The Volcker Rule

Regulators released a proposal on Oct. 11 known as the Volcker Rule, which is aimed at overhauling how the banking industry carries out its trading activity. The proposal, spanning about 300 pages, includes provisions that scrutinize how banks collect revenue, award compensation and track their compliance with the Volcker Rule.

According to financial industry lawyers and lobbyists these will challenge the very nature of Wall Street.

Questions:

1.  What is the Volcker Rule?  Specifically, explain the revenue provision focus. Do you think this regulation is needed?  Why or why not?

2. The proposal spells out an expansive internal control regime that banks must adopt, creating layers of expensive and time-consuming compliance.   Can too much internal control be a bad thing?  Discuss in general.

3. Do you agree with Sullivan & Cromwell, who say: “The combined effect of these conditions could have a highly adverse impact not only on foreign banks, but on the position of the United States as a financial center.”   Why or why not?

Source:

Protess, B. (2011) With Volcker Rule, Wall Street Braces for Change, The New York Times, Oct. 11(Retrievable online at http://dealbook.nytimes.com/2011/10/11/with-volcker-rule-wall-street-braces-for-change/?ref=business)

Mortgage Buybacks

Mortgage Buybacks

According to Standard & Poor’s, the top U.S. banks could face up to $31 billion in losses from buying back bad mortgages. Bank of America Corp and JPMorgan Chase & Co have the most exposure to such potential repurchase obligations, followed by Wells Fargo & Co, Citigroup Inc, US Bancorp and PNC Financial Services Group, according to S&P analyst Vandana Sharma. In partcular, analysts believe that Bank of America has lost so much credibility with investors that the stock’s decline might start feeding on itself.

Question:

1. According to the article, what percentage of losses from mortgage buybacks have the six companies already accounted for?
2. Besides the losses, what reason do analysts propose will lead to decreases in net interest income?
3. Based on Weil’s article, how did Bank of America record the transaction when it purchased Countrywide? 
4. Rewrite Weil’s 1^st paragraph after the “Tipping Point” subtitle, in simple terms, as if you were explaining it to your grandmother or your roommate.

Source:

Staff. (2010). Banks Face $31 Billion Loss on Mortgage Buybacks: Report, Reuters, November 8. (Retrievable online at http://www.huffingtonpost.com/2010/11/04/banks-face-31-billion-los_n_779115.html)
Youtube.com (2010). BofA Under Pressure to Buy Back $47B in Debt (Retrievable online at http://www.youtube.com/watch?v=apMyLwOJ7nU)

Weil, J (2010). Bank of America Edges Closer to Tipping Point: Jonathan Weil, Bloomberg News, Nov. 3.

Citibank under the Microscope

The SEC has probed certain Citigroup Inc debt funds to assess whether the bank made adequate disclosure to investors about the funds’ risk levels. Three California-based brokers, who worked for the then Citigroup unit Smith Barney, concluded the bank did not adequately disclose the funds’ risks and had also mismanaged them, the newspaper said, citing people familiar with the regulatory probe. Citigroup declined to comment in detail, citing the regulatory probe. However, Citi, denied misleading investors in a WSJ report.

Questions:
1. Assume a small business purchased $200,000 of Citigroup debt funds as an investment for its employee pension fund. What journal entry would it make?
2. Assume the same facts as in question 1. If the company still held these funds at March 2008, how would they account for the 77% decline?
3. Assume the same facts as in question 1 & 2. If the company was lucky enough to be offered the share buyback mentioned in the article, how would they record this transaction?

Source:

Staff. (2010). SEC Probes Citigroup Mortgage Debt Funds, Reuters, November 8. (Retrievable online at http://www.huffingtonpost.com/2010/11/08/sec-probes-citigroup-mort_n_780207.html)

Hiding The Truth?

Jane Buchan is a rarity on Wall Street. Not only has she built a hugely successful hedge fund investment firm but the firm is also the only one that is, on paper, owned and run by women. Unfortunately, it now appears that the firm Pacific Alternative Asset Management Company (PAAMCO) was bankrolled by some of the biggest (male) names in the business, in order to disguise aspects of the business from customers, partners and federal regulators.

Questions:
1. What is this scandal all about in terms of ill-gotten gains? (Include some red flags of fraud and/or motives to commit this type of fraud.)
2. The case centers on whether Mr. Sussman had the right to convert a $2 million loan he made to Paamco’s founding partners in 2000 into an equity stake in Paamco’s parent company. What journal entry would Mr. Sussman make for this transaction, if credible?
3. What was Mr. Sussman’s previous history with the SEC and why is this important?

Source: Creswell, Julie. (2010). A Hedge Fund Controlled By Women, So It Claimed. The New York Times, October 18 (Retrievable online at http://www.nytimes.com/2010/10/19/business/19hedge.html)

Put Me First In Line

Former Denver Broncos quarterback John Elway and his business partner gave $15 million to a hedge-fund manager now accused of running a Ponzi scheme.  In court papers filed by Elway and Mitch Pierce the two claim that their investment was supposed to be kept in a separate account from Mueller’s Over Under Fund. Therefore, the Denver Broncos legend is seeking a declaratory judgment for the return of their money, ahead of other investors. Mueller Capital Management has just $9.5 million left to cover liabilities of $140 million.

Questions:

1.  What is a hedge fund?

2.  What accounting guidance for hedge accounting is available under International Financial Reporting Standards (IFRS)?

3.   What accounting guidance for hedge accounting is available from the Financial Accounting Standards Board (FASB)?

4.  As one accountant said of this story: “It’s hard to feel sorry for rich people who play in games without rules (hedge funds).” Do you agree or disagree? Explain.

