Accountants plead for protection

In possibly the least unexpected news item of the year, Accountancy Age reports that the Big 4 are seeking immunity from law suits arising from the credit crunch. Perhaps they should have thought a bit more about the risks their financial clients were running.

Financial Oligarchs

Writing in the FT, Martin Woolf asks whether 'America is the new Russia'. The power of the financial sector to influence government and attract subsidies from the public purse is corrosive. Graphs of relative wages and financial sector profits show how much hold the financial sector had generated over the economy as regulation was reduced.

Will increased regulation, which everyone now expects, reverse this? The volume of noise generated by interested parties seeking to reduce the impact of regulation makes one wonder whether new regulation will be toothless.

Credit crunch humour

Here is a piece of internet humour about the credit crunch, I'd attribute it if I knew the author. For the moment credit it to 'anon'.



The Credit Crunch Explained

At last! An explanation I understand...

Heidi is the proprietor of a bar in Berlin. In order to increase sales, she
decides to allow her loyal customers, most of whom are unemployed
alcoholics, to drink now but pay later. She keeps track of the drinks
consumed on a ledger (thereby granting the customers loans).

Word gets around and as a result increasing numbers of unemployed alcoholics
flood into Heidi's bar.

Taking advantage of her customers' freedom from immediate payment
constraints, Heidi increases her prices for wine and beer, the most popular
drinks. Her sales volume increases massively.

A young and dynamic customer service consultant at the local bank recognizes
these customer debts as valuable future assets and increases Heidi's
borrowing limit. He sees no reason for undue concern since he has the debts
of the alcoholics as collateral.

At the bank's corporate headquarters, expert bankers transform these
customer assets into DRINKBONDS, ALKBONDS and PUKEBONDS. These securities
are then traded on markets worldwide. No one really understands what these
abbreviations mean and how the securities are guaranteed. Nevertheless, as
their prices continuously climb, the securities become top-selling items
because (insert here the name of your financial advisor) recommended them as
a good investment.

One day, although the prices are still climbing, a risk manager of the bank,
(subsequently of course fired due to his negativity), decides that the time
has come to demand payment of the debts incurred by the drinkers at Heidi's
bar. But of course they cannot pay back the debts.

Heidi cannot fulfill her loan obligations and claims bankruptcy.

DRINKBOND and ALKBOND drop in price by 95%. PUKEBOND performs better,
stabilizing in price after dropping by 80%.

The suppliers of Heidi's bar, having granted her generous payment-due dates,
and having invested in the securities, are faced with a new situation. Her
wine supplier claims bankruptcy, her beer supplier is taken over by a
competitor.

The bank is saved by the Government following dramatic round-the-clock
consultations by leaders from the governing political parties.

The funds required for this purpose are obtained by a tax levied on the
non-drinkers.

Some serious arguments against fair value accounting

The title link is to a very thoughtful and authoritative set of arguments against fair value accounting by a previous chair of the Federal Deposit Insurance Corporation. William Isaac argues, cogently, that the current recession is largely caused by mark-to-market, aka 'fair value', accounting and that the previous, historical cost system served us well for decades. He argues the Savings and Loan crisis of the 1980s had the potential to be much worse than the current crisis but serious harm was averted because banks were permitted to carry items at the lower of cost or economic value rather than being required to mark them to temporary unrealistic values.

My thanks to Stella Fearnley for pointing this piece out to me.

Sue the auditors

Former Chancellor Nigel Lawson and 'semi-house trained polecat' Lord Tebbit have both suggested that the auditors of failed banks might be sued by the government. If they did so the auditors would doubtless rely on the defence that they reported the fair values of the assets held by the banks. It would be an interesting case and well worth arguing in court in order to clarify the role of the auditors.

The FSA report on the current crisis is likely to make some interesting observation of the pro-cyclical nature of banks' accounting.

Sants and sinners

All right the title is a bit forced, but the link is to one of Peston's Picks on the BBC website. Peston examines a speech by Hector Sants of the Financial Services Authority where Sants says

"Markets have shown not to be rational; excesses have not been corrected by market discipline".

Peston draws the lesson that markets won't stop management making stupid decisions. He doubts that the FSA would be able to stem the tide of irrational exuberance on its own and concludes that only expert non-executive directors would be up to the job.

Jack Welch says shareholder value a 'dumb idea'. Last 28 years a mistake.

In an article in its 'Future of Capitalism' series the FT has interviewed Jack Welch the legendary ex-CEO of General Electric and the man widely regarded as the father of 'shareholder value'. He now rejects shareholder value as a strategy, calling it 'insane', but suggests shareholder value is an outcome of good strategy based on employees, customers and products.

This is yet another straw in the wind indicating the end of Anglo-Saxon capitalism as we know it, and it is to be hoped, the equating of 'liberal democracy' with the freedom to make as much money as possible.

Along with squadrons of flying pigs, look out for Francis Fukuyama explaining that history wasn't dead, merely tired and shagged out after a long squawk.