Posted on 10/26/2010 5:48:03 PM PDT by goseminoles
I have an academic topic/project that has been assigned. If anyone could provide assistance in guidance it would be much appreciated. I realize there are political/lobbying concerns, but this issue specifies accounting errors and remedies. Any thoughts? The assignment is: "What role did the Accounting profession play in the recent sub prime mortgage crisis? What could they have done differently?"
Thanks... Good guy you are..
Pieter Schoonheim on October 17, 2010 at rightsidenews blames the housing collapse on FASB 157, and 157e on a coming financial transfer to state Capitalism. He says it came as a directive from BIS (Soros is an ex-president) in November 2007 to change accounting methods. He says Hoover did the same in 1929 and Roosevelt repealed it in 1939. It led to a depression and will do so again.
Bean counting errors, if present, were secondary to the primary causes effected by the financial firms, the Fed itself, the invention of the credit derivative vehicles to carry...mortgages and everything else, and the legal precedents created by Obama himiself (his case against the B of A in the early nineties to support the intent of Congresses Community Reinvestment Act caused banks to accept subprime credit candidates as legitimate).
I think accounting errors rank last as being part of the cause. Bean counting did not invent the mechanisms for redistributing the wealth of the middle class. Focusing on accountants detracts from focus on the real causative agents who preceeded any error making by accountants. The issue of accountants is after the fact, although the info might be interesting as a small aside.
You need to go here
http://market-ticker.org/akcs-www?forum=Market-Ticker
Karl Denninger has been on top of this from the beginning.
That’s kind of an interesting angle “what role did the acct’g profession play...”
I’m not going to claim to be able to list the full litany, but one of the very, very first things that started Karl on this path was his discovery that Washington Mutual was paying *cash* stock dividends out the *accrued* income they claimed from their pick-a-pay “minimum payment
borrowers. In other words, the borrowers were paying the minimum payment; which as you know produces neg amortization and by definition, does not even cover the interest on the loan. WaMu booked the money thereby tacked on to the end of the loan as income and continued paying regular stk divs out of it. Well....it doesn’t take a CPA to realize that you cannot pay a div out of money that isn’t there!
That was an absolutely fundamental “discovery” in **uncovering** the impossibility, the unsustainability of the whole neg-am loan industry. Karl has screenshots of bal sheets and income stmts from that era. It will early in his “tickers” columns.
And then fast forward to today...more specifically a year or so ago...when the government effectively strongarmed the accounting profession to drop the mark to market provisions of FASB 157.
Wealth of info there. My strongest reco is to peruse it.
As a secondary thought, perhaps you could write your paper on “how the PERVERSION of the acct’g profession contributed..”
Dude thanks!
More regulatory than accounting - but the SEC’s change to the net capital rule (playing keep up with the Euros) in the mid-2000s was a factor:
http://www.nysun.com/business/ex-sec-official-blames-agency-for-blow-up/86130
One more observation - at the end of the day there may be massive fraud underlying many private-label MBS sold especially in 2005-2008. There are lawsuits beginning to fly - many under state law asking for recission of trades based on violations of reps and warranties - but there’s a lot of smoke and all of this can’t have been error. I believe some of the ratings agencies have also put out mea culpas on the AAA ratings they geve many of these securities - which provided tons of liquidity for loans that the banks that bought the securities could never have held in portfolio - they relied on the rating and the credit enhancement in the structures rather than the quality of the loans and underwriting. They blew a real estate bubble and like all bubbles it eventually popped.
thx..
Maybe it is putting to much emphasis on the accounting.
As we have seen there was in fact NO REAL accounting.
That process would have brought the overwhelming foreclosure crisis to a slow lane at rush hour traffic. The Mortgage holders want an HOV lane. Which meant bypassing the safeguards accounting would have provided.
Plus the Lack of ethics and morals at the very seats of power that brought this about.
My 2 Cents
First problem: GIGO. NINJA loans (No Income Verification, No Asset Verification) resulted in blatant lies on mortgage applications. Garbage in, garbage out. No one really knows what the true input values are to the accounting books. Lots of other garbage problems, but the NINJAs are the worst.
Second problem: Sales of the mortgage by the originator. Originators didn’t care if the borrower could pay back the loan because they sold off the loan and collected the origination fee.
Third problem: Securitization. Slicing up the mortgages and packaging them in tranches means no one owns the whole loan. Owners don’t know which loans they own and different owners have different (and sometimes competing) interests. The loan servicer makes very little money for processing timely payments but collects big fees if the loan goes into foreclosure. Therefore, the loan servicer has an incentive for as many loans to foreclose as possible.
Fourth problem: Off balance sheet special purpose entities. Big banks have billions in collateralized investment vehicles which carry their implicit guarantee. This also includes loans guaranteed by Fannie Mae and Freddie Mac, themselves off balance sheet entities with an implicit Federal guarantee.
That’s just a start.
You may want to separate financial (GAAP) from managerial accounting types, the latter being predictors of future financial behavior which is easily manipulated, often to the benefit of management (Frank and Dodd), and to the detriment of the stakeholders (American People).
But all in all, I think accounting played a minor role in the fiasco.
Don’t know much about accounting, but the “Mark to Market” requirement for valuing assets had a lot to do with the collapse of much of Wall Street after the housing bubble burst - much of those assets were in mortgage securities and as the housing bubble deflated, they had to be valued according to how easily they could be sold on the market, not what the underlying value of the housing was - and since by that time nobody on Wall Street trusted anyone else enough to want to buy or sell anything to anyone else, their values plummeted.....
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