 

Source:

Staff. (2010) Hall of Famer Elway Seeks Mueller Money Now. FINAlternatives, October 19 (Retrievable online at http://www.finalternatives.com/node/14212).

The Fabulous Fab is Back in the News

Fabrice Tourre, a controversial personality in the Goldman Sachs Group Inc transaction of 2007, asked a judge to throw out a U.S. regulator’s fraud lawsuit against him.  About two and a half months ago, the bank settled its part of the case for $550 million.

In his filing, Tourre asked that the U.S. Securities and Exchange Commission case be dismissed because the 2007 “Abacus” transaction, which involved collateralized debt obligations (CDOs) tied to subprime mortgages, took place outside the United States.

Questions:

1. What are collateralized debt obligations?

2. Where would CDOs appear in the financial statements of the bank that bought them?

3. Do you think he will prevail in his dismissal of the charges?

4.  How do you think the Goldman Sachs Group reported the $550 million settlement in its financial records?  

Source:

Stempel, J. (2010). Goldman’s Tourre says SEC suit should be dismissed, Reuters, September 30 (Retrieved online at http://www.reuters.com/article/idUSTRE68T3L120100930?utm_source=feedburner&utm_medium=feed&utm_campaign=Feed%3A+reuters%2FbusinessNews+%28News+%2F+US+%2F+Business+News%29)

What a Tale!

During the boom, Wachovia banker Robert Verrone made money by slicing and dicing billions of dollars in commercial real estate loans. After the crash, he made money by restructuring those loans before they blew up. As Wachovia’s No. 1 underwriter of securitized commercial real estate debt between 2002 and 2007, Verrone resigned just months before Wachovia nearly collapsed and was acquired by Wells Fargo at the fire sale price of $15.1 billion.

 Questions:

 1.  Why is/was he called “Large Loan” Verrone?

2.  What does his company called Iron Hound Management do? What is your opinion of his ethics as portrayed in the article?

3.  In the article, he says “”We sold every penny of cash flow to anybody in the world who wanted to buy it.”  What is he referring to?

 Source:

 Leonard, D. (2010). The Ballad of “Large Loan” Verrone, BusinessWeek, September 9 (Retrievable online at http://www.businessweek.com/magazine/content/10_38/b4195070500566.htm)

Bank of America: It Depends On How You Define Materiality

Bank of America incorrectly classified as much as $10.7 billion in short-term lending and repurchase deals for mortgage securities as sales. This claim surfaced in a May 13 letter to the SEC where the banking corporation alleges that the transactions were immaterial and that it would be beefing up its internal accounting controls.  This letter was sent in response to an SEC request of finance chiefs at about two dozen firms in March, asking whether they employed accounting strategies like Repo 105 used at Lehman Brothers Holdings Inc.

Questions:

1. In the letter, the bank said its incorrect accounting for the six trades wasn’t intentional. “We do not deliberately structure transactions that are economically disadvantageous simply for the purpose of recording a sale or reducing recorded liabilities.” What must their incorrect journal entries have been?

2. Why did the bank include the phrase that “its incorrect accounting for the six trades wasn’t intentional?”

3. What does “end-of-quarter window dressing” mean in terms of this event? What is Repo 105?

4. Do you agree or disagree that this amount is not material enough to disclose? Explain your answer.

Source:

Rebel Traders (2010). Bank Of America (NYSE: BAC) Admits To Hiding Debt, iStock Analysts, July 12 (Retrievable online at http://www.istockanalyst.com/article/viewarticle/articleid/4299094)

Video: Lehman Brothers ‘Accounting Gimmick’: Repo 105 Lehman Hid Assets (Retrievable online at http://www.youtube.com/watch?v=Zb3DLWeHCks)

Staff reporter. (2010). Bank of America Wrongly Classified Transactions, China Daily, July 12 (Retrievable online at http://english.sina.com/business/2010/0711/328707.html)

Risky Medicine for Hospital Financing

In a last-minute change to the financial reforms bill, Congress allowed Wall Street to continue to sell interest-rate swaps directly, rather than isolating these derivatives in separate units. The thinking behind this move is that the interest-rate securities are benign, or at least less dangerous than credit default swaps, which the legislation requires banks to detach from their main operations.

Questions:

1. What is an interest-rate swap?  Do you think that Congress’ action regarding interest-rate swaps was a good idea?  Why or why not?

2. What is an auction-rate security?

3.  How was the hospital industry harmed by these financial instruments?  What other entities took a hit from these financial instruments?

Source:

Sherter, A. (2010). Financial Reform: How Supposedly Safe Derivatives Make Hospitals Sick, BNET, July 8. (Retrievable online at http://industry.bnet.com/financial-services/100010474/financial-reform-how-supposedly-safe-derivatives-make-hospitals-sick/)

Financial Instrument Accounting

On Wednesday, May 26, 2010, the FASB released an exposure draft for the purposes of improving accounting for financial instruments. The new rules, projected to take effect in 2013, incorporate both amortized cost and fair value information about financial instruments held for collection or payment of cash flows.

Questions:

1. According to the article, how does the proposal plan to provide more timely information for financial statement users about anticipated credit losses?

2. What is the deadline for comments and when does FASB plan to hold roundtable meetings?

3. How many members are on the AICPA’s Accounting Standards Executive Committee, that has weighed in on the proposal and who are those represented on the committee?

Source:

Lamoreaux, Matthew (2010). FASB Proposes Comprehensive Changes to Financial Instruments Accounting, Journal of Accountancy, May 26 (Retrievable online at http://www.journalofaccountancy.com/Web/20102977.htm)

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