Catch up, we covered this on Sunday night: In a bizarre piece of auditing news released late on a Sunday night, KPMG has verbally resigned as Nebraska-based TierOne Bank’s independent auditor, withdrawn its audit opinion for 2008 and taken back its review of TierOne’s financials for the quarter ended March 31, 2009. Citing risk of material misstatement, KPMG has also warned the audit committee that TierOne’s financials are not to be relied upon by investors.
Well today is April 30th and that means TierOne has run out of time to get its shit together to please the OTS. Meanwhile, KPMG is still paddling away in the lifeboat before the ship sinks but with a week’s head start, we’re sure they’ve gotten far enough away from the scene of the crime to be entirely unaffected by the outcome, whatever it may be.
In a textbook case of he said/she said, TierOne is a little butthurt that KPMG would suddenly change its tune and bail on the bank so close to such an important deadline. Adding insult to injury, KPMG claims that TierOne destroyed a document on specific reserves required by the OTS, even though the auditors had requested the document more than once. TierOne claims that it gave the document to both the OTS and KPMG as requested. TierOne also enthusiastically states that not once did KPMG express any concerns about the bank’s condition until just before bailing on the bank and resigning from the audit.
We’ll update if the FDIC moves in later this afternoon and takes down TierOne.
UPDATE: TierOne tried to sell itself to Great Western Bank but the deal was shot down by the OTS. The $2+ billion bank is sort of just sitting there exposed in the open without an auditor and no real plan, you can pretty much guess what happens from here. Meanwhile, it was a busy Bank Fail Friday but TierOne was not among them. See you next week?
TierOne sale plan due today [Lincoln Journal Star]
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.”