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Friday, January 11, 2008

MBA: I Can Haz Accountentz?

by Tanta on 1/11/2008 10:16:00 AM

What happens when a reporter straps on a decent-sized pack of skepticism about a trade association's PRs and picks up the phone. It's like so totally cool.

Floyd "Maybe This Isn't Just Subprime" Norris in the New York Times:

And now the banks are begging the accounting rule makers to allow them to ignore a rule that has been on the books for almost 15 years. They explain that they never had any idea that they would have to restructure a lot of home mortgages, and thus had no reason to develop systems to deal with the accounting for such restructurings.

“No one anticipated a day when potentially hundreds of thousands of residential mortgage loans would be modified,” said Alison Utermohlen, an official of the Mortgage Bankers Association who has led the effort to get the accounting rules relaxed.

She said many members of the association did not have computer systems adequate to comply with the rule, but she did not identify any specific banks. . . .

The accounting rule in question, Financial Accounting Standard 114, was adopted in 1993. Lynn E. Turner, a former chief accountant of the Securities and Exchange Commission, recalls that it was enacted because of abuses by financial institutions during the savings and loan debacle. Under the old rule, banks could avoid reporting losses so long as they expected to get the principal back eventually, even if the borrower did not have to pay interest on the restructured loan. The rule put an end to that.

Or at least it put an end to it for most types of loans. These banks live with F.A.S. 114 for their commercial mortgages and corporate loans, but according to Ms. Utermohlen, they don’t have systems in place to do the calculations for large numbers of restructured residential mortgage loans.

The calculations, it turns out, are not that complicated. You could do them with a decent financial calculator, or an Excel spreadsheet. But the banks argue that would take too much effort, given the volume of loans likely to be restructured. “This would be extremely time-consuming and would likely involve additional staff dedicated to this purpose,” Ms. Utermohlen said in a letter to the Financial Accounting Standards Board this week.

Will the banks win this argument? It appears to be one that they want to win without having to actually admit that any specific bank has a problem at all. I called five members of the Mortgage Bankers Association that are represented on the committee that Ms. Utermohlen said she worked with: Citigroup, JPMorgan Chase, Bank of America, Countrywide Financial and Washington Mutual. Countrywide said that its computer systems were adequate to comply with F.A.S. 114, but that it felt it would be “less burdensome from an operational standpoint” if the rule could be ignored. None of the other four told me whether their systems were adequate.
Thanks, Floyd, for joining the team. Whenever they're going out of their way to look stupid ("we have no one on staff who can actually use Excel"), the pea is under the other shell. And yes, it is always worth asking why we give bank charters to people who can't discount a cash flow with both hands and a flashlight.