Bloomberg: Can the Fed Cook Bear’s Books?

Here is today’s intriguing article from late yesterday: Bloomberg’s Jonathan Weil explains why the Fed does not follow GAAP. This sets up a situation where the Fed books regarding Bear Stearns are ripe for creative accounting.

Ubiq-cerpt:™

"The Federal Reserve is just days away from completing the financing for its bailout of Bear Stearns Cos., after which the central bank will have another big decision to make: how to account for it.

Flip through the footnotes to the Fed’s latest annual report, and you’ll come across an open secret. The Fed doesn’t follow normal accounting rules, as promulgated by any of the major standard-setting boards. Rather, the Fed writes its own, in a document called the Financial Accounting Manual for Federal Reserve Banks.

If you ever wanted to design an accounting regime to help a bank cook its books, the Fed’s would be perfect. This doesn’t exactly inspire faith in the U.S. financial system, at a time when a good example might help a lot.

Imagine if there were no rules specifying when a bank must bring an Enron-style special-purpose entity onto its own balance sheet. The Fed’s accounting manual has none. Now picture an accounting system where a bank never had to recognize losses on any securities it holds, as long as it continues holding them. That, too, is the Fed’s policy."

Now, before the Fed got involved in the rescue orderly liquidation of Bear Stearns, their accounting practices were not a big
deal. Since the vast majority of the Fed’s assets are U.S.
government securities, they can — "Hey, What the Hell! — change their value by changing interest rates.

But these are very different assets; its a very different question as to how to account for them . . .

>

Source:
Fed’s Bear Stearns Books Look Prime for Cooking
Jonathan Weil
Bloomberg, June 18 2008
http://www.bloomberg.com/apps/news?pid=20601039&sid=a70JZmfcakF0&

Print Friendly, PDF & Email

What's been said:

Discussions found on the web:
  1. Uncle Jeffy commented on Jun 19

    To paraphrase Claude Rains in “Casablanca”…

    “I’m shocked – shocked! – to find that sex is going on in this whorehouse.”

  2. DonKei commented on Jun 19

    Why require the fed to do what the rest of the fed, state and local governments do not?

    It would be indeed be sobering, should we begin requiring truth in accounting for government entities.

    Of course, even if they were required to report using the FASB rules, it still would render a fantasy. How much, I wonder, would the US government be allowed, under FASB rules, to mark its liabilities down, given its nascent monetization of its debt?

  3. stuart commented on Jun 19

    And who owns the Fed??? Monkey see, monkey do.

    A little snippit from this morning’s daily pfennig

    “Oh, and remember yesterday when I called the Fed the new “junk bond house”? Well… Now they are not only the new “junk bond house” they are also the new “ENRON accounting firm”… Here’s the story, by Jonathan Weil on Bloomberg…

    “The Federal Reserve is just days away from completing the financing for its bailout of Bear Stearns Cos., after which the central bank will have another big decision to make: how to account for it.

    Flip through the footnotes to the Fed’s latest annual report, and you’ll come across an open secret. The Fed doesn’t follow normal accounting rules, as promulgated by any of the major standard-setting boards. Rather, the Fed writes its own, in a document called the Financial Accounting Manual for Federal Reserve Banks.

    If you ever wanted to design an accounting regime to help a bank cook its books, the Fed’s would be perfect. This doesn’t exactly inspire faith in the U.S. financial system, at a time when a good example might help a lot.”

    Foreigners that buy U.S. assets and finance the Current Account Deficit need to have faith in the U.S. Financial System to continue buying… The Fed’s not exactly giving foreigners a reason to buy U.S. assets are they now? ”

  4. scorpio commented on Jun 19

    see the Bloomberg article today re FRB extending the so-called temporary back-up lending facility for Investment Banks past its current Sept expiry. my guess as to the new expiry date? Nov 5

  5. Ali_M commented on Jun 19

    Damn it Ritzholz…Next you’re gonna claim the gov cooks the books too!!!! And that inflation is a problem… and that we’re in a RECESSION!!! Come on..what are you and the BLS smoking????…

    Darda

  6. Brendan commented on Jun 19

    I think I’m going to revert to bartering for goods. Who knows what my dollar will be worth in a year with this kind of funny business going on? I think I’ll buy lots of rice; at least I can eat my rice if I can’t find someone to trade for it. Even with spoilage it seems more stable than the dollar right now… oh, wait, I can’t buy more than four 20-pound bags, huh? Damn, we’re screwed!

  7. Risk Averse Alert commented on Jun 19

    Hence the shot across the bow yesterday coming from RBS, no insignificant player in global finance.

  8. scorpio commented on Jun 19

    Paulson says we need “clear” procedures for letting investment banks fail. sounds a lot like his bleating about a strong-$ policy. up is down, etc. prepare yourselves for the next bailout. looking at the bank stocks the last couple days, one of them will be next.

Posted Under