Who Holds the Note? A Loaded Question for Credit Scores.

Before Steven Marks started looking for debt relief on his Reno, Nev. home, he sent a simple request to Bank of America to ask who owned his mortgage.  He also wanted documentation of this.  What he got in return was an initial decline regarding who owned his loan by Bank of America and a lowering of his credit score.  This caused his insurance rates to go up also.  Marks had never been late on his payments, but all he wanted was information.  

Marks asked the bank for this information through a “Where’s the Note? website, which was created by the Service Employees International Union and the African American grassroots-advocacy group Color of Change.  Amid reports of widespread fraud in the foreclosure process, resulting in everything from illegal fees to improper evictions, the site’s stated purpose is to offer borrowers legal leverage to challenge bank wrongdoing.  More than 100 complaints similar to Marks’ have occurred since the launch of “Where’s the Note?” with the overwhelming majority coming from the activities of Bank of America. Currently , it’s not clear whether BofA is intentionally attempting to intimidate borrowers, or whether this is a mistake created by a high-volume business that is not above cutting corners by coding all inquiries as disputes in order to reduce costs.

Questions:

1.  Do you think the Bank of America is deploying an automated process to handle the requests?  Why or why not?  Use Steven Marks’ template as an example.

2. What does the term “servicing” a note or loan mean?

3. Do you believe this was a retaliatory act against borrowers that exercise rights under consumer protection acts?  What recent legislation was enacted to combat some of these incidents? Do you think more is needed?

4.  According to your understanding, is the website at fault? Research its disclosures.

Source:

Carter, Z. and A. Delaney. (2011). Honey, I Shrunk the Credit Score. Huffington Post.com, January 5 (Retrievable online at http://www.huffingtonpost.com/2011/01/05/honey-i-shrunk-the-credit-score_n_804105.html)

Mickey D’s in the News: Which story is right?

According to the Wall Street Journal, McDonald’s Corp. has warned federal regulators that it could drop its health insurance plan for nearly 30,000 hourly restaurant workers unless regulators waive a new requirement of the U.S. health overhaul.  However, less than an hour after that release, ABC News  and Reuters reported that McDonald’s and the Obama administration said the claims of the  Wall Street Journal are false, regarding the dropping of its “mini-med” health insurance for hourly workers because of the new health care reform law.

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Question:

1.  Why do you think the stories are so different and why do you think there was such a quick response from McDonalds and the Obama administration?

2.  What is the medical loss ratio in the new legislation?

3. What effects do you think the new legislation will have on the financial statements of companies?

4.  What do you see as the costs and the benefits of this new legislation?

Sources:

 Adamy, J. (2010). McDonald’s May Drop Health Plan, Wall Street Journal, September 30 (Retrieved online at http://online.wsj.com/article/SB10001424052748703431604575522413101063070.html?mod=WSJ_hpp_MIDDLENexttoWhatsNewsThird)

Arnall, D. and H. Khan. (2010). McDonald’s Fights Back Against Report It Will Drop Health Care Plan, ABC News, September 30 (Retrieved online at http://abcnews.go.com/Politics/HealthCare/mcdonalds-fights-back-report-drop-health-care-plan/story?id=11764596)

Reuters. (2010). McDonald’s Denies Its Cutting Health Insurance, MSNBC, September 30 (Retrievable online at http://www.cnbc.com/id/39435771)

WSJ Video. (2010). AM Report: McDonald’s May Drop Health Plan, September 30.  (Retrievable online at http://online.wsj.com/public/page/0_0_WP_3001.html?currentPlayingLocation=37&currentlyPlayingCollection=The%20News%20Hub&currentlyPlayingVideoId={088AC31E-1087-428F-AD84-62AA9E6D5EA6})

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)

A Fee to Visit the U.S.

Starting Wednesday, September 8, 2010, travelers from 36 nations will be required to pay a new two-year entry or travel fee when they visit the United States — part of which will be used to promote tourism.

The travelers will pay $14 to register through the Electronic System for Travel Authorization (ESTA), required for those using the Visa Waiver Program. Four of the $14 will cover ESTA operating costs, and $10 will go toward promoting the United States as a tourist destination.

Questions:

 1. According to the video and article, the legislation will create a corporation for Travel Promotion, which is a private corporation that will be funded in part by the $10 fee collected from visitors (who are not required to apply and pay for visas). Assume that the corporation begins its existence on September 8, 2010.  How much revenue will it report as of December 31, 2010, if we assume that 500,000 visitors come to the U.S. over this period? (Hint: remember this fee covers a 2-year period.)

2.Assume that 200,000 visitors pay the fee on October1, 2010.  What journal entry should be made on October 1?

