April 13, 2009

What is a “Glimmer”? Five Reasons to Still Be Plenty Scared

While I was on holiday last week, the President and his economic advisor, Lawrence Summers, made a splash by announcing the economy had a “glimmer of hope.” The stock market has been behaving like it sees more than a glimmer. Here are five things gleaned from my very full inbox that give me pause:

1. According to this story, there will be $4 trillion in losses in the financial institutions. It notes $1.29 trillion in losses have been already booked, meaning $2.71 trillion in losses have not yet been recorded – more than twice the amount already recorded.

When I read articles like these, I still worry that banks aren’t giving us the full story in their disclosure (see this article) – although part of the problem is that the government is now in cahoots with banks in obscuring transparency. Banks aren’t allowed to disclose how they fare in the soon-to-be-completed stress tests until later this month. I imagine this will result in a spot of insider trading.

2. Some academics say that there is “little evidence that suggests these markets are experiencing fire sales” when it comes to whether the government needs to be tinkering with the pricing of toxic assets. This article concludes: “The problem is that highly leveraged financial firms own assets that are worth far less than they thought they would be, and the firms are insolvent as a result. This is why the latest bailout plans secretly give huge subsidies to banks – because the only way to keep the insolvent zombies afloat is to transfer billions of dollars to banks, bank stockholders, and bank creditors.”

3. Read this interview with a former S&L regulator, William Black, who criticizes the recovery efforts. This quote gives me chills: “We have failed bankers giving advice to failed regulators on how to deal with failed assets. How can it result in anything but failure?”

4. Politics continue to get in the way of serious reform efforts. There is ample evidence that our “independent” regulators aren’t given the freedom to do their job (or cave too quickly; Canada’s regulator just said “no” to loosening mark-to-market). Exhibit A is Congress bullying the FASB into changing accounting standards. But that is only the start. While I was gone, Rep. Barney Frank criticized Moody’s for being too negative? [Although Frank was not criticizing Moody’s for doing its job, so-to-speak, when rating municipal borrowers, but for applying a double standard that favored corporate borrowers.]

In addition, according to this article, the Administration seems to be willing to skirt the bailout restrictions that were just implemented. With these types of games going on, it feels like any rule can be avoided if you know the right people.

By the way, this is a worldwide problem. As noted in this article, the EU Commissioner stated recently at a IASB monitoring group meeting that he had indeed let Spanish banks break the law and fail to comply with IASB accounting standards. An amazing instance of a European government official condoning breaking of the law and securities fraud.

5. It still appears that boards are paying big pay packages (including bonuses) to CEOs despite poor performance. Read this new commentary by Bud Crystal about the pay lavished on the homebuilders. Until this vital governance area truly gets reformed, senior managers will be incentivized to play fast and loose – and boards will continue to show a lack of backbone, resulting in poor oversight.

There are plenty more of these types of stories filed every day (eg. this Rolling Stone story), leaving me with a lack of confidence that we will come out of this mess any better than before we went into it. Maybe I need a vacation from my vacation…

As an aside, Nasdaq’s new Listing Rulebook goes into effect today.

FASB Issues Three Fair Value Staff Positions

On Thursday, the FASB issued three final Staff Positions that provide application guidance and enhance disclosures regarding fair value measurements and impairments of securities (here is the related press release):

FSP FAS 157-4, Determining Fair Value When the Volume and Level of Activity for the Asset or Liability Have Significantly Decreased and Identifying Transactions That Are Not Orderly

FSP FAS 107-1 and APB 28-1, Interim Disclosures about Fair Value of Financial Instruments

FSP FAS 115-2 and FAS 124-2, Recognition and Presentation of Other-Than-Temporary Impairments

Note that the last one contains the dissent registered by the two FASB Board members (Linsmeier and Siegel) who voted against the recent rule change by the FASB regarding fair value accounting.

Madoff Spotted in London?

One of the more peculiar things I saw during my vacation in London? I swear I spotted Bernie Madoff in Trafalgar Square. He’s supposed to be in a Manhattan jail pending a June sentencing hearing. Here is the video where I captured a glimpse of the slightly younger look-alike (compare to this photo of the real deal):

– Broc Romanek