Thursday, February 25, 2010

Accounting Shocker - Even For Me

You want to know what is wrong with America? You don't have to go much farther than look at the accounting board - FASB which has become a politicized monstrosity. This makes me livid with anger. It is shocking for me and I expect such outcomes. The only thing worse than MTM accounting is relying on estimates from parties who have an interest in the end results. Jonathan Weil does an excellent piece of reporting on FHLB and the accounting absurdities.

From Bloomberg

Next time you see some company complain its “mark-to-market” losses aren’t real, remember this name: the Federal Home Loan Bank of Seattle. It used to claim that, too. And it couldn’t have been more wrong.

About a year ago, the government-chartered lender blamed accounting rules after it wrote down its portfolio of mortgage- backed securities by $304.2 million to reflect how much their fair-market values had fallen. While those declines counted against its earnings and regulatory capital, the bank said they were “well beyond any expected economic loss.”

The bank’s executives said they expected to lose a mere $12 million of principal over the life of the securities. That estimate proved far too hopeful, though.

Remember that $304.2 million number.

The bank, one of 12 regional Federal Home Loan Banks that supply low-cost loans to about 8,000 member banks and finance companies, now says it expects about $311.2 million of credit losses on its portfolio.

What???? So let me get this straight. They took a mark to market loss of $304.2 million. Complained and complained and lobbied and lobbied that the accounting rules were ridiculous. As we shall see, where part of the hearing that got the rules changed AND the the ACTUAL LOSS IS GOING TO BE BIGGER THAN EVEN THE PREVIOUS MARK TO MARKET LOSS????? ABSURD!!!!!!!!! Can it go worse? Well yeah actually.

The bank became a poster child for everything supposedly wrong with mark-to-market accounting. At a March 12, 2009, congressional hearing, U.S. Representative Ed Perlmutter of Colorado cited the disparity between the bank’s writedown and its much smaller anticipated loss as “an example that really was disturbing.”

The congressman leading the hearing, Paul Kanjorski of Pennsylvania, pointed to a similar instance at the Federal Home Loan Bank of Atlanta. The bank reported an $87.3 million writedown on its mortgage-backed securities for the 2008 third quarter; however, it said it expected its actual losses would be only $44,000.

So this bank became a poster child and why the rules were wrong. And wait, the FHLB bank of Atlanta reported $87.3 million in writedowns but only expected a $44 k loss. That is less than a loss on one home?? What are these guys smoking and how do people actually give it any credibility? Well the answer to the second question is they already know the outcome they want so the facts don't matter. And the absurdity of the accounting when the rules got changed.

Here’s how it works in practice. When the Atlanta bank reported its results for the first nine months of 2009, it showed net income of $201.3 million. That included the $263.1 million of credit-related charges. However, it excluded $943.4 million of other mark-to-market writedowns on its securities portfolio. Those got dumped into a line item on the equity statement that banking regulators don’t count.

Like I said. I expect this sort of stuff and I was still shocked. It is easy to see why our system is insolvent when you have numbers being reported by government entities and companies that are no where near reality.

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