Chicago Daily Observer

Martin Sullivan, former chief executive of AIG, the insurance giant that was rescued by the US government, on Tuesday blamed a single accounting rule for the company’s travails.

In written testimony released before he was set to testify before Congress, Mr Sullivan said that “multiple actions by multiple parties” created the “unprecedented financial market disruption” that caused his firm’s near-collapse and eventual $85bn bail-out by the US Treasury.

The $700 billion financial bailout may be the biggest flimflam ever pulled on the American public. It has all the earmarks of a good con: Bankers and assorted Wall Street grifters will make off with hundreds of billions of dollars, abetted by Washington politicians, while we get stuck with the tab.

We can thank Wells Fargo & Co, a big Western bank, for exposing this swindle for what it was by agreeing to buy Wachovia Corp., a troubled Eastern bank, thereby rescuing it from a government-arranged shotgun marriage with Citigroup Inc.

1. Question: On Motion to Concur in Senate Amendments
2. Bill: H R 1424
3. Vote description: Emergency Economic Stabilization Act of 2008
4. Vote type: Yea-and-Nay (Help)
   A standard vote that requires a simple majority for approval or passage of the legislation.
5. Result: Passed, 263–171.
6. Date/time: October 3, 2008, 1:22 p.m.

Interview with Brian Wesbury on less radical solutions to the financial crisis.

Link is offsite

inancial problems have not yet dragged down the economy, but it is also true that the economy is not the cause of financial-market problems. Most of the loans that have been going bad in recent months would have gone bad even if the economy had been growing twice as fast. So what is to blame for the “worst financial crisis since the Great Depression”?

The answer seems simple. Mark-to-market accounting rules have turned a large problem into a humongous one. A vast majority of mortgages, corporate bonds, and structured debts are still performing. But because the market is frozen, the prices of these assets have fallen below their true value. Firms that are otherwise solvent must price assets to fire-sale values. Not only does this make them ripe for forced liquidation, but it chases away capital and leads to a further decline in asset values.

To understand why the emphasis of policy must switch from punishing bank shareholders to giving them some comfort, we have only to ask why more banks keep failing despite the huge amount of public money being poured into bank “rescues”and “bailouts”. The answer is simple: the government rescues that have cost so much money have not been rescues at all. They have been more like demolitions or robberies. Governments have guaranteed bank deposits, but they have wiped out the value of bank shares. This expropriation of bank shareholders has not only put the “rescued” institutions out of business. It has sabotaged the viability of other banks, as investors dump their shares before they are “rescued” like Bradford & Bingley or AIG.

A mere accounting rule change won’t reduce foreclosures or raise home prices—then again, if spared drastic writedowns, banks might be more willing to lend, raising home prices and reducing foreclosures.

A mere accounting rule can’t alter the underlying economics of a lending business—then again, no longer worried about insolvency-by-accountant, investors might discover new confidence to inject capital and improve the underlying economics of a lending business.

No accounting rule is worth $700 billion. Then again, the essence of the Paulson plan was to raise the value of bank assets to help banks escape the regulatory equity trap. Does that mean we can change an accounting rule and save Congress from having to appropriate $700 billion?

Let’s find out.

Under intense political pressure, regulators for securities and accounting standards this afternoon issued what they called a “clarification” to provisions that have come under fire from bank executives and some lawmakers for contributing to the credit crisis.

Regulators said that the new guidance will help companies figure out the value of complex mortgage-related investments at a time when there are few trading partners willing to purchase them.

The U.S. Securities and Exchange Commission probably will resist calls to suspend the fair-value accounting rules that some members of Congress blame for exacerbating the global financial crisis, people familiar with the matter said.

The SEC and Financial Accounting Standards Board instead said banks should apply rules that require them to review their assets each quarter and report losses if values have declined, according to a proposal released today. A suspension isn’t being considered, said the people, who declined to be identified because the plan hasn’t been completed.

Congressmen, banking lobbyists and companies including American International Group Inc. have urged the SEC to place a moratorium on fair-value accounting, saying it forces firms to report losses that they never expect to incur. Federal Reserve Chairman Ben S. Bernanke and other proponents say a suspension would erode confidence that firms are owning ... Read More...