3. Based on question 3, what adjusting journal entry should be made on December 31, 2010? (Hint: remember this fee covers a 2-year period.)

4.  How should the corporation account for the $100 million of matching private sector funds?

Sources:

Hunter, M. (2010) Visitors from 36 nations to pay U.S. tourism promotion fee, CNN Travel, September 8(Retrievable at http://www.cnn.com/2010/TRAVEL/09/08/promotion.fee/index.html?iref=allsearch)

Video (2010).U.S. Charges Entry Fee, September 8 (Retrievable at http://www.cnn.com/video/)

Power to the Shareholders

According to a new report from the Wall Street Journal, shareholders have won a victory in obtaining greater clout to place directors on corporate boards.  This is part of the the ”shareholder rights” movement that has been chipping away the power from top executives in U.S. run corporations. However, the Journal also predicts skirmishes ahead by public companies that hope to strike down the SEC rule, which they say will be used to distract management and advance special-interest agendas.

Questions:

1. What was the SEC vote in favor of the “proxy access” rule?

2. What does the “proxy access” rule require?

3. What are the costs and benefits of this new rule?

4.  How could this new rule impact you as an accountant?

Source:

Holzer, Jessica and D. Berman. (2010). Investors Gain New Clout, The Wall Street Journal, August 26. (Retrievable online at http://online.wsj.com/article/SB10001424052748703632304575451572616571774.html?mod=ITP_pageone_0)

Who are the most trustworthy companies and why?

Who can you trust? 

In a recent examination by Audit Integrity, an independent financial analytics company in Los Angeles, the company assessed the true quality of corporate accounting and management practices by looking at more than 100 factors beyond the balance sheet and income statement. Their aim was to identify the measures most highly associated with fraud and to quantify the risks of drops in stock prices, that could force managers to restate financials or could potentially result in securities lawsuits. Audit Integrity has back-tested its proprietary metrics to 1996 to establish correlations between corporate behavior and negative events. Audit Integrity’s measures have been used over the past seven years by institutional investors, insurers, auditors, regulators and corporations to identify risk.

Questions:

1. How many public companies typically make Audit Integrity’s Most Trustworthy Companies list?

2. What industry or region of the country has a concentration of the most trustworthy companies?

3.  Who are the companies with the most impressive records and why?

4.  Speculate on what metrics are used by Audit Integrity and list at least 10 factors that would be important to include.

Source:

Weinberg, N. (2010). The Most Trustworthy Companies. Forbes.com, August 6 (Retrievable online at http://www.forbes.com/2010/08/05/most-trustworthy-companies-personal-finance-audit-integrity.html?partner=daily_newsletter)

Multi-Million Dollar Swindle of Four Universities

In one of the most recently uncovered Ponzi cases, a former hedge-fund manager has pleaded guilty to criminal charges in an investment scam in which he bilked as much as $900-million from investors, including four university endowments. According to investigators, the Paul R. Greenwood and his partner Stephen Walsh spent at least $160-million on mansions, horses, rare books, and an $80,000 collectible teddy bear. Mr. Walsh has pleaded not guilty, and Mr. Greenwood will testify against him at trial.

Questions:

1. What did the investors find out about their assets?  Explain why this was a bad sign.

2.  What do the articles say could have prevented the university investments in this scheme?

3.  What potential penalties does Mr. Greenwood face?

Sources:

Fain, Paul. (2010). Hedge-Fund Manager Pleads Guilty to Multimillion-Dollar Swindle of Four Universities. The Chronicle of Higher Education, July 29 (Retrievable online at http://chronicle.com/article/Hedge-Fund-Manager-Pleads/123713/?sid=at&utm_source=at&utm_medium=en)

Fain, Paul. (2009). Two Universities Seek Answers After $114-Million Vanishes in an Alleged Swindle. The Chronicle of Higher Education, March 5 (Retrievable online at http://onnidan1.com/forum/index.php?topic=24965.0)

New Revenue Recognition Standards on the Way for Contractors

Contractors should be educating themselves on the impact of the new proposed revenue recognition standards and the recently published (June 24, 2010) exposure draft pertaining to revenue from contracts with customers. Public comments are due October 22, 2010, and it is expected the standards will be finalized in 2011.

Questions:

1. What are some of the significant changes in this standard that will affect contractors?

2. How will the proposed standard define the economic unit of measure?

3. Explain what the new cost of capitalization rules will mean for contractors.

 

Source:

Henderson, J. (2010). Proposed Revenue Recognition Rules Would Significantly Affect Contractors, BKD Alerts, June (Retrievable online at http://www.bkd.com/industry/Construction-RealEstate/Insights/2010/2010-06alertsCRE-1.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/)

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