Explore Posterous

UK brokers call banks ‘bullies’

Posted by Gwen Robinson on Nov 09 04:53.

Three leading London City stockbrokers have written to Lord Myners, the City Minister, accusing Royal Bank of Scotland and Lloyds Banking Group of “corporate bullying” by forcing companies that owe money to the banks to use their investment banking services, reports The Times. In an unprecedented act of solidarity, three of London’s fiercest rivals — Tim Linacre, CEO of Panmure Gordon; Oliver Hemsley, CEO of Numis; and Alex Snow, chairman of Evolution — allege that when a company holds a rights issue to reorganise its debt, the banks will continue to lend to it only if it uses their brokerage and capital markets units for the deal.

This entry was posted by Gwen Robinson on Monday, November 9th, 2009 at 4:53 and is filed under Capital markets. Tagged with evolution, Lloyds Banking Group, numis, panmure gordon, rbs.

In costume of course.

Amid the ongoing financial regulation overhaul, the banking industry is hoping to pull off a quiet power grab that has eluded its grasp since the Great Depression, by stripping the independence of the board that sets financial accounting standards.

The move could effectively let banks set their own accounting standards in rough economic times.

Astonishingly, at a time when the public is crying out for greater regulation to limit excessive risk-taking by financial institutions, the banks are trying to get Congress to agree that the next time there's a big downturn, they should have the ability to alter their accounting standards -- essentially, fudge the numbers -- so that the public and investors won't be able to tell how insolvent they really are. By ignoring their declining asset values, they can avoid the standard requirement of raising more capital.

The mechanism is contained in an amendment set to be introduced in mid-November by Rep. Ed Perlmutter (D-Colo.) that would move final authority over the Financial Accounting Standards Board (FASB) from the Securities and Exchange Commission to a new body, a so-called "oversight" board, that would include the officials charged with managing systemic risks to the financial markets.

[UPDATED: Scroll down for the legislative language, which surfaced Friday and goes even further than suspected.]

These regulators would have the authority to override FASB's accounting guidelines by taking into account economic conditions.

The move is so radical that it has split corporate America. The bankers and members of Congress who support it have earned themselves an unlikely enemy: the U.S. Chamber of Commerce.

A typical business or investor, after all, prefers honest, independent accounting, because they buy and sell real things based on real value.

Story continues below

advertisement

"Washington isn't thinking straight," said Josh Rosner, managing director of Graham, Fischer & Co, a New York-based financial analyst who advises regulators and institutional investors. "Financial statements are for the benefit of investors."

Indeed, allowing banks to alter accounting standards when they run into trouble is incentive to take more risk and, in essence, institutionalizes fraud. The regulators would now be under enormous political pressure -- and sometimes under direct orders -- to allow banks to remain in business long after they've become insolvent, in the hopes that things will turn around and they'll grow again.

And rather than stabilize the system, removing accounting independence destabilizes it in the long run, as investors and other banks have little confidence in the veracity of financial statements.

Perlmutter told the Huffington Post that under his proposal, the FASB "would stay with the SEC, but in instances where an accounting procedure or a way it's being implemented poses a threat to the financial system by exaggerating what's going on -- is pro-cyclical to a point that it, too, threatens the system -- then the financial regulator, the systemic regulator, could look in to it.

"For virtually every situation you can think of, there's no change, but [there would be a change] in the event that there's a threat to the system, like the dysfunctional market we had from October through March, and that the accounting procedures just didn't fit for a system where there was no market," Perlmutter said.

Leslie Oliver, a spokeswoman for Perlmutter, said backers of the amendment haven't been surprised at the opposition from certain sectors of corporate America.

"That's understandable for a company that has tangible assets," she said. Perlmutter said he has yet to hear directly from the Chamber.

That the banking industry finds itself in opposition to large sectors of the business community is evidence that a historic power struggle for control of the economy is underway.

The issue is stirring up the House Financial Services Committee. "It's caused a great deal of controversy," said committee chairman Barney Frank (D-Mass.). Frank has yet to take a position, he said, waiting until Perlmutter finishes meeting with members of the committee. "I told him I would wait until he finishes his conversations," Frank told HuffPost.

