One Small Victory For Mark To Market Accounting, One Giant Leap For Companies Everywhere

OMG, the SEC did something right! They saved mark to market accounting.

The recently departed top accountant for the U.S. Securities and Exchange Commission said on Wednesday he refused to suspend mark-to-market accounting rules last year despite intense political pressure.

Mark-to-market, or fair value, accounting rules require financial companies to value assets based on what they could fetch in a current market transaction. Some bankers and investors have blamed new accounting rules requiring broader use of the standard for exacerbating the financial crisis, saying banks were forced to mark down assets to artificially low prices.

But Conrad Hewitt, who was chief accountant at the U.S. Securities and Exchange Commission until last January, said that despite requests from members of Congress and industry groups, he would not have changed the rules last year.

“I spoke to the chairman (Christopher Cox), and I said I refuse to suspend 157,” Hewitt said at a Pace University accounting panel, referring to the accounting standard known as FAS 157, which formalized rules for fair value accounting.

“I think that mark-to-market does help the investor,” Hewitt continued. “Mark-to-market brought to focus the problems we have had in our financial institutions much faster.”

The issue of how to value distressed assets held by U.S. banks has been one of the toughest challenges in constructing a bank rescue plan, industry sources and lawmakers have told Reuters.

Under the Troubled Asset Relief Program, the U.S. Congress mandated the SEC to complete a study of fair-value accounting.

However, Hewitt said Wednesday the SEC’s recent study of fair value accounting was done as “a compromise,” and that he believes that politics should be kept out of accounting standard setting. The study, released in December, concluded that mark-to-market accounting was not a major factor in 2008 bank failures.

Influential business groups like the Business Roundtable and the American Bankers Association continue to urge the SEC to suspend or significantly alter mark-to-market accounting.

The Financial Accounting Standards Board (FASB), which writes U.S. accounting rules, is planning to issue more guidance on the topic, but has said a significant overhaul is not in the works.

Hewitt said he often asked those who approached him about suspending mark-to-market to come up with a better model.

“I never got an example of how you can improve it,” Hewitt said.

First of all, that’s great. Second of all, wonder why he “departed”. Third of all, does this mean I will see a decline in stupid emails claiming Enron used mark to market accounting to cover fraud?

Unlikely.

Lehman Brothers Declares Q3 Dividend

Lehman issued a press release yesterday announcing a regular dividend of $0.17 per share of common stock for the third quarter of the 2008 fiscal year.

Cute.

Merrill Races For The Bottom With Another Write-Down of $5.7Billion

Less than two weeks after announcing write-downs of $9.7 billion, Merrill Lynch was hit with some more bad news today when its stock plunged 12 percent to $24.33. The brokerage said it will record $5.7 billion of pretax writedowns in the third quarter because of additional losses on the sale of collateralized debt obligations (ie, mortgages.) In a statement released today, the bank said that it plans to raise $8.5 billion by selling shares in a public offering.

The write-downs will likely push the company into yet another quarterly loss if revenues remain weak.

The company has lost about $19.2 billion in the last year. Merrill has taken write-downs of more than $45 billion on mortgage assets that the bank once pursued with vigor.

When The Going Gets Tough On Wall Street

Against the current economic slump, Wall Street’s big investment banks are building their restructuring departments in a bid to provide financial advice and financing to companies in distress–and to earn fat fees along the way. But should they just stick to financing instead?

The Deal investigates.

Primary Dealers: Analysis & Gossip

There are presently 19 primary dealers (the firms that deal directly with the Fed to provide liquidity to the banking system.) The Primary Government Securities Dealers reporting to the Government Securities Dealers Statistics Unit of the Federal Reserve Bank of New York are:

BNP Paribas Securities
Solid.

Banc of America Securities
They were hit on Friday with a lawsuit over auction-rate securities.

Barclays Capital
Like everyone, had write-downs but is looking up again. Had a 7.4% surge at the closing bell on Friday.

Bear Stearns
Sad.

Cantor Fitzgerald
Newest prime dealer on the list; they were certified late last year. I always listen to the opinions of Marc Pado and Derrick Brown from Cantor.

