John Carney wonders aloud if Citigroup’s low reserves (approximately $1b reserve for $500b in exposure) for its repurchase risk is thanks to the guidance provided by KPMG. Citi has said that they are, “comfortable with this level of reserves because historically realized repurchase risk has been quite small.” Carney explains, “In short, they haven’t had to pay out much on these claims in the past, so they figure they won’t pay out much in the future.”
Be that as it may, JC and his colleague, Ash Bennington are pret-tay sure Citi has it wrong (they lay out their case in full) and speculates that KPMG is, at the very least, an enabler here.
Carney points out that Francine McKenna has been following KPMG’s not so stellar guidance on this particular issue for years. Starting with New Century in 2007, Wells Fargo last year and Countrywide who was purchased by Bank of America.
Carney then writes that Bank of America is “widely assumed to have the largest repurchase risk, largely thanks to the acquisition of Countrywide.”
So that’s a helluva trail to be sure and Carney wraps up:
So is the advice of KPMG part of the reason for Citi’s complacency when it comes to repurchase risk? Given the history of companies audited by KPMG missing repurchase risk, perhaps Citi should rethink that complacency.
Of course Carney forgets that Dick Bové would take exception with everything he’s saying, since this firm is perfectly acceptable. Even if he doesn’t know who they are.
We’d like to get anyone familiar with the matter (read: Citi audit team members) on the record, so get in touch and we’ll put it out there. Or you can chime in below.
“A successful lawsuit against E&Y could result in a court finding that the failure to properly advise the audit committee prevented Lehman from taking genuine steps to substantially reduce its leverage, which may have saved the firm from bankruptcy. Which is to say, E&Y could find itself blamed for all the losses to Lehman shareholders. That would be a stretch – such a claim would be speculative – but it still should be scaring the heck out of the partners.”