FHLB Chairman Disgusted With FDIC Accounting Alchemy, Quits

[girl gone mad]

From http://zerohedge.blogspot.com/2009/04/fhlb-chairman-disgusted-with-fdic.html">Zero Hedge:

FHLB Chairman Disgusted With FDIC Accounting Alchemy, Quits

When the man in charge of the second largest borrower in the U.S. is willing to lose his job due to his discomfort with the FASB's shift in accounting rules, you can bet that the tragic fallout of all the "market buoying" recent events is only a matter of time.

Somehow this noteworthy event, which happened over a week ago, passed substantially unnoticed until Zero Hedge friend Jonathan Weil at Bloomberg dug it up. Charles Bowsher, who was most recently Chairman of the Federal Home Loan Bank System's Office of Finance and previously served as U.S. comptroller general may be the only truly honorable man in the socialist nexus of politics and finance. The reason for his departure from this critical post - his discomfort in vouching for the banks' combined financial statements. And as Weil puts it succinctly: "Now the question for taxpayers is this: If Charles Bowsher can’t get comfortable with these banks’ financial statements, why should anybody else be?" Why indeed.

If Bowsher was merely involved with some marginal organization, this could be perceived as a hypocritical attempt to score populist brownie points. However, the FHLB is among the governmental entities at the heart of the current problem. Zero Hedge has written previously about the FHLB and its critical role in the ongoing housing crisis, but in a nutshell "The Office of Finance issues and services all the debt for the 12 regional Federal Home Loan Banks. That’s a lot of debt -- $1.26 trillion as of Dec. 31, making the FHLBank System the largest U.S. borrower after the federal government. The government-chartered banks, which operate independently, in turn supply low-cost loans to their 8,100 member banks and finance companies. If any of the FHLBanks were to fail, taxpayers could be on the hook."

Ah, the poor taxpayer about to get duped one last time. And the immediate reason for Bowsher's decisions: his concern with the methods used for determining when losses on hard-to-value securities should be included in banks’ earnings and regulatory capital. And it gets much worse...

http://zerohedge.blogspot.com/2009/04/fhlb-chairman-disgusted-with-fdic.html">More...

[aquart]

1. Oh, dear.

[elleng]

2. About FASB:

http://en.wikipedia.org/wiki/Financial_Accounting_Standards_Board

In 1984, the FASB formed the Emerging Issues Task Force (EITF).<1> This group was formed in order to provide timely responses to financial issues as they emerged. This group includes 15 people from both the private and public sectors coupled with representatives from the FASB and an SEC observer.<2> As issues emerge, the task force considers them and tries to reach a consensus on what course of action to take. If that consensus can be reached, they issue an EITF Issue and FASB doesn't get involved. An EIFT Issue is considered just as valid as a FASB pronouncement and is included in the GAAP.<2>

There are two large projects that FASB is pursuing. The first is the creation of a conceptual framework, the FASB Accounting Standards Codification. The Codification will take all accounting standards pronouncements from all of the different standard setters and display them in a consistent format that can be searched. The slated date of the official launch is July 1, 2009.<3>

The other project that the FASB is pursuing is a convergence project with the International Accounting Standards Board (IASB) and International Financial Reporting Standards (IFRS). On September 18, 2002, in Norwalk, Connecticut, the FASB and IASB met and issued the Memorandum of Understanding.<4> This document outlined the plans to converge IFRS and US GAAP into one set of high quality and compatible standards. As part of the convergence project, the FASB has started transitioning from the principle of historical cost to fair value.

[marketcrazy1]

3. WOW nice catch

how the fuck did i miss this!!! this is pretty fucking HUGE!!!

[marketcrazy1]

4. no one reports this.....

For the fourth quarter of 2008, the FHLBanks said their total preliminary net loss was $672 million. It would have been many times larger, had they included all their red ink.

The year-end balance sheet at the FHLBank of Seattle, for example, showed $5.6 billion of non-government mortgage-backed securities that it says it will hold until maturity. Yet the estimated value of those securities was just $3.6 billion. The bank, which reported a $199.4 million net loss for 2008, said the declines were only temporary. They’ve been anything but fleeting, though. Most of those securities have been worth less than they cost for more than a year.

The FASB’s rules on this subject, which have never been well defined, are now in flux. Today, after caving in to pressure by the banking industry and members of Congress, the Financial Accounting Standards Board is set to vote on a plan to relax its rules on mark-to-market accounting, so that companies can disregard market prices and ignore losses on their securities indefinitely.

Bowsher is not new to taking hard political stands:

As comptroller general, he was in charge of the General Accountability Office, the investigative arm of Congress. At his direction, the GAO was among the first to warn the public about the brewing savings-and- loan crisis during the 1980s. He testified before Congress in 1994 that there was an “immediate need” for “federal regulation of the safety and soundness” of all major U.S. derivatives dealers. (How’s that for prescient?)

Most recently, in 2007, he led an independent committee that issued a blistering report on financial missteps at the Smithsonian Institution, whose board of regents included U.S. Chief Justice John Roberts.

