Thursday, April 16, 2009

Orphaned month and Wall Street accounting - old habits die hard?

Old habits die hard, even after a near-death experience! It now appears that there may have been more to Goldman Sachs' strong $1.66 bn profit for the first quarter of the year, as reports emerge of doctored accounts and other practices that characterised Wall Street accounting in its halcyon days early this decade.

Barry Ritholtz points to an orphaned December month and receipts from AIG transfer payments as being responsible for the strong financial result for the quarter. In the guise of shifting their accounting calendar from December-February format to the regular calendar quarter, Goldman have omitted December 2008 from both its prveious and present quarterly results, and also pushed lots of write-offs into the December month. The quarterly results were also bloated up by its share of the receipts from the transfer payments of the bailout money given to AIG.

And this is not all, it also appears that Goldman may have unfairly benefitted from the tax payer bailout of AIG. It emerges that Goldman had already "hedged" against a possible credit loss from their CDS with AIG, and were able to collect on that hedge (no matter what it was). Despite this, and possibly suppressing the information (or the TARP administrators and regulators overlooking it), Goldman also benefitted from its share of the transfer payments from the bailout money awarded to AIG to shore up its clients. As Karl Denninger writes, "It appears Goldman got paid twice for the same risk and the second payment came straight out of the taxpayer's hide".

And as Floyd Norris points out, apart from the $10 bn of TARP money, Goldman also received blanket government guarantee for about $28 bn of FDIC backed bonds it issued in the market. While Goldman is ready to return the $10 bn of conditions attached TARP money, it is quietly holding on to other forms of public support that come with virtually no strings attached.

Another disturbing issue was inadvertantly raised by Goldman CFO, when he grudgingly attributed the profits to the fact that "many of our traditional competitors have retreated from the marketplace". As James Kwak writes, if this is true, then oligopoly profits have gone up, making "the big banks even more powerful than they were before the crisis".

It also appears that Goldman may not be the only one to indulge in accounting tricks, as the news trickling in from Wells Fargo seems to indicate. Andrew Leonard too thinks much the same here. The "green shoots" in the landscape may only be the magic of Wall Street accountants, as they seek to inflate their bottom-lines to avoid complying with the TARO conditions! When will they learn?

Update 1
More skeletons form the Goldman cupboard. An NYT op-ed asks disturbing questions about Hank Paulson's role in liquiating Goldman's competitors and bailing out AIG, all of which coincidentally (or is it mere coincidence?) has had the effect of benefitting Goldman enormously. The op-ed writes,

"How can one ignore the crucial role that Henry Paulson played in the decisions to shutter Bear Stearns, to force Lehman Brothers to file for bankruptcy and to insist that Bank of America buy Merrill Lynch at an inflated price? David Viniar, Goldman’s chief financial officer, acknowledged in a conference call yesterday the important role the changed competitive landscape had on Goldman’s unexpected first-quarter profit of $1.8 billion: 'Many of our traditional competitors have retreated from the marketplace, either due to financial distress, mergers or shift in strategic priorities'...

But he was largely mum on American International Group, which, Goldman’s critics insist, is the canvas upon which the bank and its alumni have painted their great masterpiece of self-interest. A few days after Mr. Paulson refused to save Lehman Brothers last September — at a cost of a mere $45 billion or so — he came to A.I.G.’s rescue, to the tune of $170 billion and rising. Then he decided to install Edward Liddy — a former Goldman Sachs board member — as A.I.G.’s chief executive. Goldman has since received some $13 billion in cash, collateral and other payouts from A.I.G. — that is, from taxpayers."

Goldman's long track record of expert manipulation of the levers of power in Washington reminds of Reliance's path to business glory in India!

Update 2
More skeletons form the Goldman cupboard. It is revealed that AIG chief and former Goldman Board Director, Edward Liddy, continues to own singificant stake in Goldman Sachs. This raises serious questions about the propriety of AIG's action in making good the CDS issued by them to Goldman, from government bailout money, despite the fact that Goldman had already hedged against its losses. Andrew Leonard too weighs in.

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