Zero Hedge

Cover of Financial Accounting

Zero Hedge: "The newsflow from D.C. over the next two days will make the lives of capital markets participants very exciting. Among the key expected news items is the rumored (temporary) abandonment of Mark-To-Market accounting principles, which caused quite a market rally on Thursday of last week. So as we prepare to say goodbye to the last relic of what was once an efficient market, it might make sense to reevaluate just what it is in the current accounting rules that is so inconvenient for the administration and Wall Street. Among these, chief is the Statement of Financial Accounting Standards No. 157 (here for the full 158 pages of FAS 157) as well as its lesser known cousin, FAS 115.

FAS 157 was fast-tracked for adoption in Q1 2008, with a simple goal: to streamline the valuation of an increasing plethora of hard-to-evaluate securities to a 'Fair Value' price. FAS 157's mission statement is the following:

This Statement defines fair value, establishes a framework for measuring fair value in generally accepted accounting principles (GAAP), and expands disclosures about fair value measurements. This Statement applies under other accounting pronouncements that require or permit fair value measurements, the Board having previously concluded in those accounting pronouncements that fair value is the relevant measurement attribute. Accordingly, this Statement does not require any new fair value measurements. However,"

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Greenspan Legacy

The Reckoning - Taking Hard New Look at a Greenspan Legacy - Series - NYTimes.com: "George Soros, the prominent financier, avoids using the financial contracts known as derivatives “because we don’t really understand how they work.” Felix G. Rohatyn, the investment banker who saved New York from financial catastrophe in the 1970s, described derivatives as potential “hydrogen bombs.”

And Warren E. Buffett presciently observed five years ago that derivatives were “financial weapons of mass destruction, carrying dangers that, while now latent, are potentially lethal.”

One prominent financial figure, however, has long thought otherwise. And his views held the greatest sway in debates about the regulation and use of derivatives — exotic contracts that promised to protect investors from losses, thereby stimulating riskier practices that led to the financial crisis. For more than a decade, the former Federal Reserve Chairman Alan Greenspan has fiercely objected whenever derivatives have come under scrutiny in Congress or on Wall Street. “What we have found over the years in the marketplace is that derivatives have been an extraordinarily useful vehicle to transfer risk from those who shouldn’t be taking it to those who are willing to and are capable of doing so,” Mr. Greenspan told the Senate Banking Committee in 2003.


“Not only have individual financial institutions become less vulnerable to shocks from underlying risk factors, but also the financial system as a whole has become more resilient.” — Alan Greenspan in 2004

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Contagion could fracture the eurozone

The Guardian: "Somehow you always sensed that it was tempting fate when the German finance minister, Peer Steinbrück, said last month that the credit crunch was an American matter. How long would it be before the contagion that knocked the stuffing out of Wall Street and the City would claim a eurozone bank or two?

Well, the hubristic words were barely out of Steinbrück's mouth before we had our answer. The Belgians and the Dutch bailed out Fortis bank; the Irish made a blanket guarantee on deposits amid fears that at least one, and probably two, of their big banks were about to go belly up.

Steinbrück's musings on whether the US was losing its status as the world's economic hegemon were interrupted by the need to seek approval from Brussels for the ill-fated €35bn (£27bn) rescue of Germany's Hypo Real Estate banking group. And by the weekend the leaders of Europe's big four - Germany, France, Italy and Britain - were calling for an emergency global summit next month. A lesson for finance ministers: try not to anger the gods."

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Bloomberg.com: Exclusive

Bloomberg.com: Exclusive: "Lehman Cash Crunch Caused by Lender JPMorgan, Creditors Say

Creditors say that Lehman Brothers Holdings Inc.'s main lender and clearing agent, JPMorgan Chase & Co., caused the liquidity crisis that led to Lehman's collapse".

JPMorgan had more than $17 billion of Lehman's cash and securities three days before the investment bank filed the biggest bankruptcy in history on Sept. 15, the creditors committee said in a filing Oct. 2 in bankruptcy court in Manhattan. Denying Lehman access to the assets on Sept. 12, the bank ``froze'' Lehman's account, the creditors claimed.

JPMorgan, the biggest U.S. bank by deposits, financed Lehman's brokerage operations with daily advances, while money market funds and other short-term lenders provided overnight loans, according to bankruptcy court documents. When JPMorgan shut Lehman off from funds, Lehman ``suffered an immediate liquidity crisis that could have been averted by any number of events, none of which transpired,'' according to the filing.

The creditors asked the judge in charge of the case to let them interview a witness and request relevant documents from JPMorgan and to pursue possible legal claims. U.S. Bankruptcy Judge James M. Peck is scheduled to hold a hearing Oct. 16 on that request, the creditors said.

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The accounting rule you should care about

From cnnmoney.com

NEW YORK (CNNMoney.com) -- It's easy to understand why the proposal to spend $700 billion in taxpayer money to rescue banks would inspire impassioned debate in Washington.

But in a sign of just how complex and controversial the current credit crisis has become, a move to potentially change accounting rules on how banks and Wall Street firms value the securities they own is almost as heated.

Some argue that tight accounting rules are a major reason for the credit crisis in the first place. Others contend that changing the rules will just bury problems lurking beneath the surface and could further shake investor confidence in the already battered financial sector.

Roots of the problem

First a bit of background. The one fact everyone agrees on is that the current financial crisis centers on trillions of dollars worth of mortgage loans that were packaged together into financial instruments known as mortgage-backed securities, or MBS. Those securities were purchased by banks and Wall Street firms.

But as home prices started to fall and foreclosures rose, the value of these securities plunged. Today, there is almost no market for the securities.

This is why Treasury Secretary Henry Paulson and Federal Reserve Chairman Ben Bernanke proposed that the government buy the securities. The hope is that doing so could restart the MBS market at something well above the current fire sale valuations and that the government could hold the securities until the market improves.

Some advocates of the plan argue that taxpayers will be able to eventually make money if the government sells the securities at a higher price down the road. But the more immediate hope is that banks and Wall Street firms, freed from the toxic loans on their balance sheet, will start lending again.

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