FHLB Chairman Quits Due to Discomfort with FASB Shifting Accounting Rules

When the man in charge of the second largest borrower in the U.S. is willing to lose his job due to his discomfort with the FASB's shift in accounting rules, you can bet that the tragic fallout of all the "market buoying" recent events is only a matter of time.

Somehow this noteworthy event, which happened over a week ago, passed substantially unnoticed until Zero Hedge friend Jonathan Weil at Bloomberg dug it up. Charles Bowsher, who was most recently Chairman of the Federal Home Loan Bank System's Office of Finance and previously served as U.S. comptroller general may be the only truly honorable man in the socialist nexus of politics and finance. The reason for his departure from this critical post -- his discomfort in vouching for the banks' combined financial statements. And as Weil puts it succinctly: "Now the question for taxpayers is this: If Charles Bowsher can’t get comfortable with these banks’ financial statements, why should anybody else be?"

Why indeed.

If Bowsher was merely involved with some marginal organization, this could be perceived as a hypocritical attempt to score populist brownie points. However, the FHLB is among the governmental entities at the heart of the current problem. Zero Hedge has written previously about the FHLB and its critical role in the ongoing housing crisis, but in a nutshell "The Office of Finance issues and services all the debt for the 12 regional Federal Home Loan Banks. That’s a lot of debt -- $1.26 trillion as of Dec. 31, making the FHLBank System the largest U.S. borrower after the federal government. The government-chartered banks, which operate independently, in turn supply low-cost loans to their 8,100 member banks and finance companies. If any of the FHLBanks were to fail, taxpayers could be on the hook."

Ah, the poor taxpayer about to get duped one last time. And the immediate reason for Bowsher's decisions: his concern with the methods used for determining when losses on hard-to-value securities should be included in banks’ earnings and regulatory capital.

And it gets much worse:

For the fourth quarter of 2008, the FHLBanks said their total preliminary net loss was $672 million. It would have been many times larger, had they included all their red ink.

The year-end balance sheet at the FHLBank of Seattle, for example, showed $5.6 billion of non-government mortgage-backed securities that it says it will hold until maturity. Yet the estimated value of those securities was just $3.6 billion. The bank, which reported a $199.4 million net loss for 2008, said the declines were only temporary. They’ve been anything but fleeting, though. Most of those securities have been worth less than they cost for more than a year.

The FASB’s rules on this subject, which have never been well defined, are now in flux. Today, after caving in to pressure by the banking industry and members of Congress, the Financial Accounting Standards Board is set to vote on a plan to relax its rules on mark-to-market accounting, so that companies can disregard market prices and ignore losses on their securities indefinitely.

Bowsher is not new to taking hard political stands:

As comptroller general, he was in charge of the General Accountability Office, the investigative arm of Congress. At his direction, the GAO was among the first to warn the public about the brewing savings-and- loan crisis during the 1980s. He testified before Congress in 1994 that there was an “immediate need” for “federal regulation of the safety and soundness” of all major U.S. derivatives dealers. (How’s that for prescient?)

Most recently, in 2007, he led an independent committee that issued a blistering report on financial missteps at the Smithsonian Institution, whose board of regents included U.S. Chief Justice John Roberts.

And how does the FHLB spin this event?

"Mr. Bowsher has expressed his concerns to me around the complexity of valuing mortgage-backed securities and the process of producing combined financial statements from the 12 home loan banks. I don’t think it’s appropriate for us to speak for Mr. Bowsher."

So: to paraphrase - one of the men who knows the ins and outs of the financials of banks involved in the mortgage crisis more intimately than even Bernanke and Geithner, let alone Obama, is saying that the newly implemented changes by the FASB will throw the whole system into tailspin and he wants none of it.

If this isn't the most damning condemnation of the Kool Aid the administration, the Treasury, the Fed, the FASB, the FDIC, and all the other alphabet soups are trying to make the common U.S. citizen drink and have seconds, then nothing else possibly could be.... of course until Bowsher is proven right and everything collapses into the smoldering heap of defaulted MBS still marked at par on various liquidating banks' balance sheets...

Oh and yes, let's hold a moment of silence for Lehman which held billions of mortgage backed securities that it too was "holding until maturity." Well, Lehman is no more, and all these securities now trade, in the form of the company's general unsecured claims, at the generous price of 12 cents on the dollar... Furthermore, one can't say the market is illiquid - the bid-ask spread is only 1 cent. And as there are over $150 billion of these claims floating around, one can't say the market is in any way limited from a price discovery standpoint.

Maybe if more honest people follow in Bowsher's unique example, the general population will finally start seeing through the everyday lies and misinformation coming out of D.C.

Comments

[Fighting Yoda:]

Good Dig. FASB rule change is complete nonsense, we already do not trust the bank balance sheets, now they will be officially fake, and we can officially have zombie banks and the lost decade.
Jim Chanos wrote an interesting OpEd in the Journal a couple of weeks ago against change of rules. Several points stuck out:
- Before MTM took effect, the Financial Accounting Standards Board (FASB) produced much evidence to show that valuing financial instruments and other difficult-to-price assets by "historical" costs, or "mark to management," was folly.
- The rules now under attack are neither as significant nor as inflexible as critics charge. MTM is generally limited to investments held for trading purposes, and to certain derivatives. For many financial institutions, these investments represent a minority of their total investment portfolio
- SEC 2008 report found that "over 90% of investments marked-to-market are valued based on observable inputs." And only 29% of the $8.46 trillion in assets are at MTM prices. So the percentage of MTM assets with non observable prices is quite small – 1- 3% only
- Financial institutions had no problem in using MTM to benefit from the drop in prices of their own notes and bonds, since the rule also applies to liabilities. And when the value of the securitized loans they held was soaring, they eagerly embraced MTM.

