Posts Tagged ‘Ketz’

Ohio AG Takes On Ratings Agencies

Friday, November 20th, 2009

“The attorney general of Ohio sued the country’s largest credit rating agencies on Friday, alleging that they had cost state retirement funds some $457 million by approving high-risk Wall Street securities that went bust in the financial collapse,” The New York Times reports. The paper quotes Ohio Attorney General Richard Cordray as saying: “We believe that the credit rating agencies, in exchange for fees, departed from their objective, neutral role as arbiters. At minimum, they were aiding and abetting misconduct by issuers.”

Writing in 2007 for his column on SmartPros.net, Smeal’s Edward Ketz addressed this conflict of interest between rating agencies and the companies they’re supposed to be objectively rating:

Moody’s and the other agencies make money by charging the business entities who are issuing debt.  It doesn’t take a genius to see the conflict of interest.  The credit agencies lean on the issuer for more money or they risk receiving a poor rating.  Payment not only entitles one to a good rating, but also it gives one the privilege of not receiving a downgrade unless bad news becomes public.

… Policy-makers can reduce the problems by reducing the very real conflict of interests that perniciously raises its ugly head from time to time.  The solution is to prohibit credit rating agencies to receive any funds from the issuers.  If the ratings have any merit, then investors will be willing to pay for them.

Tags: Banking, Business Law, Economic Crisis, Ketz
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Pay Brain Drain?

Wednesday, November 4th, 2009

Pay czar Kenneth Feinberg acknowledged concerns on Monday that his mandated executive compensation cuts at bailed out firms may cause some talent to leave these firms for those not facing pay restrictions.

In his latest column, Smeal’s J. Edward Ketz questions this assumption that talented executives will jump ship:

I find it amusing to hear the arguments of bank managers and directors.  Their major complaint is that the administration’s cap on executive salaries will drive talent away.  That is such a self-centered argument!  If they cannot live comfortably on $500,000 per year, then I really feel sorry for them.

But wait—aren’t these the same guys who misunderstood the nature of the derivative instruments that their firms were dealing in?  And didn’t these managers make faulty decisions with respect to the housing market and counter-party risk?  In short, didn’t these executives bring their own firms to the brink of destruction?  Given the foolish and reckless behaviors of these managers, one has to ask what talent they are talking about.  If this is talent, let’s give some untalented people the chance the run these companies.  They couldn’t do worse.

Besides, where would these executives go?  Before these talented people leave their firms, they would desire other positions with salaries greater than $500,000.  I doubt that there are enough open positions that pay that much for so many executives.  The labor market is slim for this end of the pay spectrum.

And there are other people who could easily replace these businessmen and who could do a credible job.  For example, competent university presidents must have great managerial skills.  With a median salary of $427,400, some of them might be willing to accept the new challenges of running a bank.  And take a pay boost.

There are several legitimate concerns about Obama’s intervention into the pay of bank managers and others who accepted government bailouts.  But, concern over the flight of talent is not one of them.

Tags: Executive Compensation, Ketz, Politics
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Feel-Good Regulations

Friday, September 18th, 2009

Speaking on Wall Street this week, President Obama renewed his call for a Consumer Financial Protection Agency to “make certain that consumers get information that is clear and concise, and to prevent the worst kinds of abuses” by financial institutions. Smeal’s Edward Ketz, in a forthcoming column, says this proposed new regulatory agency amounts to little more than politics:

What Obama is really trying to do is give American voters the impression that he is in charge, that he cares about them, and that he is improving matters so that the chances of another financial meltdown is infinitesimal.  It is political legerdemain.

As long as managers have perverse incentives to cheat investors and as long as the SEC goes after only the little  guys and ignores managers at Enron, WorldCom, Madoff Investments Securities, and GE, nothing is going to change.  If the Congress and if the president want to improve matters—and I have no idea if they really do—then they must change the set of incentives and disincentives.  To effect real change, the system must punish managers and directors who lie and steal and cover it up with scandalous financial reporting.

