[Jay] Rasulo was asked if he’d rather have five minutes with Federal Reserve Board chairman Janet Yellen or a five-year-old kid who’d just gone to a Disney park for the first time. “That’s an easy one — way too easy,” he said. “I’ve had a million of those conversations with kids and they’re all great. And they’re always honest, which is the best thing.” [CFO]
Related Posts
Regulators’ Exposure of Accounting Loophole Helped Banks Hide Risk
This story is republished from CFOZone, where you’ll find news, analysis and professional networking tools for finance executives.
Not exactly shocking news but one of the mysteries of the financial crisis is how it came to be that banks ended up with r transferred to investors.
Sure, it’s well known that the assets banks removed from their balance sheets did not shift much risk to investors after all, thanks to liquidity guarantees they supplied to investors. But that even took former Citigroup vice chairman and Treasury secretary Robert Rubin by surprise, as Rubin said he didn’t know such guarantees existed until after the bank was forced to increase its capital reserves because it had to make good on them.
Now research that came out a year ago but was revised late last month helps clarify what went awry.
It turns out that a conflict between the Financial Accounting Standards Board and federal bank regulators was even more critical than I thought it was when I reported it in 2004. The conflict arose after FASB voted to require commercial banks to consolidate such vehicles after such financing arrangements caused energy trading firm Enron Corp. to fail.
I was aware that the regulators asked the FASB to delay the new accounting rule and that the board eventually provided an exemption for so-called “qualified” special purpose entities, which provided a loophole from consolidation so long as they vehicles weren’t actively managed.
But the full significance of that escaped me until I saw the research, which shows that securitization along the lines of Enron’s — guarantees that limited or even eliminated investor risk — exploded after bank regulators codified the exemption in their capital requirements. Indeed, the exemption essentially paved the way for banks to use more off-balance-sheet financing vehicles that masked their true risk.
How exactly? In late 2004, the Federal Reserve Board, Federal Deposit Insurance Corporation and the Office of Thrift Supervision decided that asset-backed commercial paper put into special purpose vehicles known as conduits would not have to be consolidated for purposes of calculating capital requirements. And the regulators decided that banks need only reserve against 10 percent of the amounts put into conduits even when they guaranteed that investors would be repaid if there were a run on the conduits. Previously, securitizations typically put investors on the hook for that risk.
The research, originally published in May 2009 but revised in late January and entitled “Securitization without Risk Transfer,” found that the amount of subprime assets securitized through such vehicles soared in the wake of the exemption, even though the liquidity guarantees extended to investors meant that little or no risk had been transferred to them.
“Regulation should either treat off-balance-sheet activities with recourse as on-balance sheet for capital requirement and accounting disclosure purposes, or, require that off-balance sheet activities do not have recourse to bank balance sheets,” the authors, Viral V. Acharya and Philipp Schnabl of New York University and Gustavo Suarez of the Federal Reserve, conclude. “The current treatment appears to be a recipe for disaster, from the standpoint of transparency as well as capital adequacy of the financial intermediation sector as a whole.”
CPAs No Longer Have to Be CFOs When They Grow Up
“The Street doesn’t care about accounting functions any longer. They don’t get into the nitty-gritty […]
SEC Wins Backdating Case Against Former Maxim CFO
This story is republished from CFOZone, where you’ll find news, analysis and professional networking tools for finance executives.
The SEC, under attack last week for its Goldman lawsuit and porn allegations, late Friday finally had a victory to celebrate.
Carl Jasper, the former chief financial officer of Maxim Integrated Products was found liable for securities fraud in a stock-option backdating lawsuit filed by the SEC’s San Francisco office, according to Bloomberg.
Carl Jasper, the former chief financial officer of Maxim Integrated Products was found liable for securiti option backdating lawsuit filed by the SEC’s San Francisco office, according to Bloomberg.
It was a rare civil jury trial involving backdating allegations.
Even rarer, it was the second backdating case decided in a court in one week.
Earlier in the week the former CEO of KB Home was convicted of four felony counts in a criminal stock option backdating case.
In the Jasper case, the former finance executive of the maker of chips for laptop computers was found liable on eight out of 11 counts, and cleared him on three, according to The Recorder. Bloomberg said he was found liable for fraud, lying to auditors, and aiding Maxim’s failure to maintain accurate books and records.
“We are pleased that a jury sitting in the heart of Silicon Valley recognized that stock-option backdating is, in fact, a fraudulent practice that matters to investors, and that Mr. Jasper, as the CFO of a public company, was ultimately responsible for misleading investors about the accuracy of Maxim’s financial reports,” Mark Fickes, trial counsel for the SEC, told the wire service in an e-mail statement after the eight-day trial.
Jasper’s lawyer, Steven Bauer, told Bloomberg in an e-mail he will ask the judge to overrule the jury verdict at a May 24 hearing. “Carl Jasper is a good man who never intended to do anything wrong,” he reportedly said. “This is the first step in a long road, and we are confident that in the end he will prevail.”
In late 2007, the SEC filed civil charges against Maxim, Jasper and former chief executive officer John F. Gifford, alleging that they reported false financial information to investors by improperly backdating stock option grants to Maxim employees and directors.
The Commission alleged that Jasper helped the company fraudulently conceal tens of millions of dollars in compensation expenses through the use of backdated, “in-the-money” option grants.
In a separate action, Gifford agreed to pay more than $800,000 in disgorgement, interest, and penalties to settle charges relating to his role in the options backdating.
Maxim, without admitting or denying the Commission’s allegations, consented to a permanent injunction against violations of the antifraud and other provisions of the federal securities laws.
The Commission’s complaints also alleged that Jasper was aware of the improper backdating practices, drafted backdated grant approval documents for Maxim’s CEO to sign, and disregarded instructions from CEO Gifford to record an expense in connection with certain backdated options. According to the Commission, Gifford should have known that the company was not reporting expenses for those in-the-money stock options and instead was falsely reporting that they were granted at fair market value.
According to The Recorder, in his opening statement at the trial, Bauer said Gifford, who is now deceased, was to blame for the backdating and not Jasper.”You can’t talk about options at Maxim without talking about Mr. Gifford,” Bauer reportedly told the court. “You can’t talk about picking dates without talking about Mr. Gifford.”
The SEC is seeking injunctive relief, disgorgement of wrongful profits, a civil penalty, and an order barring Jasper from acting as an officer or director of a public company.
Early last week, Bruce Karatz, the former CEO of KB Home was convicted of four felony counts in a stock option backdating case. He was found guilty of two counts of mail fraud, one count of lying to company accountants and one count of making false statements in reports to the Securities and Exchange Commission, according to published reports.
He was acquitted on 16 other counts, including mail and wire fraud, securities fraud and filing false proxy statements, according to Bloomberg.
He faces up to 60 years in prison when he is sentenced.