Posts filed under “Legal”

What is the Intent of Fair Value Accounting?

It looks like the FASB is in full retreat on fair value accounting.  Below is an artifact from the period we published today in The IRA.  Author is a very well respected analyst who worked for the Fed in the 2007 period and tried to sound a warning about the supervisory implications of a FVA regime.  I am going to do a victory lap at AEI today when we convene the latest “Deflating Bubble” session. – Chris

The Institutional Risk Analyst

March 17, 2009

The following article on fair value accounting (“FVA”) was authored in May 2007 by a researcher who at the time worked for the Federal Reserve System. The paper, which was not approved for publication by the Fed Board’s bank supervisory staff, outlines some of the issues in a transition to FVA, issues that have turned out to be critical. Many of these issues now may be obvious to students of financial institutions and the general public thanks to the financial crisis, yet two years ago the paper was dismissed by the Fed’s staff in Washington. To us, the story around this article provides yet another example of how the intellectual closed-mindedness of the Fed’s Washington staff results in bad public policy.

Some background for context. The Fed and other bank regulators historically did not push back on supervised firm accounting “choices” or otherwise second guess the external auditor on valuation issues for financial firms. That is, if a financial firm could get its paid accountant to sign off on a choice of valuation methodology — choices which in many cases are based purely on “stated intent” at the time to hold an asset for sale or to maturity, then the paid regulator at the OCC (figure roughly 50 examiners for each too-big-to fail bank) and its more poorly staffed step-brother, the Fed (roughly 7 examiners per TBTF bank), would simply accept the decision without question or review.

During the bubble years, the author and other members of the federal bank supervisory community fought internally and with the banks against apparent inconsistencies in accounting choices — for example, the same large bank would put a big chunk of liquid exchange traded equites that turned over frequently into AFS, while putting illiquid slow-to-turn distressed debt in trading. Most regulatory accountants, though knowledgeable and well meaning, were in some sense lazy, as they felt it much more important to maintain GAAP and regulatory accounting parity, then it was to have more correct reporting based on actual facts and behavior.

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Category: Legal

Sesame Street explains the Madoff Scandal

1:18 JimmyKimmelLive March 12, 2009

Category: Humor, Legal

When Smart People Do Dumb Things

Joe Nocera had a brutal — and brutally honest — column today. He essentially states that the Madoff victims were willing accomplishes through their own naivete and bad judgment. “And yet, just about anybody who actually took the time to kick the tires of Mr. Madoff’s operation tended to run in the other direction. James…Read More

Category: Legal, Regulation

Charlie Rose: William Donaldson & the SEC (2003)

The conversation about the SEC with William Donaldson begins at 31:37


2003, 26 minutes

Category: Bailouts, Legal, Video

Madoff in Prison

In all the week’s lunacy, we neglected this story — which can be resolved with a simple cartoon: > via Time Magazine

Category: Humor, Legal

How a Loan Becomes a Scam

The Seattle Times has an interesting look at Mortage fraud cases, showing how real-estate insiders were scamming the system for profit: > How a Loan Becomes a Scam Publish at Scribd or explore others: Finance & Investing Business & Legal mortgages real estat Former Bellevue loan officer is expected to appear for sentencing in federal…Read More

Category: Credit, Digital Media, Legal, Markets, Real Estate

McCain & Shelby: “Let Insolvent Banks Fail”

“Close them down, get them out of business. If they’re dead, they ought to be buried.” -Richard C. Shelby, the senior Republican on the Banking Committee, on ABC’s “This Week” > Thus, the strangely inverted world of bank bailouts continues. Republicans who started the entire lurch towards Socialism under George W. Bush at least understand…Read More

Category: Bailouts, Credit, Legal, Politics, Really, really bad calls

iBanks Grabbed $50 Billion in AIG Bailout Cash

Yesterday, in Backdoor Bailouts for Goldman Sachs?, we noted that GS, as well as Morgan Stanley, Merrill Lynch, and Deutsche Bank, were all made whole on their bad bets with AIG. That’s right, what was misleadingly described as systemic risk turned out to be in large part little more than a counter-party bailout — money…Read More

Category: Bailouts, Corporate Management, Finance, Legal, Markets, Politics, Really, really bad calls

Cramdown Implications

An interview with Paul Van Valkenburg of Mortgage Industry Advisory Corp. regarding the Mortgage “Cramdown” Legislation and what does it implies. (Bloomberg News)

Category: Credit, Legal, Real Estate, Video

Should Ratings Agencies Disgorge “AAA” Fees on Junk ?

A new Bloomberg column on the rating agencies: “Standard & Poor’s called for more regulation of credit-rating companies, recommending a global framework that would eliminate potential conflicts of interest, increase transparency and create an industry code of ethics. New rules should ensure ratings are independently derived and unbiased, the methodologies used are disclosed, and regulators…Read More

Category: Credit, Derivatives, Legal