Submitted by Tyler Durden, publisher of Zero Hedge
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:
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.
If this isn’t the most damning condemnation of the Kool Aid the administration, the Treasury, the Fed, the FASB, the FDIC, and all the other alphabet soups are trying to make the common U.S. citizen drink and have seconds, then nothing else possibly could be…. of course until Bowsher is proven right and everything collapses into the smoldering heap of defaulted MBS still marked at par on various liquidating banks’ balance sheets…
Oh and yes, let’s hold a moment of silence for Lehman which held billions of mortgage backed securities that it too was “holding until maturity.” Well, Lehman is no more, and all these securities now trade, in the form of the company’s general unsecured claims, at the generous price of 12 cents on the dollar… Furthermore, one can’t say the market is illiquid – the bid-ask spread is only 1 cent. And as there are over $150 billion of these claims floating around, one can’t say the market is in any way limited from a price discovery standpoint.
Maybe if more honest leaders follow in Bowsher’s unique example, the general population will finally start seeing though the everyday lies and misinformation coming out of D.C.
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“ignore losses on their securities indefinitely.”
Thats a different FASB then the one that I am familiar with.
http://www.fasb.org/action/sbd040209.shtml
This is a very complicated subject and an appeal to authority doesn’t cut it. Exactly what part of the FASB decision didn’t the guy like?
And where does it say anything about ignoring credit losses?
It is rather complex, but unless you can show me something different, the committee guidance clarifies how one determines if there is an orderly market. No change … just a clarification.
Secondly, the ruling requires additional disclosure on valuation.
Thirdly, it simply splits “fair value” into the expected value of credit losses and other. The first goes into OTTI and the latter goes into OCI, if the security is held to maturity …. now defined as intended to be held and with the resources to hold to maturity.
I don’t blame the guy. With Sarbox, I wouldn’t sign off on a statement like that for a civil service salary. It would take a few million, min.
The important thing is the underlying facts, like…. what/how were credit losses determined and what/how did they determine losses other than credit losses.
“the general population will finally start seeing though the everyday lies and misinformation coming out of D.C. “
This is the big misunderstanding. At some level virtually every american understands what is going on, and 85% disapprove. What we have is a government run by the other 15%. Obama will get lumped together in history (as Buchannan and Pierce did leading up to the civil war) before being overturned by a populist.
The general population, has NO CLUE, none, zip, nada.
Millions of investors, continue to buy Citigroup, AIG, FRE, FNM, without a clue, to problems with debt, cdo’s and banking problems.
The general population is financially illiterate. Why so few, even professionals saw this coming.
Twenty years of Greenspin (Greenspan) was enough to dupe the public. Even the rest of the world bought into the bubble.
Who knows, maby if Paulson and Ben can convience us to buy more stocks, borrow more money, we can avoid a depression.
Doutful, but heck anything is possible. On second thought, the depression and crash will come. The democrates will blame Bush. The poor will blame the rich. The crooks will take a bonus.
I imagine it’s pretty easy in general to become disgusted when working in Washington.
@Anonymous 1:07 am :
If someone buys C at $1 , that doesn’t mean he is clueless. He just hopes it will go up to $2, where he will dump it. (Darn, shoulda held it til it got to $3.)
These valuations are beyond tragic, they are comical. No, the public knows that the crooks are looting them, and they are right, whether or not they have learned yet what a CDS is and what a black hole they represent.
@cap vandal: Come on, everyone knows the watering down of FAS 157 is tantamount to capitulation by the FASB. Basically under the new model, balance sheets will be allowed to be even more of a fiction than they currently are today.
If Timmy Geithner et al believe for a second that this will cause confidence to *return* to the market they are most sorely mistaken. I predict after this suckers rally peters out in the coming days/weeks, it’s turtles all the way down to Dow 2000.
Only question is just how long it will take the writhing beast formerly known as the US economy to get there?
This is like trying to stop hair from falling in the back of your head by proclaiming that since it’s hard to determine (or hard to see) without a mirror, let’s suspend the use of it and voila, we think we don’t having a growing balding spot on the back of the head.
Yup, that’s how I got rid of that pesky little nuisance.
I agree w/ cap vandel on:
“ignore losses on their securities indefinitely.”
Thats a different FASB then the one that I am familiar with.
http://www.fasb.org/action/sbd040209.shtml
Tyler Durden might be spreading more hype & fear by copy/pasting the Bloomberg article…
As if there could be any further doubt about the effect of PPIP, check this out:
"Past auctions cannot reliably predict asset prices in the Public Private Investment Program, as we are creating a new market that has not previous existed to help value these assets, and offering financing to help investors purchase them,” Treasury spokesman Isaac Baker said in an e-mail.
http://www.bloomberg.com/apps/news?pid=20601087&sid=aylbeokVZaWo&refer=home#
Bob Herz should have done this. During Barney Frank’s hearings. Banks’ books are cooked.
cap vandel’s link to the FASB minutes does not persuade me that guidance is or will be unchanged. There are several references to FSPs (FASB Staff Positions) in drafting or flux, and the outcomes are not “clarified” here. For example, “Require an entity to disclose a change in valuation technique (and the related inputs) resulting from the application of the FSP and to quantify its effects, if practicable.” So if the entity proposes a valuation technique that upgrades a security from market value, will that be acceptable? No telling from this link.
“Ah, the poor taxpayer about to get duped one last time.”
one last time .. ha ha … more like one more time and more on the way!
More like stick it up the dumb sucker (tax payer) constantly!!
@Independent Accountant said…
Bob Herz should have done this. During Barney Frank’s hearings. Banks’ books are cooked.
But, that is the American way, one for the IRS, one for the buyer/market, and the real one, save the flood in case some one finds it.