More regulation might make society feel better, but that is just an indication that most Americans have little understanding of economics.  They will continue to lose in the stock markets until they insist elected officials do something substantive.

My fear is that Democrats will rally around Obama while Republicans vilify him, similar to the previous administration when Republicans rallied around Bush and Democrats denigrated him.  There is too much partisanship in this country and not enough rational analysis.  Americans need to understand that both presidents have failed us by supporting new legislation and by crippling better enforcement.  (For whatever it is worth, this is one of the reasons I am an Independent.)

Tags: Banking, Economic Crisis, Finance, Ketz, Politics
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SEC Punishes GE Shareholders

Wednesday, August 12th, 2009

General Electric last week agreed to pay $50 million to settle an SEC lawsuit accusing the company of committing accounting fraud. Smeal’s Edward Ketz reacts to the settlement in his column on SmartPros.com:

The real tragedy is that the $50 million fine will be paid by the stockholders of GE rather than the criminals who created the fraudulent schemes and carried them out.  We have again let the bad guys get away with their shenanigans and have penalized the innocent.

The SEC should understand that civil penalties and criminal sentences serve two purposes in this society. These objectives are first to satisfy our collective sense of justice and second to deter future crimes. By punishing shareholders, the SEC itself becomes a tool of managers and is an instrument to carry out their devilish plots. The organization also promotes future crimes because managers feel that, with a couple of exceptions such as Lay and Koslowski and Rigas, they can do whatever they want with impunity.

Mary Schapiro may have provided the perception that the SEC is doing something after the malaise of the Bush administration, but so far it is only perception. If she wants to do something substantive, she needs to go after the managers who commit accounting frauds and the directors who approve their tomfoolery. If she really wants to get their attention, and if she really wants justice and the deterrence of accounting crime, then send the leading perpetrators to prison.

Tags: Accounting, Ketz
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FASB Should Counter Political Meddling

Tuesday, July 28th, 2009

A report commissioned by the Federal Accounting Standards Board and due out today accuses Congress of meddling in accounting rulemaking and strong-arming FASB into changing accounting regulations. “While it is appropriate for public authorities to voice their concerns and give input to standard setters, in doing so they should not seek to prescribe specific standard-setting outcomes,” the report reads.

In a recent column on SmartPros.com, Smeal’s Edward Ketz argues that interference in FASB standards setting is nothing new, and there’s no point in hoping that it goes away.

More from Ketz:

Previous leaders of the FASB, including Armstrong, Kirk, and Wyatt, have acknowledged the presence of political factors and how they prevent standard setters from finding technical solutions to technical problems.  And they yearned for a world in which standard setting would be insulated from politics.  Alas, such a world does not exist.

Leaders of the FASB would be much better off if they just accepted the world as it is instead of bemoaning the one they face.  Then they should embrace the political challenges and take the offense, as staying on defense is almost always a losing proposition.  And they should not wait until the political pressures are too great when little or nothing can be done.

For example, immediately after the collapse of WorldCom, the FASB should have seized the moment.  Investors and creditors were yelling and screaming for justice after the implosions of Enron and WorldCom, so much so that the almost economically comatose White House woke up, the Congress went from almost killing Sarbanes-Oxley to speeding up and ensuring its passage, and even Harvey Pitt found religion.  The FASB should have taken immediate action to require the expensing of stock options.  It also should have taken steps to change the accounting for special purpose entities.  And, in the process, it could have dared anybody to prevent them from mandating more truthful and more transparent accounting.

… Let’s quit wishing for a world that doesn’t and won’t ever exist.  That’s a child’s game.  Let’s engage the enemy in the world we have.  The FASB has something to contribute to the investment community, and its work is too important to whine about the tactics of the enemy.  Let’s take the fight to the public.  If the FASB did this, I think it would win.  And we would all be better off.

