Northern Country

How globalization changes capitalism, the economy and politics

Posts Tagged ‘IASB

Bernanke in a town-hall meeting, shopping for popularity

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Last Sunday Ben Bernanke, chairman of the Federal Reserve responded to questions from the public in a town-hall style meeting. For the first time in history an acting Federal Reserve chair stepped into the arena that is usually the prerogative of obligations among elected officials. We truly live in interesting times.

What could have provoked this extraordinary move by the chairman given the daunting unpopularity of cumulative actions taken by the Fed in the last twenty four months? The answer is already given in the question. Ben Bernanke is shopping for popularity in order to better his approval ratings. His term as chairman ends in January 31, 2010, when he is up for reappointment by president Obama.

I can only imagine it must have been scary and embarrassing for the chief to step in front of the very same audience he led down over the course of the last ten years. He certainly did not mean to inflict any harm upon his fellow countrymen, but together with his predecessor Greenspan he helped lay the foundations of a shaky economy based on bubble economics.

Sure he gave birth to many millionaires and even some billionaires, but for most people Greenspan’s and Bernanke’s policies were rather harmful. Certainly one cannot expect any sensational outcome of such meetings with both a preselected audience and preselected questions. Organizers won’t let that happen though the chairman won’t suffer any lasting damages. It would have been nice though to read Bernanke’s mind.

To his defense the chairman admitted that he was disgusted from bailing out giant Wall Street firms like AIG, Bear Stearns or Merrill Lynch and rescuing them from going bankrupt. Though we certainly respect his wish not to reside over a second Great Depression, of course we have to believe him that there were no other options at the time. I might also add we are not yet with absolute certainty out of the woods with regard to another Great one.

Asked about his too-big-to-fail policy he seemed to indicate sympathy for the public’s frustration and promised to make it better in the future. Though his credibility was called into question by reiterating his opposition to an independent outside audit of the Fed. Why no audit if he has nothing to hide? Yes there is the issue of independence of the Fed, but just how much independence was there say in the last ten years?!

The Federal bank closest to Wall Street, and therefore in a special position with regard to the nation’s largest financial institutions, is the Federal Reserve Bank of New York. During the financial crisis Federal Reserve and Treasury Department officials made all major decisions, but the New York Fed executed them.

In the meantime the New York Fed has been criticized as too close to Wall Street. William Poole, a former Fed president, missed a longer-run perspective among the Fed’s staff. They adopted a trader mentality instead and did not pay enough attention to a system skewed towards too much risk taking by numerous bailouts of large Wall Street firms.

The Fed’s board of directors is composed of powerful bankers and corporate titans like Jamie Dimon, the head of JPMorgan Chase, and Jeffrey Immelt, General Electric’s chief. Richard Fuld had to resign after Lehman’s bankruptcy and Stephen Friedman called it quits over a conflict of interest with the other board he served, of investment power house Goldman Sachs. The corporate-federal officials network seems too tight to ever disintegrate.

It is not only the Federal Reserve that has to fear for its independence. The lobbying departments of large financial institutions have expelled their tentacles even into the Financial accounting Standards Board (FASB) of the United States and the International Accounting Standards Board (IASB) of Europe.

According to a recent report by an international team of former regulators and corporate officials, the Financial crisis Advisory Group deplored efforts by politicians to prescribe changes on accounting standards. The integrity of valued assets on the books of financial institutions should not be called into question in an effort to save those institutions from potentially harmful bets gone awry. In April, 2009, FASB already caved in to heavy financial lobbying and paused fair-value accounting rules for illiquid assets.

Beside all the regulatory and statutory powers bestowed on elected or appointed officials their most potent tool still remains the integrity of the person and organization in question. It is by no means sufficient for Fed chair Bernanke to communicate his objection to the bailouts on Wall Street even if it is within such an elaborate setting of a town-hall meeting. There is not enough meet on the bone to undo what has already happened.

A Gallop poll, conducted in mid-July, found that only 30% rated the Fed as doing an excellent/good job. The bank had the lowest score out of nine government agencies and it was down sharply from the 53% who still approved of the Fed’s job in 2003. This time even the CIA and the Internal Revenue Service scored better than the Fed. Bernanke will have to do better. It will most certainly be like walking a tightrope.

Goldman Sachs reports second quarter earnings

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Meredith Whitney, the star analyst on Wall Street who correctly predicted the massive asset problems faced by all major investment firms during the last several quarters, increased her price target on Goldman Sachs. It prompted some to speculate if she had eventually flipped on her bearish posture on financial institutions in general. 

I don’t know if she did but the results of Goldman’s second quarter, blowing past all expectations certainly didn’t make her job any easier. In the latest April to July quarter Goldman’s profit leaped 65 percent compared to the same period of last year.

It certainly makes one wonder what does Goldman have that others don’t. For one thing a Tier 1 ratio that is depending on how you look at it, whether its Basel I of II, at 13.8 or 16.1 percent respectively. In addition the amount of liquid assets averaged $171 billion during the quarter. That is certainly a nice capital cushion in case of a more adverse operating environment in the future.

The most staggering part of Goldman’s earnings release were the huge revenue gains of 93 percent to 10.8 billion within its equities and principal investment unit. Trading and risk taking really paid off and the firm greatly profited from much higher than usual volatility in the markets.

These ups and down in the market prompted Matt Taibbi, a business writer for the Rolling Stone magazine, to call Goldman the Great American Bubble Machine. Maybe after this earnings bonanza it becomes more clear why Taibbi felt compelled to make such an outrageous claim. Goldman promptly dismissed it as the usual conspiracy theory.

Taibbi’s accusation certainly helps to explain some of the investment firm’s wizardry, and his uncompromising look behind the firms machinations reveal a really sinister network of public and private interconnections (see also here). On a more straightforward note the mere fact that Uncle Sam changed financial accounting rules back in April might have laid the foundations for the biggest jump in quarterly earnings since its IPO. 

In April the Financial Accounting Standard Board (FASB) succumbed to financial industry lobbying and lowered its requirements for market-to-market accounting of low liquidity investments without a real market. This move saved US financial institutions tens of billions of dollars in write downs to their balance sheets, which threatened to become an endless open pit.

At that point FASB only leveled the playing field for US financial institutions with their European counterparts, which according to IASB existing rules were not required to strict market-to-market in the first place. These days though IASB has again put the screws on financial institutions by threatening to implement new pro-cyclical rules in market-to-market accounting.

Getting back to Goldman, there is no denying the fact that the firm has a strong desire for excessive risk taking but they obviously seem to be able to maximize shareholder value even in a time more adverse to such high flying objectives. Again, what does Goldman have that others don’t?

Maybe it has to do with a high stake in another firm. Together with  JPMorgan, Bank of America and Royal Bank of Scotland, Goldman is a major shareholder of Markit, a firm which supplies information to financial markets around the world concerning the pricing of credit derivatives. Many believe that these relatively new products are at the core of the financial meltdown.

The US Department of Justice is now requesting detailed information about the pricing of credit derivatives and has launched an investigation into the ways Markit supplies this information and whether the firms owners have unfair access to vital market-making data. 

Markit of course denies any wrong doing, and so is Goldman I am sure, but hopefully the investigation will not stop here or just end in talk.