20. greg says:

    Interesting. BR, either no one in the accounting industry reads your blog, or more probably, they recognize there is no way to convincingly describe what a level 3 asset is. Maybe someone from Goldman could weigh in.

  21. constantnormal says:

    @greg

    http://www.investopedia.com/terms/l/level3_assets.asp

    What is the value of a busted mortgage on a house in a neighborhood where nobody wants to live? It has a value, but the “valuation function” for this asset is very fuzzy, and possibly intermittent. That would be an example Level 3 asset. Not the sort of thing that any rational bank wants to own.

    The mark-to-market rule said (essentially) that all assets were valued by what they would fetch at auction. When that rule was altered, it was changed to read that assets could be valued by pretty much whatever means the holder thought reasonable. Suddenly a lot of toxic crap had value, and the banksters were saved from their own bad judgement.

  22. constantnormal says:

    @greg

    Another example of a Level 3 asset might be a derivatives contract that is thinly traded. For example, suppose you hold a call option to buy GS @ $200, good through the end of this year. How would you value it on your books?

    You might use the Black-Scholes model to value it under current accounting rules, or you might draw a line on a chart and project a value for the underlying GS stock, and back into a value that way. Yes, it’s bogus, but it’s currently legal.

    I believe (I am not an accountant) that options contracts used to be carried on the books at values of zero.

    More enlightened (or more inquisitive) readers are encouraged to correct me on anything I have put forth here.

  23. greg says:

    Constantnormal… as per your example of a busted mortgage in a neighborhood nobody wants to live in, the answer is simple, the value for the purposes of this quarters earnings report for the company who holds it would be zero. If things change we bring it back on the balance sheet at that time.

  24. constantnormal says:

    @greg

    is this your opinion of how things are, or how they ought to be?

  25. greg says:

    Constantnormal…as far as option contracts, there is always a value. You would simply value it using the closing price on any given day. Even thinly traded options always have a value.

  26. constantnormal says:

    here’s another link that covers Level 1, 2, and 3 assets:

    http://www.wikinvest.com/wiki/Level_1,_Level_2,_Level_3_Assets

    It appears that my earlier example of a GS options contract is a bad example, as there is plenty of activity on that particular contract to use to establish a value.

  27. greg says:

    Constant….it unfortunately is not how it is, but I believe how it should be. Like most things in life, it seems the more we can make them complicated, the better we like it. An asset is either an asset or it isn’t, at any given time. Report it that way, and I’ll make my own decision on whether to value it sometime in the future.

  28. constantnormal says:

    @greg

    “Even thinly traded options always have a value.”

    Nonsense. I’ve seen options contracts that have not traded for weeks at a time. If there is no bid-ask, or if the spread is sufficiently wide, there is no effective valuation for that contract. Yes, you can use models to estimate a value, but so long as there are no contracts being traded, the next sale can occur either after the company announces bankruptcy or discovers oil in their parking lot. And the value of that next contract sale will mark the value for all identical contracts.

  29. dss says:

    The genesis of the market meltdown has direct roots in the absolute belief in laissez-faire capitalism which has been thirty years in the making:

    Laissez-faire is synonymous with what was referred to as strict capitalist free market economy during the early and mid-19th century as an ideal to achieve. It is generally understood that the necessary components for the functioning of an idealized free market include the complete absence of government regulation, subsidies, artificial price pressures and government-granted monopolies (usually classified as coercive monopoly by free market advocates) and no taxes or tariffs other than what is necessary for the government to provide protection from coercion and theft and maintaining peace, and property rights.

    The primary difference in today’s laissez-faire capitalism is that the banksters and others were protected and rewarded while the rabble took it on the chin, but laissez-faire has been seen as business’s best friend.

    In the aftermath, it is socialism for Wall Street, capitalism for Main Street, while you still hear the bleating about the free market. It will be very difficult to go back to when financial regulation was regarded as the necessary cop on the corner and FASB standards were regarded as inviolate. I remember a time not long ago when investing in foreign countries was frowned upon because of their lack of accounting standards as compared to the US.