This is another regulatory folly like CRA, repeal of Glass-Stiegel, Finance Modernization act (40:1 leverage stuff)

Apr 03 03:37 AM

[doubleguns:]

Charles Bowsher for treasury!!! Fire Geithner.

Apr 03 07:26 AM

[D. McHattie:]

Would love to see Bowsher join up with David Walker and the Pete Peterson Foundation.

We need one single unified lobby against the financial madness that is consuming us all.

Great find Tyler but it is the banks that have adopted Fight Club rules. "The first rule about bank insolvency: don't talk about bank insolvency".

Apr 03 07:52 AM

[elcopone:]

Forget Bowsher for Treasury... I'm endorsing Mr. Durden! So what if he's a fictional character!

Seriously, more great work from one of the best on SA. Thanks.

Apr 03 09:40 AM

[mrmillergd:]

Think about the audacity required to hold these securities at par:

It requires you to believe that the underlying asset values were not inflated at all and in fact represent realistic represeentations of future cash flows.

So bankers are basically saying they still believe this in the face of a wave of massive defaults and plunging asset values.

Insanity.

Apr 03 10:06 AM

[Mark Bern:]

The banks (and Treasury, FDIC, the Fed, et. al.) are just trying to keep a lid on things and hold on until the messy little recession thing passes. When the economy turns around later this year, everything will get back to normal.....NOT!

We The People are being duped! What really gets me going is the fact that there are still people out there buying bank stocks as if everything were okay. How can anyone buy an asset without having any idea what it is?

I think we should start an exchange for empty boxes with one out of a hundred having $10 in it. Sell them all for $1 and do press releases about all the ten percent of owners who got a 1,000 percent return on their money. Sure, most of the boxes will be empty. But, tell me, how is that any different from the bank stocks? We were profitable during the first two months of 2009 (excluding nonrecurring items)! Oh, please.

Apr 03 10:38 AM

[Fabien Hug:]

I see with pleasure that you start to collect more and more positive comments. Fully deserved, you talk straight.

Apr 03 01:14 PM

[bampbs:]

MTM is pro-cyclical, efficient market hogwash. The Japan analogy is bogus. Housing in their six largest cities fell by 2/3. The government propped up their banks so that they could continue to make bad loans for years. How is that relevant ?

Apr 03 01:14 PM

[John Sky:]

This is interesting to see how things will pan out in the next 6-12 months. I am more interested to see what happens when they mature @ par. Who is responsible for paying back the holders of these securities.

Apr 03 01:23 PM

[PainfullyAware:]

Eventually, The Pretend Must End - I hope it does not ruin The Thread The Constitution Currently Hangs By.

Complexity Favors The Sinister.

When the inside men abandon their post on principle - things are not well in OZ.

Apr 03 03:43 PM

[Leftfield:]

I'm having trouble getting through to starstruck Obama supporters. Too bad so many of them are in the media. They did get some good spin in this week out of G20. I guess it's just great that nothing truly disastrous seems to have happened there.

Most people still believe the experts who have led us to this point. The usual suspects who are trying to reinflate the same profoundly failed entities so that they might strike us again. Conjuring up $ trillions that we are going to be responsible for.

What kinds of jobs will there be in the hoped-for renaissance to pay this expanded tab? Best case, when the bubble was intact, we were not going to make it much further with Social Security or Medicare and only a Goldilocks economy could sustain public sector pensions and benefits. Now, with profoundly larger expenses and far fewer jobs.......?

Mr. Bowsher is of an infinitesimally small minority as a person well-paid with responsibility who measures up to it rather than sells out for it. I pray that their numbers and audience grows.

Apr 03 08:01 PM

[ifuwish2:]

he thinks that he should of been fired not let quit,, he wants the market to go to 0 what guys we had in there,,more dummies need to go and dont give them no severence pay either,,they dont deserve it..

Apr 04 12:16 AM

[Joe Bob:]

Get a grip. Former partner Authur Anderson(aka Enron). No doubt he took offense that congress could tell FASB to move on Fair Value or they would. It is altogether amazing how people acclaimed to be all wise could steer their ship into the docks and claim that they would not have to worry about docks if the land were not there.

Apr 04 10:46 AM

[Al-USA:]

Good article and comments, thanks.

Apr 04 07:18 PM

[yk00002:]

Please go to Ben Graham's book, The Intelligent Investor, and look for the parable of Mr. Market. Do you think it prudent to ask Mr. Market to value an enterprise? or a bond? to paraphrase Mr. Graham, the poor guy sometimes lets his enthusiasm and fears run away with him, and the value he proposes seems short of silly.
Now think of the way a perfectly good stock or bond is valued in a market panic. If its value starts to go down, everybody drops it like a hot potato and its value goes down even more. now you hitch the value of the whole banking system, the same guys who secure the bond, to this, and you get a self fulfilling prophecy. being an engineer, I would call that a closed loop with positive feedback. that means that left to its own devices the value of the bonds and banks together will go down to zero. The banks will not be worth anything and therefore the bonds won't be worth anything and therefore the banks won't be worth anything.
Pure market theorists understand all about the market correcting itself, but they have this strong religious faith in feedback being always negative (correcting), never positive (enhancing aberrations). As long as people treat the market as god and not as a scientifically researchable phenomenon they are not better than Marxists.

Apr 12 11:19 PM