FASB is fighting to keep its independence. "The amendment that's being considered represents a shift that threatens to fundamentally challenge the objectives of financial accounting and politicize the process and harm financial system," said FASB spokesman Neal McGarity. "The mission of bank regulators is to ensure the safety and soundness of the banking system. We have a different mandate. That's why this is of considerable concern."

A powerful subcommittee chairman already opposes it. "I'm for keeping the independent FASB and I see no reason to change it," Rep. Paul Kanjorski told HuffPost.

The Chamber joined with investors and auditors in opposing the Perlmutter amendment.

From a letter sent to top committee members by representatives of the Center For Audit Quality; the Chamber of Commerce; and the Council of Institutional Investors:

"By placing the FASB under the jurisdiction of a structure charged with managing systemic risks to the financial markets, accounting rules will be viewed though the narrow lens of a few large companies from specific industries, rather than considerate of the applicability of financial reporting policies to over 15,000 public companies. Such a narrow focus can skew standards such that it makes understanding of transactions that businesses engage in on a daily basis more difficult and undermine the confidence of investors. We believe that the SEC has been and continues to be best suited to provide the oversight of the FASB for such a broad and diverse economy."

The American Bankers Association stands on the other side. "A Systemic Risk Oversight Council could not possibly do its job if does not have oversight authority over accounting rulemaking," top bank lobbyist Ed Yingling testified before the committee on October 29. "This is a major deficiency in the draft legislation. Accounting policies are increasingly and profoundly influencing financial policy and the basic structure of our financial system. Thus, accounting standards must now be part of any systemic risk calculation. To do anything less creates the potential to undermine any action taken to address a systemic risk. The Financial Accounting Standards Board should continue to function as it does today, but it should no longer report only to the Securities and Exchange Commission (SEC). The SEC's view is simply too narrow. Accounting policies contributed to the crisis, as has now been well documented, and yet the SEC is not charged with considering systemic and structural effects."

Yingling said the ABA "strongly supported" the approach taken by Perlmutter. "We thank Representatives Perlmutter and [Frank] Lucas [R-Okla.] for their foresight and leadership on this critical issue."

While the big banks would be pleased by the change, Frank said, the major push has come from community banks. Perlmutter said that his amendment was one of the community bankers' highest priorities.

Community banks are a popular and powerful political force in Congress. They didn't heavily trade the exotic products that nearly brought down the global economy; they received little in the way of bailout money; they don't give multi-billion-dollar bonuses; they tend to take more responsibility for loans that they issue; and they're generally respected members of the local community.

"Many members of the committee are supportive of community banks," said Rep. Maxine Waters (D-Calif.), one of the most progressive members of the committee and a subcommittee chair. "The big banks have been such an outrageous, scandalous story about how they operate and what they have done that we tend to want to support the community banks in whatever they ask us to do."

Waters told HuffPost she supports Perlmutter's amendment.

And winning the support of community bankers is in essence a necessary condition for Democrats who want to pass reform legislation through the Financial Services Committee. The Perlmutter amendment could be a way to win community banks over to the idea of a systemic regulator, a priority of the administration.

But working to loosen accounting rules could come back to hurt the Democratic Party: When the system goes down again, voters will want to know why.

When HuffPost asked Frank if Wall Street was pushing Perlmutter's measure, he responded emphatically.

"You have this caricature in your heads. You literally don't understand the way the world works," he said. "It's the community banks, the credit unions, who are driving this...Seriously, the community banks have the political clout here. Not the Wall Street banks."

Frank said the ABA was likely pushing for the amendment to win favor with community banks in its rivalry with the Independent Community Bankers of America.

Perlmutter agreed. "It's the community banks I've been working with. I'm not hearing it from the Wall Street guys," he said.

While the ABA has traditionally been associated with large Wall Street banks, it also represents small banks and is attempting to expand its membership by signing up more community bankers.

