Going for the auditors

Ernst & Young sued over Lehman
The ultimate target of the lawsuit may be Lehman’s former bosses

Dec 29th 2010 | NEW YORK | from PRINT EDITION : The Economist

WAS the collapse of Lehman Brothers in 2008 aided by a fraudulent cover-up of balance-sheet shenanigans? Andrew Cuomo, New York’s outgoing attorney-general and incoming state governor, thinks so, and has filed suit against Ernst & Young, Lehman’s auditors.

Mr Cuomo alleges that E&Y committed fraud by signing off on an accounting maneuver used by Lehman, known as Repo 105. Under this scheme, towards the end of each quarter Lehman temporarily swapped some of its assets for cash with another bank or investor, but booked this as if it were a permanent sale of the assets. By doing this, it and the other banks that used this maneuver in the run-up to the credit crunch made themselves look less indebted in their quarterly results.

Citigroup’s Pandit Says Basel Accords Could Make Credit Crunches Worse

Citigroup Inc. Chief Executive Officer Vikram Pandit said many of the goals set by the Basel Committee on Banking Supervision are likely to be ineffective or make existing capital inequalities worse.

While Pandit supports higher capital levels, Basel’s rules have a cyclical quality that lowers targets in good times and raises them in bad times, the CEO said today in the prepared text of a speech at the Buttonwood Gathering in New York. The result could be “piling risk into the system” when the economy is strong as capital requirements fall, while “raising the cost of credit precisely when credit is needed most” during weak economies, he said.

“By creating an illusion of safety, Basel actually dulls the sense of urgency further,” said Pandit, 53, whose company is based in New York and ranked third by assets in the U.S.

Citigroup, 12 percent-owned by U.S. taxpayers, is grappling with stricter financial regulation in the wake of the 2008 financial crisis, during which the bank received a $45 billion bailout. The so-called “Basel III” accords are designed to keep the banking system from “falling into crisis again,” Pandit said.

New regulatory goals announced in September by the panel, made up of regulators from 27 nations, has triggered a “bidding war” for setting the highest capital targets in different countries that will hurt economies, Pandit said.

The Crisis of Credit Visualized

All you needed to know about the credit crisis of 2007-08

The Crisis of Credit Visualized on Vimeo
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Everything We Learned about the Financial Crisis, Again

The nation’s top accounting guru gets back to basics with a list of financial lessons we must remember not to forget.
Tim Reason and Marie Leone, CFO.com | US
December 9, 2008

At the last big accounting industry conference of 2008, Robert Herz, chairman of the Financial Accounting Standards Board, reiterated what he has been saying all year: It was not fair-value accounting that worsened the credit crisis, but rather a capital markets house of cards built on complex and risky securitization structures linked to subprime mortgages.

Though Herz’s speech to the American Institute of Certified Public Accountants was not entirely new (he first rolled out a version of it September), it represents a significant review of what went wrong with the nation’s economy from the perspective of the nation’s top accounting standard setter. And while peppered with the FASB chairman’s trademark dry wit, the speech is a serious one. “I hope I don’t offend anyone with my frank assessments,” Herz began, before condemning the behavior that led to the current crisis — as well as much of the finger-pointing that occurred afterwards. Few players were spared criticism, which he leveled at investors, regulators, credit rating agencies, boards of directors, bankers, Wall Street, and even some of FASB’s own accounting standards.

The Financial Crisis: What Drucker Would Have Said

Peter Drucker would have had plenty to say about the recent turmoil on Wall Street, beginning simply with: “I told you so”

By Rick Wartzman

Peter Drucker didn’t have a whole lot of nice things to say about those on Wall Street, at one point likening them to “Balkan peasants stealing each other’s sheep.”

Given the magnitude of the latest crisis to grip Fannie Mae, Freddie Mac, American International Group, Lehman Brothers, and their friends, one can only imagine what kind of acid analogy he might have used today.

Or perhaps he would have simply said, “I told you so.” After all, so much of the trouble that has befallen these giants of the investment banking, mortgage, and insurance sectors—and that threatens to “undermine the financial security of all,” as President George W. Bush put it—comes from a foolish disregard for the kinds of fundamental lessons that Drucker taught about risk, reach, and responsibility.

Some prefer to complicate things. Indeed, there is a temptation, in certain quarters, to fuzzy up what has happened here—to mask the basic management failures that are at the root of this disaster by pointing to the intricacies of credit-default swaps, “naked shorts,” and other arcana.

Market Overview: Survival of the fittest

Source: IBSJ Wealth Management Supplement – November 08

The recent market turmoil has obviously had some form of impact on the wealth management sector, but what other changes have taken place recently and how have these impacted the industry?

The recent headline announcements of the type that UBS, the world’s largest wealth manager, is cutting 2,000 jobs may imply a crisis in the wealth management sector. Behind the headlines it can be seen that those cuts are apparently being made to other UBS lines of business, such as commodity trading and investment banking. But the turmoil in the world’s financial markets has impacted the wealth management world.

One direct impact has been the fall in the equity markets. Ian Cookson, advisor to the executive committee at EFG International in Switzerland points out that ‘the fall in equities market has meant two things: one is that the value of the assets under management has taken an enormous hit. And the other is that trading volumes have gone down.’ As asset management charges/custody fees are based on the value of assets under management then ‘this hits you in the pocket’. Lower trading volumes have also reduced fee income.

How the Credit Crisis Could Forge a New Financial Order

Published: October 15, 2008 in Knowledge@Wharton 

In the middle of a battle, it’s hard to know what the landscape will look like after the smoke clears. But as the government wrestles with the credit crisis, economists and finance experts are starting to make some predictions.

Individuals and businesses will have a harder time getting loans in coming years, but also may be less eager to take on debt. There will be “more” financial regulation or “better” regulation, but definitely not less regulation. There will be intense efforts to see what is going on inside previously opaque areas like hedge funds, derivative markets and subsidiaries set up to evade restrictions. Instruments like credit default swaps, which helped bring down AIG and other big financial institutions, are likely to become more standardized, allowing them to be traded on centralized exchanges so that values will be easier to fix.

“We have to design a system where participants cannot threaten the safety of the American economy,” says Wharton finance professor Richard Marston. “I think this crisis is bad enough that it has rung some alarm bells, and there’s a better chance of doing something right … than there has been for decades.”

Financial Crisis: How to Stop the Panic

It is possible to calm the waters, but it’ll mean unlearning our post-Depression lessons

by Peter Coy and Stanley Reed

The world’s governments are shocked and dismayed by their inability to stop the increasingly grave financial crisis. Nothing they have attempted has gotten lending flowing normally. Profitable companies are cut off from borrowing. Confidence is shot. Through Oct. 7 the U.S. stock market had its worst five-day performance since 1932 on fears of a severe economic downturn. Says Stephen Jen, currency economist at Morgan Stanley (MS) in London: “The choices for the real economy are between a recession and a depression.”

Can anything be done to halt this panic? As a matter of fact, yes. It won’t be quick or easy. But the prerequisite for a new approach is unlearning doctrines that were developed in the aftermath of the Great Depression, the last time financial conditions were worse than this. The world has changed in the intervening seven decades, and what worked to quell the financial crisis then may not work now—as anyone trying to borrow money can see.