MF Global Hid Risk To Avoid Capital Requirements While FINRA Regulators Looked On

One of the common elements in most of the great financial debacles seems, at heart, to involve accounting fraud that is tolerated and excused by all those entrusted with the safeguarding of the public interest and the innocent.

What characterizes the modern financial system, and its vast influence on the fabric of society, the political process, and the dialogues of public policy is the power of easy money, obtained through the mispricing of risk and brazen fraud, to corrupt the corruptible in every station of life, from the press corps to the politicians to the professors.

Truth, honor and goodness are collateral damage when everything has its price. Greed and selfishness abound, and the 'best lack all conviction, while the worst are filled with passionate intensity.'

NY Times
MF Global Dodged Capital Requirements, Report Says
By AZAM AHMED and BEN PROTESS

Under pressure from regulators last summer to increase its capital cushion, MF Global moved some of its risky European debt holdings to an unregulated entity in an effort to avoid having to raise extra money, according to a new report. The revelation raises new questions about MF Global’s actions in its last months — in particular, how it responded to regulators. The brokerage firm had previously disclosed that it had met the capital requirements, but never mentioned that it had transferred some bonds rather than raising additional money.

The shift was detailed in a report by Louis J. Freeh, the trustee overseeing the bankruptcy of MF Global. The report is separate from the one issued Monday by James W. Giddens, the court-appointed trustee charged with recovering money for MF Global’s customers.

“This strategy allowed the MF Global Group to transfer the economic benefits and risks,” thus reducing the “regulatory capital requirements,” the report by Mr. Freeh said.

Shifting the bonds to an unregulated entity to avoid capital requirements is unusual at financial firms, corporate accounting specialists say. Regulators expressed concerns about the maneuver, although ultimately they did not block it. The Financial Industry Regulatory Authority (FINRA), Wall Street’s self-regulator, said it lacked jurisdiction to pursue the matter further.

“It’s a shell game, and the problem is the regulators buy off on this stuff, and then when it implodes, they always look so stupid,” said Lynn E. Turner, the former chief accountant at the Securities and Exchange Commission. “Common sense says why would you accept these types of shenanigans..."

Read the rest here.

SP Futures Reach Apex of Fraud As Earnings Season Arrives and Bank Accounting Dodgy as Ever, Doing God's Work

"At what point shall we expect the approach of danger? By what means shall we fortify against it? Shall we expect some transatlantic military giant, to step the Ocean, and crush us at a blow?

Never! All the armies of Europe, Asia and Africa combined, with all the treasure of the earth in their military chest; with a Bonaparte for a commander, could not by force, take a drink from the Ohio, or make a track on the Blue Ridge, in a trial of a thousand years.

At what point, then, is the approach of danger to be expected? I answer, if it ever reach us it must spring up amongst us. It cannot come from abroad. If destruction be our lot, we must ourselves be its author and finisher. As a nation of freemen, we must live through all time, or die by suicide." Abraham Lincoln

Earnings season begins again this week in the States.

Investors remain skittish despite rosy predictions for earnings. This may be because of the suspicion that there are continuing misrepresentations of the true financial picture being permitted by the regulators, the ratings agencies, and the accountants.

For example, Bloomberg reports that if Bank of America Corp., JPMorgan Chase & Co. and Wells Fargo were taking the appropriate reserves against loan losses, it would virtually wipe out all their expected profits for 2010. And I suggest that this loss estimate is likely to be conservative. But of course this is not going to happen in the land of 'extend and pretend.'

Reserves against losses? We don't need no stinking reserve, not while we have the Federal Reserve.

So don't get all short this market just yet, and provide grist for the mill as it might just grind higher. The good guys don't win until they get on their horses and do something. Wait for a key breakdown, probably triggered by some disclosures.

Misrepresentation of the facts and figures abounds. Through the years I noticed a common denominator amongst the kleptocracy and slippery sons of privilege: when the going gets tough, they cheat, even more than usual. And they become righteously indignant if you call them on it. As one pampered son said to me, "If the professors are not smart enough to stop me, why should you care?"

That is how they got through university, and how they get through life. They cheat on their taxes, on their wives, their community, their civic obligations, their business dealings, their friends, and even themselves. And they spend a lot of time and money stuffing the hole in their being with possessions, both things and people, to create the illusion of substance and self-worth. And so often they have learned this from their parents either through abuse or example. There must surely be a special place in hell for anyone who twists such a pathetic half-life out of the gift of a child.

