Audit Notes: Auditor conflicts, Frannie holdup, London Whale pressured

The latest money-laundering scandal points to problems with a business model

Francine McKenna looks at Deloitte’s role in the latest money-laundering scandal and how it points to conflicts of interest in the auditing industry’s business model:

There’s big temptation for Deloitte or any of the Big Four audit firms who get the growing number of plum “governance, risk and compliance” roles as supposedly “independent” consultants to the banks. There are so many consent decrees and settlement subjects looking for help to reassure regulators they are on the straight and narrow now, it’s inevitable that the auditors would look at the banks and see dollar signs from future work rather than scofflaws who need to be scrutinized.

Being adversarial is not profitable.

Based on the Standard Chartered Bank experience, it’s clear to me that a Big Four firm that wants to grow its consulting business is sorely tempted to “work with” a client it wants to do business with in the future, as a consultant or even as a future auditor.

“Reputation risk” doesn’t get in the way of audit firms helping criminal banks do illegal things. “Reputation risk” is now an oxymoron. Bankers and their enablers, the audit firms, have no risk to their reputation from anyone that matters. They are both repeatedly the subject of settlements, consent decrees, non-prosecution agreements, cease and desist orders and the rest of the regulator arsenal. They keep profiting and repeating their crimes with impunity.

— The Huffington Post’s Peter S. Goodman calls on the president to fire Ed DeMarco, the acting head of the Federal Housing Finance Agency that oversees Fannie Mae and Freddie Mac. DeMarco has refused to consider mass principal modifications on Frannie’s underwater mortgages, despite analysis from his own people that it could save the government a billion dollars.

For many months, evidence has mounted that the most expedient way to move the country past the slow motion agony of the foreclosure crisis is to forgive substantial loan balances for the millions of homeowners who are underwater, meaning they owe the bank more than their homes are worth. The Obama administration finally wants this to happen, after opposing this approach early on. Housing experts have been calling for this course for years.

Yet almost single-handedly, DeMarco has prevented this from happening on a large scale. He has refused to allow Fannie and Freddie to engage in principal reduction while ordering up intellectually dishonest analysis purporting to show that taxpayers are best served by the existing assortment of policies — a course that has produced blight, dislocation and economic stagnation…

All of which raises a pertinent question: What does the White House plan to do about DeMarco and his ideological insurgency? Faced with his open defiance of common sense and taxpayer interest, does the administration intend to move him out of there and replace him with a force for good?

The Wall Street Journal scoops that JPMorgan’s London Whale was asked by his boss, an executive at the bank, to artificially inflate trade valuations, apparently to conceal losses.

After reviewing emails and voice-mail messages, the bank has concluded that Bruno Iksil, the J.P. Morgan trader nicknamed for the large positions he took in the credit markets, was urged by his boss to put higher values on some positions than they might have fetched in the open market at the time, people familiar with the probe said…

Some people at J.P. Morgan concluded, based in part on references in communications to accumulating losses, that the favorable valuations might have been aimed at giving the losing trades time to recover and avoid setting off potential alarms at the bank, according to the people familiar with the probe.

At the same time, some people on the trading team say they had begun to doubt market prices and were convinced rivals were manipulating markets to the detriment of J.P. Morgan, the people said.

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Ryan Chittum is a former Wall Street Journal reporter, and deputy editor of The Audit, CJR's business section. If you see notable business journalism, give him a heads-up at Follow him on Twitter at @ryanchittum. Tags: , , , ,