Tags: Accounting, Ketz, Politics
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Say on Pay, and More

Friday, July 24th, 2009

“The U.S. Congress is moving forward on a measure to give public company shareholders a nonbinding annual vote on executive pay, a concept backed by President Barack Obama that has gained traction amid the recession and credit crisis,” Reuters reports. “Critics—including some investor rights proponents—argue that say on pay will not rein in U.S. business leader compensation or help spotlight companies where pay practices need a serious overhaul.”

Smeal’s Edward Ketz has another solution for excessive executive compensation: Give shareholders more influence over corporate boards.

“The executive compensation issue remains a hot-button item,” Ketz writes in a recent column. “I think the key institution in this matter is the board of directors.  If empowered and if held accountable for their decisions, I think the board of directors could properly address the issue of executive compensation.”

More from Ketz:

The board of directors supposedly represents the shareholders, but often belies that point by assisting managers in their grab for power and wealth. The Congress could help by enacting legislation that would allow investors to sue directors when the directors abrogate their duties to the shareholders. (Recall that the Supreme Court greatly restricted the liability of directors in Central Bank of Denver v. First Interstate Bank of Denver.)

Of course, the impotence of most boards of directors is frequently the consequence of allowing managers to choose their buddies to be on the board.  “Independent directors” is a joke; I doubt if very many of them are really independent. So another thing that should be done is to give shareholders the right to vote for the directors. And not with a manager-stacked deck of choices as if we lived in some communist country. Give the shareholders the opportunity to add candidates to the ballot. Again, they are the owners!

Tags: Executive Compensation, Ketz, Management
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Ponzi Pointers

Thursday, July 2nd, 2009

In an article on the Research/Penn State Web site, Smeal’s Edward Ketz explains how Ponzi schemes work and offers this advice for avoiding them:

A lack of clarity about the workings of an investment plan should be an immediate red flag. Investors should be skeptical if fund managers say things like “you wouldn’t understand” or “that’s private information.” Those types of claims are attempts to deceive.

Warren Buffet is one of the world’s most successful investors, and he has often said that he does not invest in anything he does not fully understand.  Those who follow his advice will not fall prey to a Ponzi scheme.

Tags: Finance, Ketz
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Feckless Accounting Standards Board

Friday, May 29th, 2009

From The Huffington Post:

Look for another rosy round of profits when banks turn in their numbers for the second quarter ending in June when it will be legal for them to improve their balance sheets by shifting losses into the future, thanks to new accounting rules passed by a one-vote margin by the Financial Accounting Standards Board (FASB).

It’s just one in a series of changes made to accounting rules that allow banks to shift or ignore losses or pretend that liabilities aren’t liabilities. The struggle for control of the financial recovery—where the money goes, how it’s counted and who survives—is nothing short of war. Truth has been the first casualty. The latest rule change allows banks to split losses into ones that they recognize immediately and others that are pushed down the road and may pop up on the books later. It passed in April with barely any notice from the press.

The press may not have noticed the rule change, but Smeal’s Edward Ketz did. Ketz penned a column in April that calls for the resignation of FASB chair Robert Herz, who cast the deciding vote in favor of suspending the mark-to-market accounting rules.

From Ketz:

April 2, 2009 is a day of accounting infamy. It is a day in which the Financial Accounting Standards Board (FASB) bowed to the pressures of the banking community and Congress to allow distortions, massagings, and manipulations of the U.S. financial reports. Because of these cowardly acts, I think it time for Robert Herz to resign from the FASB.