Someone sent me the series currently playing on HBO, "The Pacific." They knew I would be interested because my father was one of those kids who, right after high school graduation, took their first trip away from home, from Cherry Point to Tokyo via hell. Its a brutal series, but worth watching if you want a less romanticized version of what war is like, without the self-indulgence excess of the anti-war movies. I enjoyed the exposure they give to John Basilone, the only NCO to win both the Medal of Honor, and the Navy Cross posthumously, in WWII. I used to attend the church in his hometown of Raritan, NJ where they still have a parade in his memory every year.

That experience and the Great Depression made all our fathers and uncles as tough as nails, reminiscent of the character in the movie Gran Torino. My father wasn't pretty. He was rather rough around the edges with a hard shell, did not suffer fools gladly, and had a truly remarkable command of rough language, as I understand is the custom among Marine Corps sergeants. But he always stood his ground, and did the right thing even when it hurt, out of a sense of duty, honor and pride. And he made sure that I knew that being honest, and honorable and truthful was the right thing, the only thing, to do. And I thank him for it. I am glad he is no longer around to see this triumph of the privileged, and the submission of the many, in a country that he loved. Semper Fi, dad.

Bloomberg
Bank Profits Dimmed by Prospect of Home-Equity Losses
By Dakin Campbell and David Henry

April 12 (Bloomberg) -- Bank of America Corp., JPMorgan Chase & Co. and Wells Fargo & Co. may have to set aside an additional $30 billion to cover possible losses on home-equity loans, an amount almost equal to analysts’ estimates of profit at the three banks this year.

The cost of these reserves was calculated by CreditSights Inc., a New York-based research firm whose prediction almost four years ago proved prescient after banks reported unprecedented mortgage-related writedowns. Recognizing the home- equity loan losses is unfinished business from the housing bubble, CreditSights said in a March 29 report.

Potential writedowns on the loans are casting a shadow over earnings, as analysts try to determine how much, and how quickly, loan-loss expenses will decline from the industrywide peak reached in June 2009. Banks led by New York-based JPMorgan begin reporting first-quarter results this week....

NY Fed Implicated in the Accounting Fraud at Lehman

Quite a bombshell from Yves Smith of Naked Capitalism tonight.

I wonder if the US mainstream media will ignore and dismiss it as they did the exclusion of the Wall Street banks from European debt sales in response to their fraudulent CDO sales. Is there a 'reverse gear' on the Voice of America?

In response, let's see if Chris Dodd puts the Consumer Protection section of the financial reform legislation under the control of a private organization,the Fed, which is owned by the institutions it is supposed to be regulating, and which is now implicated in the failure and fraud that helped to trigger the recent financial crisis.

The senior Republicans on the committee have insisted that it be. Originally Senator Dodd seemed to be going along with that in the spirit of bipartisan support for the monied interests and the financial lobbyists. That would be the perfect Orwellian twist to an increasingly surreal decline in the observance of the Constitution and the rule of law.

And then of course there is Turbo Tim, knee deep again in messy conflicts of interest and crony capitalism. The "CEO defense" claiming attention deficit disorder and blissful aloofness is in fashion among highly paid US executives. Considering Mr. Geithner's record, even in the execution of his own tax returns, the incompetence defense might be plausible. But it then calls into question the judgement of the person who subsequently appointed Tim to be the head of the most powerful financial organization on earth, the US Treasury.

Call the New Yorker. Time for another media PR blitz, but this one is for the Chief.

Naked Capitalism
NY Fed Under Geithner Implicated in Lehman Accounting Fraud

Quite a few observers, including this blogger, have been stunned and frustrated at the refusal to investigate what was almost certain accounting fraud at Lehman. Despite the bankruptcy administrator’s effort to blame the gaping hole in Lehman’s balance sheet on its disorderly collapse, the idea that the firm, which was by its own accounts solvent, would suddenly spring a roughly $130+ billion hole in its $660 balance sheet, is simply implausible on its face. Indeed, it was such common knowledge in the Lehman flailing about period that Lehman’s accounts were such that Hank Paulson’s recent book mentions repeatedly that Lehman’s valuations were phony as if it were no big deal.

Well, it is folks, as a newly-released examiner’s report by Anton Valukas in connection with the Lehman bankruptcy makes clear. The unraveling isn’t merely implicating Fuld and his recent succession of CFOs, or its accounting firm, Ernst & Young, as might be expected. It also emerges that the NY Fed, and thus Timothy Geithner, were at a minimum massively derelict in the performance of their duties, and may well be culpable in aiding and abetting Lehman in accounting fraud and Sarbox violations.

