ACCOUNTING RULES STAGNATE, MAINTAINING ILLUSION OF STATUS QUO

COMBO Title and Securitization Search, Report, Documents, Analysis & Commentary COMBO Title and Securitization Search, Report, Documents, Analysis & Commentary

This simple accounting fact would enable any homeowner to show that the transaction was table funded several times over. It would lead to the inescapable conclusion that the lender of record was NOT a party to whom any money was owed by the borrower or anyone else. THAT would lead to legal consequences under state law that would decouple the obligation from the loan documents, which were fraudulent in their conception and their execution. The fact that it was sold under the false pretense that the property was worth more than the loan, is secondary — a cause of action for damages. The first thing is that the obligation is neither secured by the property nor described in the note.

Editor’s Note: It was the rule changes in the 1960’s that actually started this mess, giving management far more control and discretion on how to report the financial condition of a company. Look for an old book called Unaccountable Accounting published around that time for a detailed explanation. I think the author’s name was Briloff.In litigation, through the process of discovery, the truth can be revealed if you ask teh right questions. Did this “lender” ever book the loan as an account receivable or did it just book the transaction as a fee-based service. There is no question in my mind that in nearly all cases it was a fee based service and entered as such on the books of the originating lender. Otherwise they would have had to post an off-setting entry for bad loans or liability from bad loans. This was never done.

This simple accounting fact would enable any homeowner to show that the transaction was table funded several times over. It would lead to the inescapable conclusion that the lender of record what NOT a party to whom any money was owed by the borrower or anyone else. THAT would lead to legal consequences under state law that would decouple the obligation from the loan documents, which were fraudulent in their conception and their execution. The fact that it was sold under the false pretense that the property was worth more than the loan, is secondary — a cause of action for damages. The first thing is that the obligation is neither secured by the property nor described in the note.

Now we have institutionalized management discretion and given them good reason and even incentives to continue lying to their shareholders, the public and the regulatory agencies with immunity from what would have been certain prosecution for crimes that were obvious to anyone looking. We have things like Tier 1, Tier 2 and Tier 3 assets that are described in some detail in the DVD we sell — an overview CLE seminar for lawyers and a short version for laymen. Tier 3 allows management to simply do a stated asset version much like the loans that were allowed under the SISA (stated income, stated assets) underwriting of loans in the mortgage meltdown period.

Why do we have a problem dealing with reality? because the rules guarantee the illusion and allow Wall Street to prosper while the rest of us suffer. If they are required to show their Tier 3 and Tier 2 assets at true fair market value, they would all fail the “stress test.” The administration believes the story from the mega banks that if those rules change, and the truth comes out in court or regulatory filings, the sky will fall and our country will be buried under an avalanche. An avalanche of what? I say it is an avalanche of illusions and that the 7,000 community banks and credit unions in this country together with the electronic funds transfer options available to all of them would enable them to pick up the pieces after the mega banks fall. There is no merit to the too-big-to-fail myth. It is merely an excuse to concentrate ill-gotten wealth and abusive power into the hands of a new royalty or aristocracy.

The only one to lose some clout in an era of reality and transparency would be Wall Street. The recognition of fraud and the victims of fraud from investors to homeowners would allow us to seek a new equilibrium that would enable us to start on a true road to recovery. Without it the road is blocked and the path will lead to further concentration of wealth and power into the hands of those who use it the worst.

New Faces Enter Fray in Accounting

By FLOYD NORRIS

As the great accounting fight of the past decade moves near to a conclusion that seems likely to satisfy no one, the cast of characters is suddenly changing. The two most important accounting bodies in the world will be under new leadership as they try to move on from bruising battles that have pitted them against banks, bank regulators and politicians.

The changes are coming before it is clear just how far the two boards — the Financial Accounting Standards Board, which sets accounting rules in the United States, and the International Accounting Standards Board, whose rules are followed in a growing number of countries — will have to back down in their efforts to force banks to report the current value of their assets.

Both boards have made concessions that alarmed some believers in the use of market values, but neither has fully satisfied powerful critics in the banks, who have gathered support from bank regulators and politicians on both sides of the Atlantic.

Robert H. Herz, the chairman of the American group since 2002, stepped down at the beginning of this month. His decision, announced in late August, came as a surprise to many accountants. A replacement for David Tweedie, the chairman of the international group since 2001, was picked last week, although Mr. Tweedie’s term will not end until mid-2011.

The new leaders will play a major role in shaping accounting rules around the world. It will become clear how successful the two boards are being at producing “convergence” of their rules, and decisions will be made by the Securities and Exchange Commission on whether to allow international rules to be used by American companies instead of the traditional generally accepted accounting principles, or GAAP, which are set by the American board.

