Wait a Minute, You Mean Citigroup Cooked Up Their Numbers Too?!

Maybe I'm getting soft in my old age with just a few months to go til I turn the big 3-0 but I am going to go ahead and give Citigroup a big fat pass. Know why? This is obviously (after three of these "oops we screwed up the accounting!" revelations) an accounting standards issue, not a fraud issue. If everyone is doing it and FASB is still trying to figure out what to say, perhaps that is where we need to start.


Citigroup Inc. for the first time has publicly detailed one way it dressed up its balance sheet and incorrectly hid risk from the public.

In a filing made public Thursday, Citigroup explained how it made an accounting mistake that hid billions of dollars in debt from investors by misclassifying certain short-term trades as "sales" when they should have been classified as borrowings.

Citi had acknowledged in a securities filing in May that it had misclassified as much as $9.2 billion of short-term repurchase agreements, or "repos," at times over the past three years, but it had provided few details.

The disclosure highlights one of the ways banks can engage in Wall Street "window dressing." The traditional way banks have done this is by temporarily shedding debt just before reporting their finances to the public at the end of quarterly periods.

In this case, Citigroup went further by improperly booking repos as sales and not borrowings. Both types of window dressing hide from investors the true risk banks are taking on.

Are financial media whores still foaming at the mouth over Lehman Brothers? Are we still calling for Dick Fuld to become the next Ken Lay or can we finally set that nonsense aside?

OK, FAS 140 is clear on the issue of control of an asset. Really clear.

The transferor has surrendered control over transferred assets if and only if all of the following conditions are met:

a. The transferred assets have been isolated from the transferor—put presumptively beyond the reach of the transferor and its creditors, even in bankruptcy or other receivership (paragraphs 27 and 28).

b. Each transferee (or, if the transferee is a qualifying SPE (paragraph 35), each holder of its beneficial interests) has the right to pledge or exchange the assets (or beneficial interests) it received, and no condition both constrains the transferee (or holder) from taking advantage of its right to pledge or exchange and provides more than a trivial benefit to the transferor (paragraphs 29−34).

c. The transferor does not maintain effective control over the transferred assets through either (1) an agreement that both entitles and obligates the transferor to repurchase or redeem them before their maturity (paragraphs 47−49) or (2) the ability to unilaterally cause the holder to return specific assets, other than through a cleanup call (paragraphs 50−54).

Gee, I'm not even a CPA and I can figure that out. Easy right?

But that's not the issue. The issue is that it keeps happening so clearly there is either rampant fraud (unlikely. Even in the case of Citigroup GOD THAT PAINS MY HEART TO SAY) or some confusion as to the interpretation of these rules.

And you guys REALLY think we're ready for IFRS? We can't even figure out the principles buried in the rules we've got!

So go on, FASB, stop holding hands and skipping through the juniper with the IASB and go work on making this as clear as humanly possible or else it's going to keep happening and worse, regulators will be helpless to stop it.

If you leave a giant loophole in the interpretation, don't be shocked when bank accountants go ahead and drive a truck through of money through it. That's all I'm saying.

Jr Deputy Accountant

Some say he’s half man half fish, others say he’s more of a seventy/thirty split. Either way he’s a fishy bastard.


Jonah Gibson said...

If the standards are crystal clear and the banks are violating them anyway, that's fraud. Proving it may be an uphill battle, but we all know what happened. If the auditors gave them a pass, that's collusion. There's no confusion on the standards, else they wouldn't be doing mea culpas now in advance of being caught out. Let's quit wringing our hands, and just throw the bastards in jail.

Sarah said...

Hey all, as someone who works in finance and accounting I wanted to let everyone know that these repurchases are standard for the Street and the repo 105 practice was previously allowed by GAAP but is now no longer permitted thanks to rule changes. However, the SEC’s claim that repurchasing was limited to only one bank and wasn’t widespread is obviously false. Read the WSJ’s article that detailed how Citigroup and Bank of America did the exact same thing as the rest of the Street: http://online.wsj.com/article/SB10001424052748704792104575264731572977378.html?mod=WSJ_Markets_LEFTTopNews