We need to demand an immediate release of the e-mails, phone records, and meeting notes from the NY Fed and key Lehman principals regarding the NY Fed’s review of Lehman’s solvency. If, as things appear now, Lehman was allowed by the Fed’s inaction to remain in business, when the Fed should have insisted on a wind-down (and the failed Barclay’s said this was not infeasible: even an orderly bankruptcy would have been preferable, as Harvey Miller, who handled the Lehman BK filing has made clear; a good bank/bad bank structure, with a Fed backstop of the bad bank, would have been an option if the Fed’s justification for inaction was systemic risk), the NY Fed at a minimum helped perpetuate a fraud on investors and counter parties.

This pattern further suggests the Fed, which by its charter is tasked to promote the safety and soundness of the banking system, instead, via its collusion with Lehman management, operated to protect particular actors to the detriment of the public at large.

And most important, it says that the NY Fed, and likely Geithner himself, undermined, perhaps even violated, laws designed to protect investors and markets. If so, he is not fit to be Treasury secretary or hold any office related to financial supervision and should resign immediately...

Read the rest of the story here.

December 2009 Non-Farm Payrolls Report Preview and Forecast

As you may know, and as we suggested the other day, the ADP report, based on payroll data from American business, showed a loss of 84,000 jobs in December, versus expectations of a loss of only 75,000 jobs.

We also suggested that this Friday's US Non-Farm Payroll Report will be a positive surprise, at least 10,000 or so jobs to the good. Here are the details.

The Imaginary Jobs component, also known as the Bureau of Labor Statistics Birth-Death Model, will contribute approximately 72,000 jobs allegedly created by small businesses with less credible evidence than a Bigfoot or an Elvis sighting.

Not that they are always positive. Each January there is an enormous job loss shown here, in the neighborhood of about 350,000 jobs. The reason they do this is because the seasonal adjustment factor is so huge in January that this imaginary jobs number does not matter, since it is subtracted (and added) from the numbers prior to the seasonal adjustment.

We can expect this model to continue to show positive annual jobs growth until the End of Days, and perhaps longer than that if there is fireproof paper in the afterlife.



The 'headline jobs number' which is the Seasonally Adjusted Number will be a positive 58,000 jobs, and provide much joy and exultation in Washington and on Wall Street. Pundits like Paul Krugman will caution that the economy is still fragile and a second stimulus bill will be required to insure these positive gains.



What is the basis for these projected numbers? The same basis used by the BLS - nothing. At least nothing connected with the real world. These are the numbers that bureaucrats might mindlessly crank out in response to the desire of their bosses for certain targets, a phenomenon well understood by most corporate financial staffs.

We drew the trendline on that chart earlier this year, assuming that the government would wish to show a steady job increase with a positive number by December, or at least January. So far we have not been disappointed, although there have been quite a few revisions along the way.

There will also be revisions this time again, with some jobs added and borrowed from prior months to help make this latest number seem believable.



So, let's see how it really turns out. Am I being too cynical? I used to spend many hours estimating these numbers and potential targets, but this month I decided to go with the trends. Not trends in job growth, but trends in the general corruption of nearly all financial and economic data in the US, from the government, the banks, and the kleptocracy.

Perhaps the numbers will be realistic and credible this time, and I can be pleasantly surprised.

And perhaps the Obama Administration will begin to deliver the promised, genuine financial reforms.

The Great American Bank Robbery

If you suspected that fraud, corruption, incompetence, and coverups at the highest levels are at the heart of our current financial crisis, you're right.

"...ideology enabled criminality and political failure led to economic crisis as Wall Street bought Capitol Hill..."

The Great American Bank Robbery
Video - Lecture
By William K. Black

1. Why do we have repeated, intensifying economic crises?
2. What can white collar criminology add to our understanding of what's going wrong?

Purchase Accounting Rules Set to Deliver $29 Billion Profit Windfall to JP Morgan and Other Banks

"It's Not the People Who Vote that Count; It's the People Who Count the Votes."
Josef Stalin

One of the many benefits of being a leading citizen of the Potemkin economy and a silent partner with the Treasury and Federal Reserve.

There is an analog to this in the tech sector, in which some companies may choose to write down the value of their components and subassembly inventories in fat quarters, and then take them as an improvement to their Cost of Goods Sold (COGS) in lean quarters, to boost EPS even as the top line revenues are flat to down.

And as for merger accounting, there are several companies showing excellent and consistent results using that rolling paintbrush of accounting embellishments.

Things are not always as they appear, especially when viewed through magic lantern of Wall Street.


RTTNews
JPMorgan likely to reap $29 Bln windfall on WaMu bad loans purchase
5/26/2009 8:29 AM ET

(RTTNews) - JPMorgan Chase & Co. stands to reap a $29 billion windfall due to an accounting rule that lets JPMorgan transform bad loans it purchased from Washington Mutual Inc. into income, the Bloomberg reported Tuesday.

