No Runny Eggs

The repository of one hard-boiled egg from the south suburbs of Milwaukee, Wisconsin (and the occassional guest-blogger). The ramblings within may or may not offend, shock and awe you, but they are what I (or my guest-bloggers) think.

Archive for April 1st, 2009

Bonus madness – Congressional edition

by @ 16:26. Filed under Politics - National.

I only wish The Wall Street Journal were pulling an April Fool’s prank with this story on Congressional bonuses. However, they’re not. The highlowlights:

  • Congressional bonuses increased House aide pay by an average of 17% in the 4th quarter of 2008.
  • Rather than return $9.1 million in budgeted-but-not-spent taxpayer-funded office budgets, which vary between $1.3 million and $1.9 million per member, 200 House members, both Democrats and Republicans, showered that on their staffs.
  • Barney Frank (D-MA), chairman of the Financial Services Committee, gave bonuses to dozens of committee members who worked on criminalizing bonuses for employees who took TARP money.
  • Loretta Sanches (D-CA) holds the record for the largest individual bonuses, dishing out $14,000 apiece to 3 aides.
  • Tom Udall (D-UT) rewarded the members of his staff who took time off to work on his successful Senate campaign with those bonuses, increasing the net pay of 19 of his 22 aides to an annualized salary of $163,795 (including a part-time employee).
  • Heather Wilson (R-NM) gave 13 aides up to $3,000 apiece in bonuses after her Senate bid fell short.
  • Thelma Drake (R-VA) divvied up $40,000 among a dozen aides as a going-away gift after she lost her re-election bid.

The story does not mention how much in excess office funds was returned this year, but notes that in a typical year, between $1 million and $2 million gets returned, and that in 2006 (the previous election year), just $36,549 was returned.

A Novel Idea

by @ 5:32. Filed under Politics - National.

I wonder if President Obama has considered nominating a Democrat who hasn’t been caught making “errors” on their tax returns?

Sebelius Failed to Pay Taxes

President Obama’s nominee for secretary of Health and Human Services, Gov. Kathleen Sebelius, failed to pay $7,918 in taxes and interest, she writes in a letter sent today to Senators Max Baucus and Charles Grassley.

OK, to be fair, it does appear that her issues may have been a bit less straight forward than Geithner’s:

According to Sebelius, an accountant who was hired to review tax returns for 2005, 2006, and 2007 discovered a number of errors. “In July of 2006, my husband and I sold our home for an amount less than the outstanding balance on our mortgage,” Sebelius writes. “We continued paying off the loan, including interest we mistakenly believed continued to be deductible mortgage interest.”

In addition to this error, there were three charitable contributions for which they “could not locate our acknowledgement letter.” She adds she had “insufficient documentation” for some tax deductions for business expenses, though these adjustments did not affect the amount of tax owed because she paid the Alternative Minimum Tax.

In separate news, Sebelius testified today for her potential appointment to HHS Secretary.  She claims that she will attack fraud in the medical industry:

“Having a few strike operations may be the most effective way to send the signal that there’s a new sheriff in town, and I intend to take this very, very seriously,” Kansas Gov. Kathleen Sebelius told the Senate Health, Education, Labor and Pensions Committee.

I don’t know about you but, anyone who “could not locate our acknowledgement letter,” for charitable deductions and has to back out business deductions because of “insufficient documentation,”  sounds pretty close to having committed fraud.  Perhaps we voters should consider

“Having a few strike operations may be the most effective way to send the signal that there’s a new sheriff in town, and we intend to take this very, very seriously!”

The End Of The Beginning?

by @ 5:20. Filed under Economy, Politics - National.

I’ve written several times about the idiocy of not modifying or eliminating the current interpretation of an accounting procedure known as Mark to Market.

In short, “mark to market” means that financial institutions need to recognize the market value of their investments as they change rather than waiting until they dispose of the asset and recognizing a gain or loss.   The purpose for “mark to market” is to reflect the estimated “value” change of the asset, real time, rather than having shareholders or mutual fund holders get surprised (up or down)  in one fell swoop. 

In a “normal” world, mark to market is a good tool.  However, for mark to market to work properly there needs to be a fairly active market for the asset being marked.  If the market for the asset has few trades (thinly traded), it has the possibility of causing “fire sale” pricing for assets that have actual, recoverable value that is much higher.  This latter situation is what is happening to various financial instruments that many of the banks and other financial institutions (Citicorp) hold.  Today, there are many reports that assets like the mortgage backed securities have been written down to as low as 30% of their face value.  This while the actual cash flow performance of those same assets are performing at a level that is close to 90% of face value.

Various government entities, including the FDIC, require that banks have capital of a certain ratio to the loans they have outstanding.  Part of the capital that a bank has is the value of assets that they invest in.  When the assets, like CDOs get written down in a dramatic fashion, the bank or financial institution’s capital is also reduced.  This is part of the reason that financial institutions have been chasing after capital infusions during this meltdown.  Part of the reason that the TARP plan exists is to infuse capital into financial institutions to replace the eroded capital from written down assets.  You can see from the previous paragraph that because of mark to market, it is possible that TARP is having to infuse 50% + more capital than they need to for the capital they are providing to support the CDOs.

Finally, FINALLY, after having first written about this nearly a year ago, it looks like the FASB is going to address and likely modify mark to market.  About dang time!

You may ask, “Shoebox, if this was so obvious, why did it take a whole year to address?”  Good question!  This is yet another example where government’s “good intentions” led to unintended consequences. 

Mark to market as we know it, was created by the Financial Accounting Standards Board (FASB) with FASB 157.  FASB 157 was a direct result of the Enron scandal.  Congress was so incensed by what happened at Enron that they basically told FASB and others that either they fixed the problem or Congress would.  FASB 157 is the result. 

The other result of Enron was that auditing firms became extremely conservative in interpreting FASB rules.  All you have to know is that Arthur Andersen, then one of the largest auditing firms in the world, ceased to exist as a result of Enron and you can see why auditing firms quit “interpreting” and merely “implemented” anything that FASB promulgates.

Let me make one caveat to my advocacy for a change in mark to market.  Many of complained that by eliminating M to M we will not have financial statements that fairly reflect the company’s status.  In some respects that’s accurate.  What I propose is going back to a mark to model for financial purposes but providing information in the financial statement notes that reflect the difference between mark to market and mark to model.  This will give both sides of the argument the information they want/need and will allow knowledgable investors the information they need to make assessments.

The sad part of all of this is that FASB, the FDIC or Congress could have acted on this long ago.  Had they done so, even if only doing so on the capital requirement calculations, some portion of the hullabaloo in the financial industry could have been avoided.  Additionally, some of the financial bailouts could have been avoided or at least mitigated and maybe, just maybe, President Obama would not have had the door thrown wide open to waltz into any company he now chooses and dictate how they should do business.

I hope that FASB does act on Thursday.  If they don’t, expect a nasty reaction from the stock market.  If they do act, as I expect them to, this could provide a significant boost to the viability of several financial institutions.  If that happens, we could see the end of the beginning of this financial downturn.

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