Author: Adrienne Gonzalez

Going Concern’s own Jr Deputy Accountant did a pretty interesting piece this week via the Mortgage Lender Implode-o-Meter (which brought us such fabulous bloggers as Option ARMageddon – now at Reuters – and Mandelman Matters) that might be of interest to GC readers, at least those with a lawyer bent.
Can anyone tell me what Richmond Fed was thinking?! Anyone? Please?
Anyway. Just a reminder, GC did LandAmerica long ago.

How did LandAm’s Gluck end up at the Richmond Fed?

“With her broad range of leadership experience and extensive legal expertise, I know she’ll make great contributions to the Bank and to the Federal Reserve System,” said Richmond Fed President Jeffrey Lacker in July of the Fifth District’s new Legal Counsel Michelle Gluck. It leads one to wonder how thoroughly Lacker was briefed on Gluck’s sordid history at Richmond-based LandAmerica Financial Group previous to his statement. I still can’t understand why the Bank would hire her, maybe by the time I’m done with this I will.

For the not-so-quick background on Gluck and both previous and current employers, do check out LandAmerica: The final days appeared like a Ponzi scheme, The Good, the Bad, and the Less Bad for Richmond Fed and her bio that still sits on the LandAm web site:

“Executive Vice President – Chief Legal Officer Michelle has more than 20 years of experience in the legal profession. As General Counsel, she contributes sound legal reasoning and practical insights into legal issues facing LandAmerica. As Corporate Secretary, she oversees the governance of our Board of Directors. Michelle joined LandAmerica in 2003 after serving Kmart Corporation as VP – Associate General Counsel & Assistant Secretary. She holds a juris doctor degree from the University of Michigan Law School and a bachelor’s degree in English from the University of Michigan, where she graduated with honors.”
This Tuesday is the deadline for LandAmerica 1031 exchange victims (LES – dubbed exchangers amongst themselves) to accept pennies on the dollar for funds lost in LandAm’s bankruptcy proceedings. It is suspected that many Exchangers will vote for the plan, which guarantees at least some monies returned to victims instead of an excruciating court battle that many of LandAm’s unsecured creditors simply cannot afford.

For the rest of Michelle Gluck’s not-so-pretty resume and more musings on WTF Richmond Fed was thinking, head over to the Implode-o-Meter for the rest. I warn you, it’s ugly. Financial terrorism never is pretty you know.

Editor’s Note: Want more JDA? You can see all of her posts for GC here, her blog here and stalk her on Twitter.
Over the weekend, I covered an obscure financial reform proposal that may mean taking away final responsibility of accounting standard-setting from FASB af “emergency” switch for use solely in situations of undue financial stress. This type of “escape hatch” might be familiar; the practical application of the Fed’s 13(3) rule left the door wide open for Bear Stearns and AIG.

In regards to Meet the FASB Override Button, I received a note from reader Ron with the simple rhetorical question:

Do you think a system this corrupt can survive in its present form?

He even gave me an out, qualifying the email with “No need to reply.”
Well thanks, Ron, but how in the hell am I supposed to ignore a loaded question like that?
In the article, HuffPo calls it “Civil War in Corporate America”:

Amid the ongoing financial regulation overhaul, the banking industry is hoping to pull off a quiet power grab that has eluded its grasp since the Great Depression, by stripping the independence of the board that sets financial accounting standards.
The mechanism is contained in an amendment set to be introduced in mid-November by Rep. Ed Perlmutter (D-Colo.) that would move final authority over the Financial Accounting Standards Board (FASB) from the Securities and Exchange Commission to a new body, a so-called “oversight” board, that would include the officials charged with managing systemic risks to the financial markets.

The Center for Audit Quality came back with a nasty letter to Barney Frank — among others — insisting that accounting setters must remain independent (implying that they have been all along). I assume that the CAQ has forgotten about FAS 157-e by now.
So do I believe in financial reform at this point? No, and I can’t say I ever did. Did I ever believe we could duct tape our way through recovery with a little accounting magic and some confident words from Tim Geithner? Yeah right.
And that therefore betrays my opinion on saving our financial system in its current form. FASB merely exists under the guise of independence, and while European accounting standard setters have a far worse reputation when it comes to allowing themselves to be politically swayed, something must change moving forward.
I doubt that an emergency FASB override button is a step in the right direction to that end.
But if they’re trying to sneak in accounting standard escape hatches, that means something must be working correctly with the currently regulatory framework – they wouldn’t be looking for ways to bypass it if it was totally useless.
Past GC coverage of Congress meddling in accounting rules:
Congress Needs More Testimony on Accounting Stuff They Won’t Understand
Barney Frank Doesn’t Legislate Accounting, He Only ‘Exerts Pressure’
Newt Gingrich Doesn’t Like the FASB

On Friday I did a post for Jr Deputy Accountant on Accounting “Irregularities” on the Rise in the Recession after I saw a piece in Reuters about battered financial statements:

Corporate balance sheets may be showing signs of the wear and tear from the prolonged U.S. recession as accounting irregularities are starting to surface at growing numbers of U.S. companies.

Going Concern also covered this so it’s been decided by the blogosphere that this one deserves your attention.

Friend of both yours truly and Going Concern, Financial Armageddon’s Michael Panzner caught this tale and tied it in to one he’d done the day before on banking shenanigans.

In yesterday’s post, “Bad C’s,” I highlighted a few reports that lent further weight to the notion that the financial sector has not been a paragon of virtue, to put it mildly. Yet while many banks and brokers have engaged in some pretty bad behavior — which, among other things, helped bring about the worst financial crisis this century –they are apparently not the exceptions to the rule, as jr deputy accountant reveals in “Accounting ‘Irregularities’ on the Rise in the Recession”:
Reuters is reporting accounting fudging and fraud are on the rise in the US as a result of “pressures” for companies to perform despite the hostile economic environment.