It works well for the big banks when their interests are aligned with the little ones, as is the case here. When their interests are not aligned, the little banks often win. Community banks, for instance, won an exemption from examinations -- though not the rules -- related to the Consumer Financial Protection Agency.

The ICBA wants to use its clout and the distrust of the big banks to move Perlmutter's amendment even further in their direction. "We're not buying and selling all the time. We hold a lot of things for the long term.... So we'd like to build in some additional sensitivity to community banks so would like to make that more explicit," Steve Verdier, an ICBA senior vice president, told HuffPost. "We're going to get in touch with [Perlmutter] to see if there are more things that can be done to tweak it in our direction."

Much of the debate around the amendment comes down to what is called the mark-to-market accounting requirement. Banks -- both big and small -- have long sought to avoid marking their assets down to market prices when those market prices are too low. Marking down the assets requires the bank to take a loss on its books, which then requires it to raise more capital by selling off assets at low prices. Banks claimed that in the fall, the market had frozen and that they couldn't sell assets. Another way of putting it is that the market price was lower than they wanted to accept.

Regardless, forced selling at low prices creates a downward spiral that banks and the GOP blame for the financial crisis last fall. The GOP called for a study of the effect of mark-to-market accounting on the economic collapse as part of the bailout. That report found the accounting practice did not cause the collapse. Either way, the banks hope to avoid that cycle when the commercial real estate market collapses and they find themselves with bad loans again.

"It's about easing the pressure to reduce the value of their assets in community banks, so they don't have to raise more capital," Frank said.

Asking accountants to change standards based on economic conditions could very well make their heads explode, however. It's not their job, they say, to keep the system from collapsing. It's their job to give honest numbers. If a company is bankrupt, it's bankrupt.

"Accounting standards are not policy," remarked one person involved in the fight.

But they have become policy. In the spring, Kanjorski's subcommittee hauled the head of FASB in for a hearing and demanded the number-crunchers change their mark-to-market standards within three weeks or Congress would do it for them. FASB's head pushed back during the hearing, saying that banks who called him asking for such a change were usually bankrupt fairly quickly.

"They practically dragged him into the hallway and beat him to death," said Rep. Brad Miller (D-N.C.), a committee member skeptical of the Perlmutter amendment.

Three weeks later, they eased their accounting rules. But it wasn't simple for the banks. Even with the intense congressional pressure, the change only sneaked by by a single vote and created tension on a board accustomed to a freedom from politics. The Perlmutter amendment would make such a battle unnecessary for the banks.

"There are a lot of banks that are in a lot of trouble and have a lot of exposure to commercial real estate," Miller said. "You can't fix that with accounting."

Rep. Alan Grayson (D-Fla.) fought a lonely battle last spring to stave off the loosening of the accounting rules and opposes this more dramatic shift, as well. Banks may have good reason to want to overstate the value of their assets, he said, and it may work for a time. But an economy can't be run indefinitely on imaginary numbers. "I enjoy reading fiction, but not in financial statements," he said.

UPDATE: HuffPost obtained a copy of the amendment language that is circulating among lobbyists. Perlmutter's spokeswoman confirmed its authenticity.

The amendment would empower the council overseeing FASB to "recommend to the SEC, either publicly or privately to take such action as is necessary, including but not limited to suspension, modification or elimination of such accounting principles, standards or procedures as they may apply to the stability of the financial system or the safety and soundness of financial companies, as a whole, for such duration as is reasonable and appropriate."

If the SEC doesn't follow the "recommendation," according to section (c) of the amendment, the council can order it to do so.

In other words, for the sake of financial stability, bank regulators could secretly order the "elimination" of accounting standards.

SEC. 1103. PRUDENTIAL OVERSIGHT OF ACCOUNTING PRINCIPLES AND STANDARDS THAT POSE SYSTEMIC RISKS.