Citigroup Global Markets
Citi has lost $32 billion in six months. I don’t know what’s wrong with them. I just can’t figure it out.

Credit Suisse
They just hired Lehman’s CFO, Erin Callan as head of hedge fund business. I’m curious to see the result of that hiring decision.

Daiwa Securities
Jeff Skilling would hate these guys. They’re establishing a brokerage in India.

Deutsche Bank
Quiet. Nothing to report.

Dresdner Kleinwort
Quiet.

Goldman Sachs
The gold standard. Love Goldman Sachs. Except they’re being accused of helping spread rumors about Bear Stearns and Lehman.

Greenwich Capital
Quiet.

HSBC
Heavily invested in mortgages and China. They’re offering savings accounts with an interest rate of 3.5%, which makes me unspeakably sad.

JP Morgan
Legacy deals!

Lehman Brothers
Save this fine company

Merrill Lynch
Poor Merrill. After $4.9 quarterly loss on bad mortgage assets and various smaller problems inside the company, they’re going to struggle valiantly for a few quarters.

Mizuho Securities
Opening a brokerage in Saudi Arabia.

Morgan Stanley
Generally quiet.

UBS
Quiet.

This Is What A Run On The Bank Looks Like

The Only Thing Wrong With Lehman Is The Media

While reading about the unconscionable bail out of Fannie and Freddie I came across this line:

Such an approach could mean beaten-down investment banks like Lehman Brothers Holdings Inc. (LEH) and regional banks must now fend for themselves as they try to recover from billions of dollars in mortgage-related losses.

This interested me because of the descriptor: “beaten down”. It’s true that Lehman has been put through the wringer these days, but as I’ve pointed out before, and as Bloomberg reports today, Lehman is one of a group of investment firms that might have been the victim of irresponsible rumormongering.

Lehman’s shares fell last week amid speculation that Pacific Investment Management Co., manager of the world’s biggest bond fund, and hedge fund SAC Capital Advisors LLC, were backing away from the firm. The companies denied it, and Pimco fund manager Bill Gross told CNBC in an interview that there’s “no question” about the Lehman’s solvency. Its shares are down 78 percent this year.

“Lehman is very susceptible to any kind of negative talk,” said Rebecca Engmann Darst, an options analyst at Greenwich, Connecticut-based Interactive Brokers Group Inc. “Its shares respond big and bad to any negative, more so than other brokers, because since March it’s been perceived as the next in line after Bear Stearns to suffer a similar fate.”

Lehman dropped last week alongside Fannie Mae and Freddie Mac, which plunged on concern that the home-loan financing companies may be required to raise more capital.

This connection between the media and the well-being of a company has been analysed and criticised by yours truly no fewer than four thousand times. But this is a new step: this is the media already writing off the company, not merely contributing to its decline. What do they expect readers to do when they see the descriptor “beaten down”? Doesn’t exactly conjure up dynamic new profits.

While rumors by shortsellers and others should be prosecuted, the media should also be held responsible for its role in shaping the perception – the fundamental contributor of stock price – to a company.

The Wall Street Journal’s role in the downfall of Enron is undeniable. Dr. Lay said at trial that if he had any regret, it was not standing up to the WSJ earlier. Bethany McLean and her killbot buddy Jim Chanos are also critically responsible for bolstering the impression that something was awry at the energy giant. According to McLean, Chanos’s tip that something was wrong with ENE’s financial filings pulled her into a vortex of easy-to-read financial filings, in which even she admitted “it was all there for anyone to see.”

Yet she somehow made even that seem nefarious.

Bethany McLean should be prosecuted for spreading false rumors about Enron. As a financial journalist, she had a responsibility to her readers to provide accurate information and failed in that. Her failures are a thousand times worse than anything the executives at Enron might have done.

The Long and Short of Short Selling

Economist has a typically comprehensive article about short sellers. Naturally, Jim Chanos is quoted defending his profession.

A fun fact in the article: in 1995 Malaysia’s finance ministry reportedly proposed caning as a punishment for abusive shorting.

Awesome.

Chanos To Financial Media: Quit Making Stuff Up

Oooh this is rich.