Skippy… true story, guy got letter of audit and freaked out, friend set him up with truck w/rubber tray liner and 7 years of boxes went in topped off with water. 3 days of soaking and the paper is mush, dam that bad water heater in my basement, another friend (plummer) doctored a invoice for services rendered post dated lol.
Thank you ZH for explaining this.
I read the original article on Bloomberg, but didn't really understand all the details you guys here explained so well.
All I knew in my gut was that a man who was in charge of some rules was so unconfortable with the changing of rules b/c it is essentially gaming a already-broken system even more more, so he quit..
I am not a finance guy, but there is something about all this excessive money printing, changing rules.. well.. its like they are holding a crumbling system together. I don't understand why the dow and s&p is up.. but my gut says … its not based on fundamentals, and there are bigger fish than me, an average middle class american, who are gaming the system… and when the crash comes, they will be the first to leave, leaving little guys like me holding the bag.
I don't trust any of this .. so I am grateful to sites like yours for this information, and the explainations. thank you.
This blog just lost all credibility with me. I used to think you researched your subjects pretty well before you spouted off about them. No more. Ta-Ta Buh-Bye.
Well the FASB rules could have been worse with all assets being asumed to be distressed unless otherwise identified, but even so I doubt whether banks will have too much difficulty in showing there is virtually no market for their toxic stuff. That is unless the PPIP takes off which might be rather inconvenient for the banks. The reality is that there are so many ways around this for banks already that it pretty much makes no difference.
My understanding is that bowsher quit before the FASB accounting rule changes due to not being comfortable signing off on the combined FHLB banks accounts. Particularly he was concerned that losses marked as temporary don’t have to be included into the accounts. Temporary meaning over a year old and some miracle will come along so that they can be ignored. My take would be he quit so that he would not face prosecution at some later point for signing off those accounts.
Perhaps we should note that countrywide borrowed 51 billion from the FHLB just before collapse and Washington Mutual borrowed 58 billion just before collapse so we can perhaps understand why current FHLB losses declared look a little light. FDIC chairman Sheila Blair worries that the FHLB will spell big problems for the FDIC, SEC and Treasury. This is why a line of credit was very quietly extended to the FHLB from the treasury in the autumn.
Just last month the the Federal Home Loan Bank of Seattle said it failed to meet a regulatory capital requirement and it is disallowed from paying a dividend. Since other FHLB banks have also suspended or delayed dividends there is a worry that FHLB funding will dry up taking some of the big banks with it unless the Treasury bails it out. Tim Yeager, a former Fed economist suggests the The Federal Home Loan Banks cannot effectively control or monitor the risks that are in the FHLB banks any more.
All fingers point back to congres and the financial institutions recovery and the gramm leach bliley acts which extended the FLHB way beyond its original intent. The wheels seem to be coming off what is known as the shadow Fed (FHLB) and China will almost certainly be watching closely as this unravels.
Um, you do know that’s not a photo of Bowsher, right? That’s Lawrence Small, disgraced former President of the Smithsonian Institution (and formerly with Fannie Mae and Citibank, which he left in such great shape…)
The way I understand the FASB changes: IF a bank has a MBS on the books, which it bought for the revenue stream (cash flow) and not with the intent to sell for a profit, THEN it can put that MBS on the books with a valuation deduced from the revenue stream.
Currently, some 4% do not pay their mortgage; that number probably will increase with the ongoing worsening of the labor market (today´s U6: 15%), but in all likelihood, it won´t become more than say 20%. In other words: say 80% will still pay their mortgage. Off course, the bank will have to take a loss, taking into account the lesser revenue stream, but why would the bank put that MBS on the books for say 12 cents on the dollar, just because that is the current market price, but the bank currently still gets some 96% of its originally anticipated revenue stream.
If a person buys a share of Shell Oil with the intend to hold it for its dividend, then what happens to the share price over the years is irrelevant to that person. If the market price decreases, that person does not sell, but gets the dividend, and if the market price increases, that same person does not sell, but keeps the share for the dividend (no trading). Why should that person feel poorer or richer, when what happens in the market is irrelevant to him?
In the same line of thought: the PPIP scam can now be completely abolished, saving $ 1 trillion taxpayers´ money! The whole PPIP ¨price discovery¨ is now utter nonsense. For items that banks need/want to sell, a liquid market, with known prices, exists, and for items that banks do not want to sell, but keep for revenue stream, a price discovery is irrelevant.
“socialist nexus’? whether left or right, a better term would be state capitalist.
“after the 10th Congress in 1921, which introduced the New Economic Policy. Many members of the Workers’ Opposition and the Decists (both now banned) and two new underground Left Communist groups, Gavril Myasnikov’s Workers’ Group and the Workers’ Truth group, developed the idea that Russia was becoming a state capitalist society ruled by a new bureaucratic class.[11][12] The most developed version of this idea was in a 1931 booklet by Myasnikov.
The left communist council communist traditions outside Russia see the Soviet system as state capitalist. Otto Rühle, a key figure in German left communism, developed this view from the 1920s, and it was later articulated by Dutch council communist Anton Pannekoek, for instance in “State Capitalism and Dictatorship” (1936).
Murray Rothbard, a laissez-faire capitalist thinker, uses the term interchangeably with the term state monopoly capitalism, and uses it to describe a partnership of government and big business where the state is intervening on behalf of large capitalists against the interests of consumers.’
How is an arrangement that funnels trillions in the money of ordinary citizens to the wealthiest 1 percent even remotely socialist, by ANY standard? http://amoleintheground.blogspot.com
Here is a biographical article on Charles Bowsher that includes a picture of him when he was Comptroller General:
Charles Bowsher: The Government’s Fiscal Watchdog
He doesn’t resemble the man in picture at the top of this post.