Last year, the Seattle-based Washington Mutual, or WaMu, collapsed after it faced $19 billion of losses on soured mortgage loans and its credit rating was slashed, leaving it with insufficient liquidity to meet its obligations.

On September 25, 2008, JPMorgan Chase & Co. acquired all deposits, assets and certain liabilities of Washington Mutual Inc. for about $1.9 billion from the Federal Deposit Insurance Corporation, or FDIC.

The New York-based JPMorgan reportedly has used purchase accounting, which allows it to record impaired loans at fair value, marking down $118.2 billion of assets by 25%. JPMorgan took a $29.4 billion write down on WaMu's holdings, mostly for option adjustable-rate mortgages and home equity loans.

The purchase-accounting rule provides banks with an incentive to mark down loans they acquire as aggressively as possible. One of the benefits of purchase accounting is after marking down the assets, one can accrete them back in, which is said to be favorable over the long run.

Now, as borrowers pay their debts, the bank reportedly says it may gain $29.1 billion over the life of the loans in pretax income before taxes and expenses.

JPMorgan aside, Wells Fargo, PNC Financial Services Group Inc., and Bank of America Corp. are also poised to benefit from taking over home lenders Wachovia Corp., Countrywide Financial Corp. and National City Corp., the report said citing regulatory filings.

On This Morning's Worse Than Expected Economic News...

It looks like those 'green shoots' which Bernanke saw were, in fact, merely fungus growing on the rot of the economy which the Federal Reserve has engineered through long term manipulation, mismanagement, and malinvestment.

People without jobs, and in particular jobs that pay well, are not able to buy consumables and take on additional credit, much less service the debt which they have on things which they have already consumed. Mirabile dictu!

U.S. stocks tumbled on Wednesday as worse-than-expected retail sales hurt shares in the sector, including Wal-Mart Stores Inc, and dampened recent enthusiasm over the economic outlook.

Government data showed sales at retailers fell for a second straight month in April, after a string of more upbeat reports suggested a turning point in the economic cycle.

And the prices of imports and 'real goods' are increasing as the dollar and financial assets continues to collapse.

We remember the stagflation of the 1970's very well. If you did not experience it as an adult with financial obligations it will be a new and instructive experience in monetary policy and the fallibility of economists and financial engineering.

The U.S. Import Price Index rose 1.6 percent in April. A 15.4 percent increase in import petroleum prices more than offset a 0.4 percent decline in the price index for nonpetroleum imports. Export prices also rose in April, increasing 0.5 percent.

Its too early to forecast for stagflation, but it remains a very realistic outcome.

Wells Fargo's Papier-Mâché Earnings Report

This just in from Dave the Bond Trader.

We would not have minded this bit of accounting chicanery so much, if Wells had not accompanied their earnings with so much "master of the universe" bravado and bluster about their superior banking management.

But we suppose when you are down on your chips and running a bluff, you have to give out the right sort of attitude and moral high ground to make it work, to hide the fact that you are just crooking the books like everyone else.

That smoke you feel being blown up your backside is nothing more than legalized accounting fraud being presented to the world in the form of Wells Fargo's 1st Qtr 2009 earnings release. As suspected, the infamous "record profits" preannounced 2 weeks ago by Wells Fargo are nothing more than a result of our Wall Street-financed Governmnet, including our President, forcing the FASB to change the way big banks account for toxic assets. As per WFC's earnings release today:

"The net unrealized loss on securities available for sale declined to $4.7 billion at March 31, 2009, from $9.9 billion at December 31, 2008. Approximately $850 million of the improvement was due to declining interest rates and narrower credit spreads. The remainder was due to the early adoption of FAS FSP 157-4, which clarified the use of trading prices in determining fair value for distressed securities in illiquid markets, thus moderating the need to use excessively distressed prices in valuing these securities in illiquid markets as we had done in prior periods"

Essentially, what WFC did was post $5.2 billion mark to fantasy gains, which were then added into its revenues, by reversing out previous charges expensed against their securities and loans held for sale. Without this gain, Wells Fargo loses a couple billion.

In looking at WFC's balance sheet, I see that their "securities held for sale" miraculously jumped to 27% of their net loans vs. being only 21% of loans at the end 2008. This is obviously WFC taking full advantage of the new mark to fantasy accounting standard and piling as much toxic waste into this category and marking the price levels up substantially. Be really interesting to see what kind of worthless crap was conveniently moved into this category.