Monday, 3 November 2008

Affronted by accounting

Bloomberg Opinion has a nice piece by Jonathan Weil. He points out that Wachovia's accounts show it having a positive net worth of about $50B but Wells Fargo is buying it for $15B. The difference, of course, is accounting. Or as Mr. Weil puts it:
The reality is that Wachovia's management, including Chief Executive Officer Robert Steel, still won't admit the company's balance sheet is a farce and has been for a long time. More worrisome, though, is that nobody with any authority is calling them on it, even today. That includes Wachovia's auditor, KPMG LLP, as well as the Securities and Exchange Commission and banking regulators such as the Federal Reserve and FDIC.

If those lapdogs won't stop Wachovia from conjuring up bogus asset values, it's only prudent to assume they're letting lots of other companies bake their books in less obvious ways.
This is a glaring example, it is true. Clearly Wachovia's loan loss provisions are not adequate, in Wells' view, to cover their likely losses. Wachovia seem to think that Wells have a point, moreover, at least to the extent that they have not sought a higher price.

Now I am the first to agree that determining the fair values for anything as complicated as a large bank's book is difficult. And forced sellers are likely to get less than willing ones. But $35B is a big gap.

Recent accounting changes are making the situation worse, as Deutsche's recent profit illustrates. This profit was entirely due to an accounting reclassification which, perfectly legally, moved the bank further from fair value. Is this state of affairs really what the users of financial statements want? Both auditors, in their often gutless appraisal of loan loss reserves and of level 3 marking methodologies, and accounting standards setters, in caving to pressure from the banks to permit more earnings manipulation, are to blame. Show some backbone boys. Make them mark it down.



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