  30. greg says:

    Constant…thanks for the links. I have read them but I think they only help to make my point. Why are they even graded as level 1 or 2 or 3? There is only one level of asset, it either is one or it isn’t.

  31. constantnormal says:

    Sadly, we do not live in a deterministic reality. There are answers that we cannot know, and there are questions that have no answers.

    But I do believe that we should endeavor to make accounting as deterministic as possible, with as few situations that require subjective opinion or judgement as possible. Sadly, the financial industry lobby likes it better the way things are today, where reality can be bent or warped as necessary to achieve the happy balance sheet. And what the lobbyists want, they purchase.

  32. greg says:

    Constant…I respectfully think you are wrong about option contracts. I trade them a lot, and have never seen one without a bid/ask.

  33. greg says:

    Constant.. got to get some sleep. Thanks for your input and discussion. Maybe a Goldman employee or and Arthur Anderson alum will happen upon this thread and illuminate both of us.

  34. buckykatt says:

    Bill F. is correct. Again.

  35. mark says:

    This is what happens in a bubble. Always has. Always will. At some point the only thing people care about is making money and as long as prices are rising and the cash is flowing people stop asking questions or caring about the answers.

    The only people who say anything are “outsiders”. As long as the money rolls in everyone in actual authority self censors, self deludes, eventually goes along, is fired or quits.

    Ask Brooksley Born or Chuck “Gotta Dance” Prince.

    The fact that nothing has been done about FASB, inter alia, tells you that the bubble ain’t done yet.

  36. dsawy says:

    I think Fleck is off target here.

    FASB is a 501(c)(3) organization; they, unlike the ratings agencies, don’t have any special government status as far as I know. FASB creates accounting standards for public corporations; the SEC is who demands compliance with those standards. Further, the SEC has the statutory authority to set accounting standards for public corporations.

    Let’s go to the SEC website for their propaganda:

    “The Chief Accountant is appointed by the Chairman to be the principal adviser to the Commission on accounting and auditing matters. The Office of the Chief Accountant assists the Commission in executing its responsibility under the securities laws to establish accounting principles, and for overseeing the private sector standards-setting process. The Office works closely with the Financial Accounting Standards Board, to which the SEC has delegated authority for accounting standards setting, as well as the International Accounting Standards Board and the American Institute of Certified Public Accountants.

    In addition to its responsibility for accounting standards, the Commission is responsible for the approval or disapproval of auditing rules put forward by the Public Company Accounting Oversight Board, a private-sector regulator established by the Sarbanes-Oxley Act to oversee the auditing profession. The Commission also has thorough-going oversight responsibility for all of the activities of the PCAOB, including approval of its annual budget. To assist the Commission in the execution of these responsibilities, the Office of the Chief Accountant is the principal liaison with the PCAOB. The Office also consults with registrants and auditors on a regular basis regarding the application of accounting and auditing standards and financial disclosure requirements.”

    (From: http://www.sec.gov/about/whatwedo.shtml)

    OK, so let’s get to the nut of the issue here:

    If the SEC thought that FASB were creating and promulgating accounting standards that were insufficient or conducive to fraud, and the SEC could not prevail upon FASB to change said standards, the SEC could pull all public corporation accounting back within their own offices and enforce public accounting from their own offices.

    So, Barry, you’re a lawyer: You tell me how the SEC can go after FASB now, when they have made no effort to compel FASB to change anything, after voluntarily delegating accounting standards to FASB? Isn’t there a need for the SEC to have shown a problem with FASB prior to this? Would not the SEC need to exhaust their regulatory powers to require changes from FASB or to set/change accounting standards themselves before going after FASB ex post facto?