(a) IN GENERAL.--In the event that any member of the Council believes that an accounting principle, standard or procedure threatens the stability of the United States financial system or companies, as a whole, then the Council shall investigate and by a majority vote, determine whether any corrective action, emergency or otherwise, is necessary to prevent or mitigate any adverse effects from such principle, standard or procedure. In the event that the Council determines that corrective action is necessary then, the Council shall recommend to the SEC, either publicly or privately to take such action as is necessary, including but not limited to suspension, modification or elimination of such accounting principles, standards or procedures as they may apply to the stability of the financial system or the safety and soundness of financial companies, as a whole, for such duration as is reasonable and appropriate.

(b) ADOPTION OF COUNCIL RECOMMENDATIONS BY SECURITIES AND EXCHANGE COMMISSION.--the Securities and Exchange Commission shall ensure that the prudential standards recommended by the Council are implemented within 60 days of the Council's recommendation or within such other time period specified by the Council.

(c) FAILURE TO ADOPT STANDARDS.--If the Securities and Exchange Commission fails to ensure that the prudential standards recommended by the Council are implemented within the time period specified in paragraph (b), the Council is authorized to direct that any recommendations issued pursuant to paragraph (a) be implemented for the purposes of generally accepted accounting principles."

UPDATE II: The SEC and the American Institute of Certified Public Accountants both oppose the amendment, as well. "Accounting should be about accounting, and not about anything else," writes SEC chair Mary Schapiro in a letter to Frank sent Thursday.

From a letter from the AICPA:

It is our understanding that Congressman Ed Perlmutter (D-CO) is considering language to amend the Financial Stability Improvement Act of 2009, which would undermine the independent accounting standard process as currently carried out by the Financial Accounting Standards Board (FASB). The American Institute of Certified Public Accountants (AICPA) strongly opposes this amendment and any attempt that would serve to undermine the independence of accounting standard setting. The purpose of public company financial reporting is to provide investors with clear, objective, and transparent financial information. This helps investors make informed investment decisions. Any attempt to divert financial reporting from its primary investor-focused objectives to other policy objectives with regard to financial institutions damages investor protections.

Get HuffPost Politics On Facebook and Twitter!

It seems I have been a bit too positive of late... as American taxpayers just took a $2.3 billion hit in their public investment portfolio. Yes, we were all told that the "bail out" could offer significant returns for the American taxpayer, and there was a good deal of hope flying around the country that the economy would get back to the good old days sooner rather than later.

CIT Group's (CIT) failure and subsequent filing for protection under US Chapter 11 bankruptcy laws prove only that the economy, and the banking industry specifically, is far from stable. Their failure to pay dividends to the US government in the third quarter makes them the largest institution that accepted TARP (Troubled Asset Relief Program) funds to do so. And CIT was only one of eight banks behind on dividend payments.

What really is the American taxpayer getting for their investment? That's what the bail out in essence was sold as. According to the Huffington Post, three major issues have been left unresolved. Top executives at banks have not had their salaries cut, even after the government takeover, but have rather been given long term stock options and had their base salaries raised, so that they will not seek work elsewhere. The "too big to fail" financial institutions that are rather "too big to exist" need to be broken up to ensure that there is never again a need for another AIG-style bailout, but there has been no mention of trust busting. Also, when is the government getting out of the banking industry? Where's the exit strategy? The strategy of the federal government towards US banking institutions is beginning to look more and more like the war in Afghanistan!

So, what about the auto companies? Daimler Chrysler and GM both came under TARP. It is now looking as if:

Taxpayers are unlikely to recover their full investment in General Motors or Chrysler, U.S. government investigators said Monday in the latest review to cast doubts that the government will recoup the $80 billion it poured into the two automakers.

GM used part of its bailout to

buy Delphi

, an auto parts maker. With 61% of the company now owned by the American taxpayer, it is unlikely to be nimble enough to show a profit any time soon. The federal government has become the majority shareholder in GM, and purchases of $100 million or more must now be decided by the Feds. That is not any way to run a profitable business.