The previous post he refers to sums it up nicely:

In an interesting twist of fate, the firms that have traditionally decided who should get credit have been put in the position of needing extraordinary amounts of other people’s money just to stay alive. Unfortunately, based on what we’ve seen so far, including reports like those that follow, it’s doubtful whether most, if not all, of today’s troubled financial institutions would even qualify for a loan based on traditional measures of suitability — like “character,” for example — if their friends in high places weren’t so intimately involved in the process.

Going Concern agrees in “Homebuyer Credit to Continue Helping People Get into Crazy Debt?“
Worse, large banks (or rather Regions Financial) are willing to lend to bankrupt municipalities and bank regulators will not step in and say “Hey, WTF are you doing?” (yes, I’m talking to you, Atlanta Fed). This is your bank and it’s quite obvious even to the common man what they are doing – you don’t loan money to someone who has no money and has not paid their sewer bill in 16 months. Red flag!
It’s ugly out there and it doesn’t appear to be getting any prettier any time soon.
Oh and Economic Populist has some additional ideas on the subject. You’re welcome.

Editor’s Note: Want more JDA? You can see all of her posts for GC here, her blog here and stalk her on Twitter.
There’s a new regulator in town and if his recent comments are to be taken seriously, he’s not kidding around.
The Fed gets plenty of face time these days as the regulatory face of the financial crisis, leaving the SEC, PCAOB and auditors limping behind. Unlike federal regulators, the Fed has a unique muscle due to its dual role as central bank and supervisor and Fed governor Daniel Tarullo would like you know that he is not afraid to flex it.
That’s great, but Tarullo might be getting a tad ahead of himself. I believe one former Fed official called him an “egotist”.

In recent months, Tarullo has been fairly quiet since he was installed at the Board of Governors in January of this year but he seems intent on speaking out lately, positioning himself as an early hero of commercial real estate and a regulatory force to be reckoned with. He even kicked off his week with a thorough Wall Street Journal rub:

The rise of Daniel Tarullo, a lawyer with a longstanding interest in bank regulation appointed to the Federal Reserve Board by President Barack Obama, is a sign the era of light-touch bank regulation is over.
New guidelines on bankers’ pay proposed by the Fed last week reflect Mr. Tarullo’s influence. He is shaking up the Fed’s 2,858-person army of bank supervisors, weighing in on issues ranging from the way regulators deal with troubled commercial real estate loans to the rules that will govern global banking for years to come.

Oh please, how ominous.
Regulatory rewrites might not be the first thing on his to-do list as newbie Fed governor, Tarullo’s first big takedown may be the Atlanta Fed.
As Tarullo came in, Atlanta Fed’s head of banking supervision went out, with the Board in Washington dispatching a few Board goons to keep an eye on Atlanta’s supervision department until they find a new sucker to head things up over there. With 20 Georgia bank failures for 2009 (out of 106), you can see why Daddy in DC might be worried about what Atlanta is (or isn’t) doing.
Tarullo appears to be positioning himself as a bad ass regulator ready for war and I wouldn’t take that threat lightly if I were Atlanta Fed, especially since they already know what it feels like to be on his shit list.

Editor’s Note: Want more JDA? You can see all of her posts for GC here, her blog here and stalk her on Twitter.

I have often been accused of taking the term “audit” in “Audit the Fed” a tad too literally. Thinking as an auditor might stem from spending far too many hours in Audit class (I’m not a CPA, I just play one on teevee). Nevertheless, I cannot help but wonder what proponents of a Fed audit think they’ll find once they crack open the books.

My primary concern is that Fed accountants do not use GAAP but rather a bizarre hybrid of GAAP, governmental, and WTF accounting. In fact, they write their own 325 page manual on accounting for Federal Reserve Banks and if you’re really really bored you can find that document here. What auditor is qualified to audit those statements? In no other situation would the client hand you their accounting manual and say, “Do us a favor and make sure we prepared our statements in accordance with our own special rules, would you? Thanks!” except in this case. And maybe that’s where I’m hung up on the word “audit.”

Some have argued that the “audit” in “Audit the Fed” actually means “crack open the books and figure out where the bailout bodies are buried.” Okay, that’s all well and good but even if that’s the case, how would an independent, outside source identify these bodies? It goes back to the client-provided handbook and we’re back at square one: defining the Fed balance sheet as a freak of nature.

It’s right there in the footnotes – pulling out the closest Fed annual report I’ve got (Richmond Fed 2007), both Deloitte and PwC agree that the Fed is a special case in Note 3: Significant Accounting Policies:

Accounting principles for entities with unique powers and responsibilities of the nation’s central bank have not been formulated by accounting standard-setting bodies.

The note goes on to explain why government securities held by the Fed are presented at amortized cost instead of GAAP’s fair value presentation because “amortized cost more appropriately reflects the Bank’s securities holdings given the System’s unique responsibility to conduct monetary policy.” Right there, you can see why auditing this thing might be a problem.

Proponents of HR 1207 and now newer proposed legislation to storm the Fed’s financials say that we need transparency from our central bank but I have argued time and time again that we’ll never get there poking around their statements trying to find the bloody glove. We’re
going to have to do better than an audit. Hell, Citigroup can pass an audit.

For more on Fed audits from yours truly, check out Fed Economic Rocket Scientists on Auditing the Fed, Liquidity Crises, They’re Comin for Dat Ass, Bernanke: Defining “Federal Reserve Accountability”, Auditing the Fed: Redux, and You Want to Audit the Fed. But Why?