Differing views of the proper role of accounting rule makers around the world are at stake. In the United States, there is general support for the concept that rules should be set by independent experts, although that has not kept politicians from intervening at times, as they have in the fair-value debate. That idea of using market values is generally supported in Britain but has much less support in continental Europe, particularly in France.

Some American supporters of independent rule-making fear that a decision to move to the international rules may mean making unwelcome compromises. Some in Europe fear — and others hope — that American involvement will restrain European politicians from exercising the influence they desire.

The arguments over the use of market value — or fair value, as the accounting rules characterize the numbers — have polarized accounting debates. Banks complained bitterly that the limited rules forcing the use of market value for some assets contributed to the financial crisis, first by exaggerating their wealth as prices rose and then by making them appear worse than they really were when market prices plunged to unreasonably low levels.

That argument was exaggerated. The securities on which the banks lost the most money — largely mortgage-backed bonds — had not soared in price, and so had not made the banks look better. But banks had been so confident that the securities could not lose value that they borrowed heavily to own more and more of them, leaving them vulnerable to the collapse. When that came, however, there were no buyers. Many of the few trades that were made did take place at distressed prices.

The first assault by banks on fair value was aimed at preventing them from having to recognize such distressed prices as being fair, and they largely succeeded in that as both boards hurriedly put out advice under political pressure. The American board acted after Mr. Herz was called to a Congressional hearing and was berated by legislators from both parties.

After that, under heavy pressure to act quickly, the two boards chose differing courses. The international board adopted a new rule in record time concerning which assets had to be carried at market value. It generally allowed banks to ignore market values of loans, as they wished. But the board put off some other issues.

The American board put forth a stronger and more comprehensive proposal. That proposed rule would allow banks to keep losses from falling loan values off their income statements, but the banks would be forced to show market-value numbers prominently. Banks, and their regulators, complained loudly.

Mr. Herz told me this week that his decision to step down was not forced, but it appeared to have cleared the way for the board to soften its proposal. His temporary successor, Leslie F. Seidman, had opposed issuing the proposed rule. The board recently said that its consultations with investors and analysts — known as users of financial statements — had shown splits on the issue, with bank analysts more likely to go along with the companies they covered.

Some who question fair value worry that determining the figures will be difficult and ultimately subjective, at least for assets that are not readily traded. At the same time, there is little doubt that the actual value of an asset, not what was paid for it, is usually more relevant in evaluating the financial health of a company. “It is better to be vaguely right than to be precisely wrong,” Roman Weil, an accounting professor at New York University, said at an N.Y.U. conference this week.

Banks and bank regulators have frequently complained that market-value accounting is “pro-cyclical,” meaning it makes banks seem richer, and therefore more willing to lend, during booms, when restraint might be appropriate, and less willing to lend during busts, when the economy may need more lending.

Mr. Herz has repeatedly argued that such decisions are properly made by bank regulators, but that accounting should reveal the actual facts, not sugar-coated ones. At the same N.Y.U. conference, he said the account statements he received from Merrill Lynch during the financial crisis were also pro-cyclical, since they made him and his wife feel poorer and less willing to spend. Perhaps, he said, Merrill should have been told to send out more palatable numbers.

It now seems likely that the American board will back off at least part of the way from its proposal, although it is not clear how far it will go. The foundation that appoints members of the American board has decided to expand it to seven members, raising the possibility that new members might be more amenable to compromises. Ms. Seidman wants to stay as head of the board, but no decision on that will be made until early next year.

Arthur Levitt, a former chairman of the S.E.C., said in an interview this week that he feared “independent standard setting is in greater jeopardy than at any time since the F.A.S.B. was formed.” He added, “I don’t see any power at all on the side of fair value. Because of the power of the banks and the actions of the Congress, the battle is well on its way to being decided.”

Mr. Levitt knows about political pressure. In the 1990s, when he was chairman of the S.E.C., Senator Joseph Lieberman of Connecticut threatened to legislate against F.A.S.B. if it did not back down on efforts to force companies to show the value of stock options granted to employees as an expense. Mr. Levitt quietly advised the board to retreat, which it did, and that rule was not adopted for another decade. He later said that was the worst decision he had made as chairman.

The new chairman of the international board will be Hans Hoogervorst, a Dutch regulator and a former government minister. He has also been chairman of a group that monitored the international board on behalf of governments, but he is not an accountant and not an expert on technical rules. An Australian accountant, Ian Mackintosh, who is currently chairman of the British accounting standards board, was chosen as vice chairman.

The international board under Mr. Tweedie was at times very controversial, particularly in France, where bankers were angry over earlier efforts to increase the use of fair value.

In 2003, Claude Bébéar, then the chairman of AXA, the French insurer and perhaps the most influential business leader in the country, called Mr. Tweedie “a super-super-ayatollah” who “has a fascination with market value.”