As a business appraiser in a CPA firm, I see similar issues all the time. The problem is that we have conflicting definitions of the word value. The new rules essentially define value as “what you can cash out for today.” In some circumstances, this may be the important number to know, but in others, it’s more important to know the intrinsic value—the present value of what you can expect to receive from it, allowing a proper rate of return for the risk involved.

The problem occurs when readers of a balance sheet, who are used to seeing numbers closer to intrinsic value, suddenly see lower market-snapshot numbers and think it’s an intrinsic number. This may have a substantive effect in the case of banks, where the reduction can throw you out of regulatory compliance, or where a loan covenant is endangered. (Kind of like playing a basketball game ... Read More...

If regulators on their own—or Congress, if regulators fail to use their discretion—can fix 70% of the financial crisis by changing the mark-to-market accounting rule, we should change the rule first before attempting to pass another reevaluated bailout package.

“Mark-to-Market” Accounting and the Origins of the Financial Crisis: Mark-to-market accounting (also known as “fair value” accounting) means that companies must value the assets on their balance sheets based on the latest market indicators of the price that those assets could be sold for immediately. Under such a rule, declining housing prices don’t just reduce the value of defaulting mortgages. They reduce the value of all mortgages and all mortgage-related securities because the housing collateral protecting them is worth less.

Moreover, when a company in financial distress begins fire sales of its assets to raise capital to meet regulatory requirements, the market-bottom prices it sells out for become the new standard ... Read More...

Members of the Congressional Black Caucus were divided on the proposed $700 billion bailout plan that failed in Congress Monday afternoon. A slight majority of CBC members voted against the plan, while a significant number voted in favor of the bailout.

In total, 21 members of the CBC opposed the bailout while 18 members supported it. The bill, called the Emergency Economic Stabilization Act of 2008, failed 228 to 205 in the House of Representatives on Monday.

Rep. Jesse Jackson called the bill “a tremendous improvement over the legislation proposed by the Bush Administration last week,” but he voted against it because he said “it still falls short of what is needed to shore up the economy, protect taxpayers and promote economic growth.”

“We have gone from Roosevelt’s New Deal, to Reagan’s Raw Deal, to Bush’s Quick Deal,” Jackson said in a statement. He said the American People ... Read More...

WaMu Recognized as Top Diverse Employer—Again
Company ranks in top ten of Hispanic Business’ Diversity Elite and earns perfect score on the Human Rights Campaign’s Corporate Equality Index

SEATTLE, WA (September 24, 2008) – Washington Mutual, Inc. (NYSE:WM), one of the nation’s leading banks for consumers and small businesses, has once again been recognized as a top employer by Hispanic Business magazine and the Human Rights Campaign.

Hispanic Business magazine recently ranked WaMu sixth in its annual Diversity Elite list, which names the top 60 companies for Hispanics. The company was honored specifically for its efforts to recruit Hispanic employees, reach out to Hispanic consumers and support Hispanic communities and organizations.

The Human Rights Campaign, the largest national gay, lesbian, bisexual and transgender (GLBT) civil rights organization, also awarded WaMu its second consecutive 100 percent score in the organization’s 2009 Corporate Equality Index (CEI), which measures progress in ... Read More...

Was the extent of the Treasury’s and Fed’s involvement in financial markets during the past several weeks justified? Certainly there was a widespread belief during this week among both government officials and participants in financial markets that short-term capital markets completely broke down. Not only Lehman, but also Goldman Sachs, Stanley Morgan, and other banks were also in serious trouble. Despite my deep concerns about having so much greater government control over financial transactions, I have reluctantly concluded that substantial intervention was justified to avoid a major short-term collapse of the financial system that could push the world economy into a major depression.

once regulators slow down foreclosures, other potential homeowners are denied opportunities to purchase housing they can afford. The housing stock cannot recirculate. Banks that acquired this mortgage paper see their portfolios nosedive. That dicey paper, as William Isaac noted in last week’s Wall Street Journal, drives the entire economy over the edge by strict government regulations that require all financial institutions to “mark-to-market” the various instruments in their portfolio.

Unfortunately, there is no working market to mark this paper down to. To meet their bond covenants and their capital requirements, these firms have to sell their paper at distress prices that don’t reflect the upbeat fact that the anticipated income streams from this paper might well keep the firm afloat.

One bad regulatory turn leads to another, and lo, the bailouts come thick and fast. At the nth hour, wise heads often rightly conclude that some desperate measure has to ... Read More...

