Economy • Edmund G. Brown, Jr. (Jerry)

Jerry Brown Sues Badly Behaving Banks for $1.5

April 23, 2009
by Celeste Fremon
4 Comments

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Okay here’s the full story I mentioned earlier in brief.

California Attorney General Jerry Brown announced this morning that he had filed suit against three Wells Fargo affiliates to recover $1.5 billion for California investors who purchased auction-rate securities based on “false and deceptive” advice that these financial instruments were “as safe and liquid as cash.”

Here’s the deal according to Jerry’s press release:

“Wells Fargo’s affiliates promised investors auction-rate securities were as safe and liquid as cash, when in fact they were not, and now investors are unable to get their money when they need it,” Attorney General Brown said. “This lawsuit seeks to recover $1.5 billion for Californians and holds these companies accountable for giving investors false and deceptive advice.”

Auction-rate securities are investments with long-term maturity dates (e.g., bonds) that Wells Fargo and other banks marketed as short-term investments equivalent to cash. These investments paid a slightly better rate of return than a bank account. And, investors could sell the securities at regular weekly or monthly auctions which provided the promise of liquidity.

In February 2008, these auctions froze up nationwide, and investors were no longer able to redeem their securities for cash, as promised. This left approximately 2,400 Californians who had invested with Wells Fargo without access to more than $1.5 billion. Almost 40% of Wells Fargo’s auction-rate securities were held by Californians, far more than any other state nationwide.
In total, 5,687 investors purchased $2.9 billion worth of auction-rate securities from these companies nationwide.

By August 2008, major financial institutions including UBS, Citigroup, Wachovia, and Merrill Lynch met their obligations to investors and restored the cash value of these securities. The three Wells Fargo affiliates, however, have refused to do so.

4 Comments

  • Now that the government has their hands in the banks, we still see the banks cooking the books more than ever. Dishonest reporting from financial institutions hasn’t improved with government running the show.

  • Blow hard, Woody ! Blow hard !!!

    (Mr “Mark-to-whatever-the-CFO-pulls-out-of-his-butt” speaks…Thank God TurboTax doesn’t whine and expel rightwing gas.)

  • Turbo Tax – What Geithner falsely blamed for his tax fraud.

    reg, you understand so little about accounting and finance, why don’t you drop your pretentiousness and quit spouting left-wing talking points fed to you? When you fail miserably at that, then you resort to personal attacks, which are boring to everyone and adds nothing to the discussion.

    – – –

    Congress hijacked accounting standards

    When the nation’s largest banks issue earnings reports later this year, will they be fact or fiction?

    The headlines will look good: stronger assets and higher profits will be reported. But thanks to Congress, it all will be guesswork.

    Congress, acting like Somali pirates, has hijacked accounting rules. The banks appreciate it because they now can assign values to their bad assets based on what they think they should be. But investors are going to be left in the dark.

    The biggest investors are who exactly? Oops, they are us, the U.S. government taxpayers.

    Here is what happened, and it has not been reported widely enough:

    The accounting industry is governed by the Financial Accounting Standards Board, whose rules are recognized as authoritative by the Securities and Exchange Commission.

    Some members of Congress think the banking system is suffering under a rule called mark-to-market. Under mark-to-market, banks must value their assets, including loans and securities on their books, at the prices most recently traded. For mortgage-backed securities, those values are nearly zero because no investors want to buy them.

    But the securities must have some value, bankers have told Congress. So Congress hauled FASB Chairman Robert Herz to a March hearing. There, U.S. Rep. Paul Kanjorski, D-Pa., threatened that if FASB doesn’t relax the mark-to-market rule, Congress will.

    On April 2, the FASB blinked. In a new policy, banks can assign values to assets, including its most toxic securities, based on what they might be worth in a normal market.

    They even can push their troubled assets onto another balance sheet, making the main financial statement look much cleaner than the company as a whole really is.

    A company over in Houston used to do something similar. Enron Corp. doesn’t exist anymore. Enron’s 2001 collapse sparked stronger corporate accounting rules. Now Congress is eroding those rules. ….

    – – –

    Kaufman, Rossin & Co:

    Under heavy pressure from bank lobbying groups, on April 2 the Financial Accounting Standards Board (FASB) liberalized changes in “mark to market” rules, which gives banks greater leeway in determining the value of instruments they hold such as mortgage backed securities and collateralized mortgage obligations.

    While mark to market has been criticized in many quarters for what some see as its contributing role to the banking crisis, many see its liberalization as something less than the savior of the industry.