Now there is further news that

TARP is going on steroids

, as the White House opposes a proposal that would limit TARP funds to $1 trillion. All this while some of the best and brightest minds that oversaw the collapse of the US financial system are now in positions of economic leadership in the Obama administration. Yes, the government needs an exit strategy, and fast. But with these insiders doling out money to their former associates, there is no sign of TARP ending.

On a more positive note, E*Trade (ETFC) withdrew its request for TARP funds and Bank of America (BAC) wants to pay back the TARP funds it borrowed to allow it to take over Merrill Lynch, thus allowing it to pay its workers as it deems fit. Seems BofA may be one of the few big banking institutions that may get through this crisis.

With the news this week of 3,700 job cuts in Royal Bank of Scotland's (RBS) branches, the government increasing its stake in RBS from 70% to 84% and Lloyds setting off on a £21 billion fundraising spree, it seemed like a good time to launch the Financial Services Club Scotland.

We had our first meeting on Monday at the prestigious Royal Society of Edinburgh ...

... with keynote speakers John Rendall, Chief Executive of HSBC Scotland and Professor Michael Mainelli of Gresham College and the London School of Economics.

The focus of the first meeting was to study what the financial crisis has meant to Scottish industry, society, the economy and its future?

Here's a quick overview of a few key facts and backgrounders.

Scotland's population is just over five million people, with 2.7 million workers and an unemployment rate of just over 7%.  GDP was £86.3 billion in 2006, but this is slowing with output in Scotland contracting 6.0% year-on-year since the second quarter of 2008, and Scottish GDP down 3.2%.

In particular, Scotland’s dominant service sector fell by 0.4% quarter-on-quarter during the three months to the end of June 2009, with banking showing contraction of 0.9%.

Banking in Scotland has a long history, beginning with the creation of the Bank of Scotland in Edinburgh in 1695.

Retail banking services to ordinary people followed in the 19th century based upon the trustee savings bank model and Scotland now has four large clearing banks: the Halifax Bank of Scotland (HBOS, now Lloyds Banking Group), the Royal Bank of Scotland (RBS), the Clydesdale Bank (part of National Australia Group) and Lloyds TSB Scotland.

RBS was, until 2008, the second largest bank in Europe and fourth largest in the world by market capitalisation and, in 2005, Scotland ranked second only to London in the European league of headquarters locations for European banks.  However, having expanded greatly with a growth rate of over 35% over the period 2000 to 2005, the sector is causing big challenges today as RBS and HBOS keep hitting the headlines and damaging the brand.

Even so, the financial services industry still employs 5% of the Scottish workforce or 113,160 people, and generates over £5 billion or 7% of Scotland's GDP. Edinburgh is still Europe's fifth largest financial centre and is the fifteenth largest asset managements centre of the world, and Glasgow has a thriving financial market in supporting operations and call centre management for many of the largest firms.

Equally, Scotland has one of the world's largest fund management centres, with over £300 billion worth of assets directly serviced or managed in the country.

All in all, the conclusion of the evening’s discussion is that you cannot linger over what is past.

RBS and HBOS happened: GET OVER IT!

Scotland now has to regroup, rebuild and refocus and probably get back to its fundamental roots of asset managmenet and prudence.,

Meanmwhile, one of Scotland’s biggest success stories is the Scotch Whisky industry.

The near totality of Scotch whisky production (90%) is exported, and exports rose 4% to a record $5 billion in 2006, when whisky sales accounted for 25% of Britain’s food and drink exports.

Wow!

So, if Scotland’s banks can mess up our money, at least we can console ourselves with a stiff shot of whisky.

And that's what we all did at the end of the meeting:

Actually, it was just wine and nibbles, no Whisky, but maybe next time.

Oh yes, our next meeting will take place in January 2010 and will focus upon “Scotland the Future”, with senior figures from new, Scottish based banks such as Virgin and Tesco.

And our third meeting in March will examine “Scotland the Recovery”, and will look at how the Scottish banks have turned around with a focus upon the state of play with HBOS and RBS.

So, if you're reading this and you're in Scotland or you're Scottish, then come along join in.

*

The Finanser is sponsored by VocaLink and Cisco:

For details of sponsorship email us