The Audit
Debits & Credits: Hrd on the St.
For WSJ, less is less; FT plays Boswell again; NYT unwinds ratings snarl; contrarian runs amok, etc.
By Elinore Longobardi Mon 28 Apr 2008 11:50 AMWSJ cuts muscle
A Debit to The Wall Street Journal—and we mean to the institution itself, not the reporter—for a “Heard on the Street” piece describing how some arcane accounting rules allowed Citigroup and Merrill Lynch to keep billions of dollars in write-downs off their income statements.
This piece should have been a Credit, but the Journal seriously underplayed it and cut it far too far. The paper’s bread-and-butter “Heard on the Street” column has unfortunately been dwindling for years. It once had dedicated space of 1,200 words or so and sometimes got more. Now under new ownership it seems to be wilting further. Credit-worthy reporter David Reilly needed more than a measly 621 words to tell this story, and too many questions remain unasked and unanswered.
The story says Citigroup took $15 billion in write-downs the first quarter, but legally hid $2.3 billion more. Merrill took $6.6 billion in write-downs, but legally hid at least another $3.1 billion—compared to the company’s acknowledged loss of $1.9 billion. That’s not exactly spare change, even on Wall Street.
Where are these extra write-downs lurking? Reporter Reilly writes that they’re in
a special bucket in shareholders’ equity called ‘other comprehensive income.’ The beauty of this bucket is the charges land on the balance sheet, but don’t dent the companies’ bottom line.
The theory behind the bucket is that it’s a place for companies to put losses until they deem them to be non-temporary. If a firm says its going to hold a security till maturity, it doesn’t have to mark it to market (reprice it). It’s accounting limbo, makes little sense, and seems made for abuse.
And Citigroup and Merrill aren’t alone in using this loophole, we are told in a graphic. (post updated with graphic at 1:52 p.m.)
We wonder: What accounting rule permits this evasion? What do accounting rulemakers say? Securities regulators? If this loophole is so important and bad, is there any move to change it? Will anyone speak in favor of it?
Readers are supposed to evaluate this phenomenon based on 621 words? Ridiculous. Anyone who says that’s what readers want has a low opinion of readers.
More stenography from the FT
A Debit to the Financial Times for a front-page interview with John Dugan, comptroller of the currency, about his fear of a wave of bank failures.
Dugan’s office, as the FT tells us, oversees 1,700 national banks. So, it’s one of the institutions that bear responsibility for the current credit crisis. But the paper presents Dugan as a mere observer, allowing him to distance himself from the problem.
‘We’re going to have some more bank failures that will come back more to historical norms and may go above with time,’ [Dugan] said. ‘That is a natural consequence of the economy going from historically exceptionally benign credit conditions to something that is more normal to something you would get in a downturn.”
Well, la-di-da. Except that there’s nothing “natural” about this credit crisis, and if regulators had been regulating, we wouldn’t be in such a bad spot right now. The role of Dugan’s office in this meltdown has been well-documented, finally, and yet the FT does not provide readers any of this vital context.
Some critical distance is needed from the FT with its exclusive interviews. This is becoming a common theme.
NYT takes on sub-rate raters
A Credit to The New York Times Magazine for a piece yesterday describing the crucial role credit-rating firms played in the inflation of the housing bubble.
Roger Lowenstein tells this critical story clearly and with authority through the tale of a single, subprime mortagage-backed security pool. We’re not going to say it’s beach reading by any means—this is complicated stuff; so complicated that the bankers creating them didn’t know what they were doing—but if you want to learn how the conflicted interplay between government-sanctioned ratings firms and their Wall Street paymasters created this financial crisis, this is a great place to start.
And further props for getting a Wall Street CEO, in this case the current Hero of Wall Street Jamie Dimon of JPMorgan Chase, to admit that his firm has “a large failure of common sense.”
The story is a damning picture of a system in which “the government outsourced its regulatory function” to companies, and it ought to be a roadmap for new oversight by regulators attempting to prevent this from recurring.
Not so Smart
A Debit to Smart Money for a column that tries to usher in an economic recovery that doesn’t actually exist.
Donald Luskin, chief investment officer for an economic consulting firm, sounds like warmed-over Larry Kudlow.
Everyone was already saying that the U.S. economy had fallen into recession. The Bear catastrophe could only make matters far worse.And yet now, a month later, the economy has not gotten worse. Compared to the bleak expectations then, even just hanging in there would have been an upside surprise. But it’s more than that. Things actually are getting better.
Luskin begins with earnings. Sure, he admits, GE had a bit of a disaster this quarter. But besides that little hiccup, “the news has been terrific.”
Tell that to Capital One. Or Ambac Financial , or any of the airlines .
Better than expected, maybe. Terrific? Hardly.
Luskin goes on to tell us:
The worst is over. It’s more than over.
Apparently The New York Times, and just about everyone else, didn’t get the memo. In a Tuesday piece on the scramble for capital, the paper says:
The pain is far from over. Even the most optimistic forecasters say banks will suffer billions of dollars in additional write-downs on mortgage investments and other debt in the months ahead.
If the pain isn’t over at the banks, then it isn’t over in a lot of other places, either.
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Mon 28 Apr 2008 02:50 PMI'm sorry to say this, but both the CJR and David Reilly (from the WSJ) merits a debit for the first article. Reilly may not be an accountant (and neither am i) but as a business reporter he should know that the "news" he found (ie. discovering "accrual accounting") has been an integral (and necessary) part of the american banking and insurance industry (and frankly the same in other countries) from the beginning of time. held to maturity securities are *not* marked to market and should not be in order to prevent unnecessary swings in earnings that is not correlated with reality (but rather temporary market conditions). In the absence of this accounting, all banks and insurance companies would act like hedge funds, which is not what really the goal of that industry. Accounting rulemakers and securities regulaters are fully aware of this rule, and it is not a "loophole". The real story here is not that such accounting practice exists, that there's $40BB of it in our insurance comanies and $20BB in our thrifts, or that it is legitimate (and a quick call to an accoutant would've verified these points). The real story exists if certain firms chose to adopt those practices all of a sudden out of the blue, and if so why did they choose to do it at this particular time? A little more research on the part of WSJ would have been more welcome on this article, which did not deserve even the 621 words that it got (and which CJR thot was too little!).