    Gannon said another change enacted April 2 had to do with the term “Other Than Temporary Impairment,” which is related to non-mortgage-backed securities like bonds.

    With the value of corporate bonds now drastically down, the change no longer requiring banks to report depreciation in the profit and loss category could improve a bank’s bottom line.

    While banking groups praised FASB’s decision, it also drew fire from many quarters. One critic noted that banks never complained about mark to market when the value of their securities was increasing.

    Thomas said the accounting maneuvers around the April 2 changes are not new, recalling that regulators did something similar 20 years ago during the savings-and-loan crisis.

    “They allowed things like goodwill to be counted as capital, to make banks appear to be stronger than they were,” Thomas said. “This is all a form of what I call ‘crisis accounting.’ When you have a crisis, you just change the rules.”

    – – –

    Financial Post

    Bank lobbyists and politicians are damaging the credibility of corporate reporting and hurting the interests of investors around the world by pulling back on mark-to-market accounting, one of the world’s top international accountants warned.

    The comments from Tom Jones, vice-chair of the International Accounting Standards Board (IASB), come after U.S. standard-setters unilaterally decided to dilute the controversial accounting rule earlier this month.

    In an interview with the Financial Post, Mr. Jones warned of “a loss of credibility” and said the rationale for watering down so-called fair value accounting is “crazy.” He also cited concerns about political interference that could undermine the independence of accounting rule setters.

    In early April, the U.S. Financial Accounting Standards Board pledged to backtrack on fair value accounting under intense pressure from Wall Street and demands from Congress. U.S. lawmakers had even threatened to take the matter into their own hands rather than leave it to the accountants. The resulting FASB rule changes allow banks to use judgment rather than market prices, to value financial instruments.

    Nouriel Roubini, the New York University economist nicknamed “Dr. Doom” for his prescient forecast of the global economic downturn, yesterday called the U.S. rule changes “a big mistake” that has allowed Wall Street banks to “fudge” their latest set of quarterly accounts.

    Proponents of fair value, or mark-to-market, accounting say it is the most accurate and independent way to price assets. But bankers say fair value accounting has exacerbated the current financial crisis by unfairly forcing them to take huge writedowns. They say illiquid markets for certain securities have led to fire sale prices that do not represent appropriate valuations, and they have lobbied to be allowed to value certain troubled securities based on their own estimates.

    The idea that banks have been forced to write down assets beyond any rational level is “actually crazy,” said IASB’s Mr. Jones. The market price for troubled financial instruments has probably not even hit the bottom yet, he added.

    – – –

    Accounting Today

    Under pressure from Congress to act quickly, the Financial Accounting Standards Board voted to approve substantial changes to fair value accounting.

    The votes came after the board received over 600 comments within just two weeks (see FASB Issues Fair Value Proposals), including many urging the board to resist pressure from Congress and the banks. “The vast majority of the preparer letters opposed this,” said Leslie Seidman.

    FASB Chairman Robert Herz was pressed by angry members of a House Financial Services Subcommittee to come up with the modifications within three weeks or face another hearing, or congressionally mandated changes to accounting standards (see Congress Presses FASB to Revise Mark-to-Market).

    During the FASB board meeting, he referred to his testimony before Congress alongside SEC acting chief accountant James Kroeker as the “lovefest for Bob Herz.” He added, “One of the unfortunate things in this FSP is that we have to take this responsibility on, rather than have the regulators do it.”

    Timing was also a critical issue, as the board was under pressure to allow banks to include the changes in the quarterly statements that will be due out soon.

    “There is the impression that we’re bowing to political pressure,” said one of the board members, Lawrence Smith, who described how staff members had been working late hours to draft the FSPs and pore over the comments. “We are independent standard-setters, but how can we ignore what’s going on around us?

    – – –

    AP

    “Our reaction is that this decision decreases transparency and allows financial institutions to use fictional valuations on many of their toxic assets,” Joshua Shapiro, chief U.S. economist at MFR Inc., said Thursday in a research note. “Whatever ‘write-ups’ result from this are unlikely to be valued very highly by markets, and this decision further obscures the true position of banks and other financial institutions.”

    An estimated $2 trillion in soured assets is gumming up banks’ books.

    “Banks need to have flexibility” in valuing assets but the fair market rule shouldn’t be scrapped, Sheila Bair, the chairman of the Federal Deposit Insurance Corp., told a gathering of bank executives Wednesday. “There needs to be integrity in those bank balance sheets.”

    – – –

    You can thank the Democrats for this.

    Suck on that.

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