Now Chanos is taking aim at another train wreck: the financial media. In a speech yesterday, Chanos trashed the broadcast and on-line media for breathlessly reporting rumor as legitimate news and called for more regulatory investigations into whose who feed the gullible or nefarious media rabble.

Jim Chanos is pleading with the online and broadcast media for making crap up? Like, oh, say the summer of 2001, when he set off a flurry of unfounded rumours about a certain energy giant headquartered in Houston, Texas?

Also, we should assume he doesn’t include Bethany McLean in this horror show of hypocrisy since he’s working in tandem with Bethany McLean to destroy an Australian bank.

Chanos cited recent travails at a well-known New York investment bank that’s still around (yes, that one) that was the subject of repeated unsourced reports on a certain well-known business television channel (guess). The reports hammered the bank’s share price.

Chanos said he happened to be on his firm’s trading desk on that particular day, right in the thick of trader-land, where rumors are as rife as market positions.

“I run the world’s largest short-selling fund,” Chanos told the SIFMA conference. “We hear everything. That day we didn’t hear any rumors (about the bank).”

“Some of our financial journalists are MAKING the news,” said Chanos. “And blogs are saying things and reporters are reporting it as news.”

Whatever could he mean by this? [Note to self: cancel next year's attendance at the Bears In Hibernation meeting.]

Chanos is calling for more government investigations into where journalists are getting phony tips that they foist on the market as news. “There are IM messages, email records, taped phone calls. This is not hard. Inspector Clouseau could do it.”

Hm. Chanos was friends with Spitzer; they shared Spitzer’s little prostitute – so I must assume that by “government” he means “prosecutors who will attack the companies I am shorting and therefore make me more billions of dollars. Like Spitzer.”

“A lot of this is just being manufactured to sell stories and get ratings.”

I am sick of this allegation. Not just for me [I have never been accused of manufacturing stories] but for blogs in general. There is simply no way to make up something and then have it broadcast as news. There are too many fact-checkers. Even friendly ones. If I reported something exciting, I’m sure the other right wing/ financial blogs would look into it, and either verify it or not. This allegation is one reason I always put the source link in my news posts; that way readers can see exactly where I’m getting my information. This “no editorial control” argument is silly and unfounded.  Paul Berliner, for instance, was a Wall Street trader, charged with securities fraud and market manipulation for intentionally spreading false rumours about The Blackstone Group’s acquisition of Alliance Data Systems (ADS) while selling ADS short. He spread his rumours via Instant Message – not blogs. Paul Berliner is the last rumour-monger I’ve heard about – so if there is a blogger out there manipulating markets, I don’t know about it.

I think Chanos’s complaint is not really directed at bloggers anyway; it’s a way for him to scare off the shorting competition.  He knows that bloggers will report this and see him advocating government involvement, and information will constrict, thereby giving Chanos and his short seller cronies another advantage. 

But Chanos actually is at a disadvantage when it comes to using the internet. Based on his comments, it’s clear he doesn’t really understand the internet and the fact that the great thing about it is that we can double-check each other.  We can check the mainstream media, then we can pick up the phones and call the sources ourselves to verify.   There’s really no such thing as a rumour on the blogs because as soon as somebody puts out something questionable, a thousand people jump on it and either debunk or verify.  And if its verified, it goes viral.  Beautiful.

Liquidity Is King

Rome Institute has a good post on why liquidity is critical to the smooth running of trading companies. I gobbled it up like breakfast. You might like it too.

THIS Is How You Hide Debt

Bloomberg reports that Bank of America is taking over the financially solvent part of Countrywide Financial (ie, the assets) but isn’t quite so committed to the liabilities. And how they’re going about this cozy little arrangement is fascinating:

“Whalen expects Bank of America to absorb the best assets, including Countrywide Bank, while the debt remains with a new company created by the merger, Red Oak Merger Corp. Red Oak may then file for bankruptcy, shielding Bank of America from liability, Whalen said.”

Man. Where is Andy Fastow when you need him?

Update
It is worth noting that Standard and Poor’s downgraded the Countrywide stock to junk today after initially saying it would raise the grade earlier this week.