… The FASB got pushed into this decision and Robert Herz caved in.  This isn’t the first time either.  Herz became chairman after Enron’s special purpose entities exploded on Wall Street and has yet to do anything about them.  These special purpose entities have also played a part in the current banking crisis.  Herz also presided over the new rules on business combinations.  While I applaud the elimination of the pooling option, which enabled many corporate frauds, I remain skeptical of the treatment of goodwill, which is another loophole.  And Robert Herz keeps preaching against complexity and for simplicity and principles-based accounting, which are keywords to allow corporate executives the power to do as they wish with the recognition and measurement of revenues and other elements.  (Bob, if these FSPs are based on any legitimate principles, pray tell us which ones.)

Writing about these items when originally proposed, Jonathan Weil referred to the FASB as the Fraudulent Accounting Standards Board.  I am sympathetic with his f-word, but I think it may be too harsh.  After all, the board is “merely” allowing managers to commit fraud without facing any disincentives.  But I think there are other f-words that we could employ, such as fearful, feckless, and futile.

Tags: Accounting, Banking, Economic Crisis, Ketz, Politics
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Stress Tests Neglect Fair Value

Tuesday, May 19th, 2009

The Fed’s bank stress test results, released earlier this month, found 10 of the country’s largest banks need about $75 billion more in capital to survive another serious economic downturn. The results were met with positive spin from the Obama administration and ”sparked a new round of confidence in the sector.” However, according to Smeal’s Edward Ketz, the results point out the opposite: “The banking sector remains in serious trouble.”

More from Ketz and his recent column:

That the financial industry was and remains in trouble is not revelatory to those who pay attention to fair value measurements.  Take Citigroup for instance.  This firm, once a giant among banks, now gasps for its existence.

Citi’s reported net income was $(27,684) for 2008 (all accounting numbers in millions of dollars).  While this is a smelly number, the odor grows worse when one adjusts it for various items that bypass the income statement. If one adjusts this reported number for unrealized losses on available-for-sale securities, losses on the foreign currency translation adjustment, losses on cash flow hedges, losses for additional pension liability adjustments, actual returns on pension assets, and losses on hold-to-maturity securities, the actual loss becomes $(53,671).  It reveals that Citi lost twice as much as it reported.

Further, we have been hearing how Citi has turned things around and that the first quarter in 2009 returns Citi to the black column with a profit of $1,593.  It isn’t true.  If we make similar adjustments as described above and adjust for “nonperformance risk,” the quarterly results show a loss of $(10,284).

Citigroup suffered a cardiac arrest in 2008, and it remains in critical condition.  Any other conclusion is propaganda or self deception. And forget the stress tests; they are so flawed that Lehman Brothers might pass them.  The Fed says that Citi needs another $5,500 in capital to weather any additional economic crises it might face.  It isn’t true.  Citi needs a lot more capital than that just to weather current conditions. 

If you want to protect your portfolio, don’t listen to the optimistic forecasts coming from Washington and don’t stop at the reported income number.  Look at the fair value disclosures within SEC filings, adjust reported earnings for these fair value gains and losses, and then you will obtain the truth.

Tags: Accounting, Banking, Economic Crisis, Ketz, Politics
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Stress(less) Tests

Monday, May 4th, 2009

The Obama administration on Thursday will release the results of its bank stress tests, which the administration hopes will show that “the broad financial system is healthier than many investors fear,” according to The New York Times.

But Smeal’s Edward Ketz, is not that enthusiastic about the value of these stress tests. “Banks are undercapitalized in the U.S. and no amount of propaganda will change that essential truth,” he writes in a recent column on SmartPros.com.

Ketz examined the stress test methodology and calls a few aspects of it “puzzling.” Specifically, he has concerns about how the tests account for the banks’ intangibles, deferred tax assets, and preferred stock.

“One begins to wonder whether the purpose of these stress tests is really to evaluate the well-being of banks during hard times or whether it serves a more political purpose when regulators try to get as many banks as possible to pass these stress tests,” he writes. “Somebody is going to have to improve the accounting and give an exam that banks might actually fail in a highly public fashion before the markets will be pacified.”

Tags: Accounting, Banking, Economic Crisis, Finance, Ketz
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