Since 1989, Lehman Brothers’s employees and political action committee have given $9.2 million to federal candidates, parties and political action committees, with 54 percent of that going to Democrats. In the current Congress, 271 lawmakers have collected nearly $3 million since 1989, with 72 percent going to Democrats. Democratic presidential candidates and senators Hillary Clinton and Barack Obama top the list of all-time recipients for the company, collecting $410,000 and $395,600 respectively. Sen. Charles Schumer, D-N.Y., a member of both the Senate Banking, Housing and Urban Affairs Committee and the Senate Finance Committee, hauled in $181,450, while Sen. Chris Dodd, chair of the Senate banking committee, has collected $165,800. The top recipient of PAC money from Lehman Brothers has been Rep. Mike Castle (R-Del.), a member of the House Financial Services Committee, which has jurisdiction over banking and the securities industry. Castle has collected $38,500 from Lehman’s PAC ... Read More...

Freddie Mac and Fannie Mae are the platypuses of the financial world. As shareholder-owned companies which rely on state guarantees, the two government-sponsored enterprises are neither public fish nor private fowl. They are also evolutionary relics from another time. The US Treasury looks increasingly likely to bail out the two mortgage giants. But before it does so, Hank Paulson, the Treasury secretary, must think about an intelligent design for what he would like the GSEs to evolve into.

The Federal Reserve and the Treasury are right to try to prevent the collapse of the GSEs. But they must now work to get rid of them. Conservation efforts have kept the duck-billed platypus alive. Freddie and Fannie do not deserve the same protection.

Let’s assume everything is on the square at the Illinois Health Facilities Planning Board.

OK. Forget about the fixing of the new hospital that Wisconsin’s Mercy Health Care System wanted to build in Crystal Lake to compete with local biggie Centegra Health Care System’s dominant hospitals in McHenry County.

Governor Rod Blagojevich appointed a new board, didn’t he?

Problem solved, right?

No reason to be suspicious when Naperville’s Edward Hospital gets turned down for the third time, right?

Chicago’s second biggest daily responds to my article on the Windy City’s Nanny State proclivities with an endorsement of many of the policies I criticize.

Reason mocks the city for requiring that fat cops shape up, providing them with nutritionists and trainers to help.

We don’t. Police work is physical work. A cop has to be in shape.

Fair enough. But my mocking was more about the fact that after a year of headlines about police abuses, it just struck me a bit odd that the Board of Aldermen’s biggest concern while I was in town researching the article was a proposal to assign cops personal trainers at taxpayer expense.

Reason knocks the mayor for regulating thousands of taverns—evil peddlers of demon rum—out of existence. Chicago has only about 1,300 taverns today, compared with about 7,000 in the 1940s.

We don’t. A lot of those joints were buckets of blood ... Read More...

Chicago’s grit is the stuff of legend. The city’s hard-scrabble history conjures images of wind-beaten dock hands; rugged immigrants working punishing factory jobs; and 500 acres of slaughterhouses and their hard-time killing floors.

At the same time, Chicago has always adopted a work-hard/play-hard mentality.

The city drank its way through Prohibition; its brothels became legendary, as author Karen Abbott detailed in a great new book, “Sin in the Second City”; and though Chicago today has a well-earned reputation for fine dining and cutting-edge cuisine, it is more known for sating its hunger with a greasy kielbasa, a thick steak, or an inch-deep slice from Gino’s East.

But Chicago seems to have lost a bit of its hard edge. The town that poet Carl Sandburg called “a tall bold slugger set vivid against the little soft cities” has itself gone soft, thanks to meddlesome politicians..

Whatever the outcome of the Tony Rezko trial, it has had one salutary effect: The uselessness of another government bureaucracy is on full display

I’m referring to the Illinois Health Facilities Planning Board, which was created in 1974 with the misguided notion that health care costs could be controlled by government clamping down on hospital construction.

Rezko is charged with stocking the board with an acquiescent majority, which he used to try to engineer board decisions for kickbacks. At Rezko’s instructions, according to testimony in the trial, that board approved a new hospital in Crystal Lake, even though state health experts said the Crystal Lake hospital wasn’t needed. Expertise has a way in Chicago and Illinois of collapsing in the face of hurricanes fueled by greed and corruption.

As interesting as the testimony in the lengthy trail has been, detailing the ins and outs of the arcane form of government ... Read More...