    Further, there’s supposed to be a second check on public corporation accounting here: The Public Company Accounting Oversight Board (hereinafter let’s call it the PCAOB). After the last time Congress got their panties in a wad about corporate accounting fraud and thimblerigging, they hollered and whooped until they passed SarbOx in 2002. PCAOB was part of the fallout from SarbOx. On paper, it sounded all so well and good, right?

    OK, so where’s any hint of scandal or fraud from PCAOB? Let’s take not Goldman, but Lehman, the bank about which we can currently say had the biggest accounting fraud of any of them out there. Where was the PCAOB? Where was SarbOx in preventing this melt-down? Where was the SEC? FASB comes rather late in the line of people to blame here, IMO. PCAOB should have been all over Ernst & Young immediately after Lehman blew up. How could a bank that was solvent and in good shape blow up like that… unless the books were completely cooked. Turns out, the books were cooked. Why is it going to take 2+ years for the PCAOB to even consider opening an investigation on Ernst & Young for their absurd sign-off on Lehman and their use of Repo 105?

    Or let’s take KPMG and their sign-off on Allied Capital? Where was PCAOB on that? Or on KPMG and New Century?

    I’m not saying that FASB is blameless here. I’m saying (emphatically) that the SEC failed (through PCAOB, FASB or their own aegis) to enforce the rules of accounting as they existed. What’s the point of worrying about newer, more stringent accounting standards if not even the existing (and admittedly lax) standards are not going to be enforced?

    Let’s call a spade a spade: The SEC is a failure. A complete failure on all fronts, in all divisions where they have statutory and regulatory power over Wall Street. Period, full stop. They had the authority to act, they had the means to act. They didn’t act. They were busying watching “Bambi Does DC,” and “Congressional Interns Gone Wild,” obviously.

    As for the prior claims I’ve seen that SEC had insufficient funds to enforce law/regulations properly: If Markopolos could deliver Madoff to the SEC *multiple times* on a platter, with all the math already done so that the precious little lawyers in the SEC needn’t have troubled with nasty, icky stuff like numbers and mathematics… it isn’t a lack of budget and money that is causing their problems. The “porn at the SEC” issue finishes driving home the central problem here: They’re lazy. They’re bone-idle, good-for-nothing layabouts.

    Government agencies don’t need more money. They need to have the bone-idle morons fired and replaced by some people with a work ethic. These bone-idle morons need to be fired, their pensions and benefits stripped from them, any security clearances they hold be pulled and they need to be booted out the door. They had a job to do. They not only failed in that job, they failed to even attempt to do the job. The only way that government agencies will start to perform is if there are consequences for failure to perform.

  37. Ole Drippy says:

    Long time voyeur, first time poster..

    I believe a good example of a level 3 asset would be something like an ARS (Auction Rate Security). When the market dried up there were all those investments out there STILL PAYING INTEREST, that had zero value because, “something is worth what you pay for it”. If there is no market, it makes that “thing” worth zero. Since the ARS were still paying interest (some of which paid a lot of interest due to default rates in the contract). FASB 157 was an attempt to assign some value to products in a dry market.

    I am as or more cynical than most, but making sweeping generalities that FASB 157 allows companies to make worthless assets less worthless may be a bit harsh. I’m sure plenty of companies will prove me wrong.

  38. normal1 says:

    E.F. Moody has long been critical about the “guardians” of our financial system…

  39. wsm3 says:

    ubnutsagain is right – Fleck’s article lacks elaboration upon exactly what ‘denigrated accounting standards’ he is referring to. This is because the standards themselves are not flawed, if you actually understand them.

    dsawy has it right in showing us that it is the SEC which is at fault for not ENFORCING the standards. The standards themselves are actually quite clear and would be effective if enforced.

    Hoffer and stevelaake are off base in blaming the standards as well. And Hoffer’s articles do not even address ‘flaws’ in the standards – they just show that the SEC allowed enforcement of such standards to be postponed/eliminated.