European politicians expressed horror that the board was not answerable to democratic bodies. The European Commission asserted the right to approve any new accounting rule before it took effect in Europe, and it ruled that companies could ignore part of a rule accounting for derivative securities, something French banks have done. The commission also appointed a group, known as the European Financial Reporting Advisory Group, to advise on whether new rules were warranted.

The chairwoman of that group, Françoise Flores, a French accountant, said after Mr. Hoogervorst was named that “this appointment will help strike a good balance between the accountability and the independence of the international standard setter.”

Such comments bothered some Americans. “It is a strange balance,” said Stephen Zeff, an accounting professor at Rice University who has written extensively on international accounting rule-making. The board, he said, should be accountable to the users of financial statements, and for that independence was crucial.

In an interview, Mr. Hoogervorst tried to stake out a middle ground. He said it was “very clear that fair-value accounting has done a lot of good things. It has brought a lot of transparency. It forces financial institutions to recognize problems as soon as possible.” Had Japanese banks done that after the country’s asset bubble burst two decades ago, he said, they would have been better off.

“At the same time,” he added, he approved of “the pragmatic approach the I.A.S.B. ultimately took.”

Mr. Hoogervorst served as co-chairman of a body that advised the two accounting boards on the financial crisis, and concluded that a large part of the problem was that the banks had been allowed by regulators to take on too much leverage during the good time.

“Essentially, the banking industry is a welfare state within the market economy,” he said in a speech this year. “The main difference with the normal welfare state is that the benefits are very high and that they are usually determined by the recipients themselves.”

9 Responses

  1. b davies

    Cannot always get the scribds.

  2. b davies

    Great post. Goldman Sachs has already admitted they purchased the mortgages – now Citigroup – the same admission – note multiple sources for loan purchases (and this is BEFORE the loans are converted to securities – by accounting gimmicks).

    Also, article brings up “first payment defaults.” I can remember that Wells Fargo (as servicer) once reported to SEC that they made “errors” as to classification of first payment default – they had used the wrong due date. What happened to false classifications? This is a situation in which a loan may have been targeted for a Trust – and included on the Mortgage Schedule but then subsequently Repurchased by the originator. Thus, a loan may be on the Mortgage Schedule – but the loan did not stay on mortgage schedule – even though foreclosure mills will say it did.

  3. This was President Obama’s response on Sept. 28th to (assume) group of Veterans.

    “Asked at a September 28 speech in New Mexico what the government was doing to protect veterans from foreclosure, Obama replied, “There’s no government program where we can just make sure that whoever is losing their home that we can just pick up the tab.” The president called for “a traditional, more common sense way of thinking about housing which is, if you want a house, you got to save for a while.”

    Incredible.

  4. READ THIS TESTIMONY TO THE FINANCIAL CRISIS
    COMMITTEE. SEE TESTIMONY.

    http://www.scribd.com/doc/40071514/William-Bowen-Testimony-to-the-Financial-Crisis-Committee-60-Defective-Mortgage-Backed-Securities

    A CHIEF UNDERWRITER FOR CITIBANK AND WHO OVER SAW 220 CORRESPONDENT UNDERWRITERS STATED IN 2006 60% OF THE LOAN FILES FAILED TO MEED THE REPS AND WARRANTIES AND BY 2007 IT WAS 80%.

  5. Google Search Results for Abraham J. Briloff

    1.
    The truth about corporate accounting

    Abraham J. Briloff – 1981 – 285 pages – Snippet view
    Tackles one vital aspect of our financial system, the audit of corporate reports by outside accountants who have often been undependable in assessing the true soundness of such companies as Chrysler and Penn Central


    2.
    Unaccountable accounting

    Abraham J. Briloff – 1972 – 365 pages – Snippet view
    Describes accounting theory and the dubious practices that have emerged in recent years, urging reform to restore the integrity of the accounting profession

    3.
    More debits than credits: the burnt investor’s guide to financial …

    Abraham J. Briloff – 1976 – 453 pages – Snippet view
    Indicts accounting and auditing firms and related organizations and institutions, including the prestigious American Institute of Public Accountants, for allying themselves with corporate management in the preparation of deceptive, …

    4.
    The effectiveness of accounting communication

    Abraham J. Briloff – 1965 – 319 pages –
    5.
    The accounting profession at the hump of the decades

    Abraham J. Briloff – 1970 – 22 pages –
    6.
    Distortions arising from pooling-of -interests accounting
    No cover image

    Abraham J. Briloff – 1968 – 10 pages –
    7.
    How to deceive in business without really lying: an address

    Abraham J. Briloff – 1973 – 27 pages –
    8.
    The Abraham J. Briloff lecture series on accounting and society, …

    Abraham J. Briloff, State University of New York at Binghamton. School of Management – 2000 – 36 pages –

  6. Unaccountable accounting
    by Abraham J. Briloff

  7. Neil , You’re the man!

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