And how does the FHLB spin this event?

"Mr. Bowsher has expressed his concerns to me around the complexity of valuing mortgage-backed securities and the process of producing combined financial statements from the 12 home loan banks. I don’t think it’s appropriate for us to speak for Mr. Bowsher."

So: to paraphrase - one of the men who knows the ins and outs of the financials of banks involved in the mortgage crisis more intimately than even Bernanke and Geithner, let alone Obama, is saying that the newly implemented changes by the FASB will throw the whole system into tailspin and he want none of it.

[snot]

5. K&R'd -- impt. -- can we get another rec.?

[World Traveller]

6. Lots of Pension Funds hold FHLB-backed Securities

I got nervous about assets held in my 401K, so I looked up the SEC 11K filing.

Our most liquid 401K option, a fund that is considered a cash-like, money market-like option (the only option of that type that we have) holds approx 25% FHLB mortgage-backed securities. These are in a category labeled "Government Securities" in the 11K filing.

FHLB sells mortgage-backed securities same as Fannie Mae to pension funds, insurance companies, smaller banks, etc. I really hope they're sound...it would be very bad for America if they're not.

[truedelphi]

7. The comments of those viewing this at the blog you linked to:

Anonymous said... April 2, 2009 11:55 PM
Thank God we had one honest man of principle. I had all but lost hope for even that.

I second that emotion


Anonymous said... April 3, 2009 12:35 AM
do you think Geithner actually believes the BS that spews out of his mouth or is he so stupid that he thinks this is an illiquidity crisis rather then just a bunch of horribly made loans?

I have to second that bit of doubt and disbelief myself

[Dover]

8. The great illusion continues... (more articles about this). Mr. Obama, fraud is a crime.

FASB Rule Changes: Weighing Who Gains
Analysts cite Citigroup, JPMorgan Chase, Zions, and M&T

American Banker | Friday, April 3, 2009

By Heather Landy

The more exotic the securities, the better?

New accounting rules announced Thursday may benefit Citigroup Inc., JPMorgan Chase & Co., Bank of America Corp., Wells Fargo & Co., Bank of New York Mellon Corp. and State Street Corp., analysts said.

Smaller players, such as Zions Bancorp. in Salt Lake City, M&T Bank Corp. in Buffalo and Popular Inc. in Puerto Rico, will also be on analysts' radar screens.

The new rules "should have a very positive effect on their capital balances, that's for sure," said Robert Willens, head of the tax and accounting advisory firm Robert Willens LLC in New York.

Companies will "get to write up the carrying amount of their debt securities and in some cases equity securities, and that increase in value is credited to 'other comprehensive income' and eventually to shareholder equity."

What the banks all have in common: relatively high exposures to exotic, difficult-to-value assets that could be valued higher under the new rules announced by the Financial Accounting Standards Board.

By adjusting the rules on mark-to-market accounting and on accounting for other-than-temporary impairment charges, the FASB has given companies more flexibility to value assets when prices may not be accurately reflected in distressed markets.

Analysts said that taken together, the new rules are nearly certain to make banks appear healthier, to the extent banks actually act on them.

...snip...

"At the end of the day, the investment community is looking at all this with big grains of salt," said Anthony Davis, an analyst at Stifel, Nicolaus & Co.

The Investors' Working Group, a panel of high-profile financial experts including former Securities and Exchange Commission Chairmen William H. Donaldson and Arthur Levitt Jr., said that the new rules reduce transparency and that the rushed process will lead to "an increase in capital costs, erosion of investor confidence and ultimately a disruption of markets."

FASB Chairman Robert H. Herz defended the board's compressed time frame for changing the rules, saying a shortened public comment period and other expedited procedures never compromised the board in the performance of its duties.

Cont'd

http://www.americanbanker.com/printthis.html?id=200904020Y8ZN0DN

-------------


Wall Street celebrates accounting rule changes designed to hide losses
By Andre Damon
3 April 2009

The Financial Accounting Standards Board (FASB) voted Thursday to let US banks set their own prices for assets in earnings reports, regardless of current prices.

The move, which was heavily lobbied for by Wall Street, is expected to increase bank earnings by 20 percent in the next quarter. Richard Dietrich, an accounting professor at Ohio State University, told Bloomberg News that the decision would allow Citigroup to reduce its reported losses by 50 to 70 percent.

The announcement sparked a rally on the stock market, led by financial companies. Citigroup stock rose 8.6 percent, Bank of America soared 9.6 percent and Wells Fargo rose 10.5 percent. The rally subsided later in the day, but financial stocks retained significant gains and the Dow Jones Industrial Average closed with a gain of more than 216 points.

Banks are currently required to calculate their earnings, under so-called "mark to market" accounting rules, according to the current market value of the securities they hold, but the new measure would allow them to value assets using their own internal models where the assets would otherwise be sold into a "distressed" market. Banks have argued that markets are not pricing financial assets fairly, causing credit to dry up and exacerbating the crisis...cont'd

http://www.wsws.org/articles/2009/apr2009/fasb-a03.shtml