Receiving Wide Coverage ...

Messy MF: Regulators looking for that missing $600 million have a big problem, the Journal reports this morning. It turns out that MF Global’s recordkeeping was “in shambles,” as an executive from Interactive, the brokerage that almost rescued Jon Corzine’s firm, puts it. People who’ve examined the books have found “incomplete transactions, numbers that didn't seem to add up and other inconsistencies,” the Journal says. Meanwhile, the CFTC has decided to audit every futures trading firm “to verify that customer money is protected,” the Times’ “DealBook” says. We certainly hope so, for the sake of all those goldbugs who thought they were flocking to safety by investing in gold futures. The FT has a neat video in which one of its journalists reminds us that the CFTC proposed a year ago to restrict the range of options for investing customer funds – including a pullback from, you guessed it, foreign sovereign debt. Now Bart Chilton, a CFTC commissioner, wants to revive this plan, and has cleverly branded it the “MF Global rule.” (The other fun part of the video is the interview footage of Corzine from last summer, in which he sounds like Rip van Winkle talking about how much the financial system had changed during his hiatus as a politician.) Incidentally, we made a judgment error in yesterday’s Scan and picked the wrong MF Global story to mention. It’s yesterday’s papers, as they say, but if you want a link to the story we should have told you about, and an explanation of our goof, click here.

Accounting Absurdities: In his Times column, Floyd Norris explores the Alice-in-Wonderland reasoning of bank accounting rules and practices, focusing especially on Goldman Sachs. Recall the “debit valuation adjustments” that caused all those outsized paper gains in the third quarter simply because the markets were perceiving banks as riskier credits. As we remember reading before, those could end up reverting to losses in later periods if market perceptions turn sunnier. Norris explains that Goldman tried to filter this noise out of its results by writing credit default swaps on a basket of other companies. “The logic of the so-called hedge is that if Goldman’s credit weakens, it will report phony profits. Those can be partly offset by real losses on the swaps. If Goldman’s credit standing improves, it will report phony losses, which can be offset by real profits on the swaps.” The problem, in Norris’ view, is that Goldman would be “more vulnerable if there were another financial crisis because it would have to pay out substantial sums if other firms collapsed.” He also notes that fair-value accounting is voluntary, and that banks once lobbied for the option, arguing then it would prevent them from posting misleading numbers; this was back when it was inconceivable that banks’ creditworthiness would ever be questioned. Meanwhile, the Journal’s “Heard on the Street” column advises Goldman and Morgan Stanley to stick to their guns and continue to use fair-value accounting for loans they hold, even if commercial banks are making their results look prettier with the historical-cost method. Switching methods, as the two investment banks are reportedly considering, “would also mark a first step on a slippery slope,” the column says. “Why not then hold other portions of the balance sheet at cost if it improves short-term results, bankers are sure to argue.”

Wall Street Journal

The FHA’s annual financial report is due out next week. Anonymous sources tell the Journal that the “independent audit is likely to show that while losses are rising, it will maintain positive reserves assuming the economy doesn't dip back into recession” (italics are ours). Morning Scan translation: “We’re still pretty sure we’re not broke, but don’t quote me on that.” The Journal story highlights a study by Joseph Gyourko, a Wharton School professor, who predicts the FHA will need a taxpayer bailout unless there’s a “quick and substantial economic and housing market recovery.” Morning Scan translation: "Only a miracle can save them now.” (The study’s title, “Is FHA the Next Housing Bailout?” struck us as a bit coy, especially since the very first sentence answers that question in the affirmative.) But the Journal notes that others have made doomsday predictions for FHA in recent years. Whatever the merits of such analyses, they can have “political ramifications,” the paper says, as Republicans press for higher down payment requirements on FHA loans.

Financial Times

Finding a home for new loans created under the revamped HARP program is turning out to be tricky. Since the refinanced homes will still be deeply underwater, tax rules will make it hard to place the new loans into regular Fannie Mae or Freddie Mac securities. The GSEs could create a new class of MBS, but such a small pool would be illiquid, and thus more expensive to finance … which would kind of defeat the purpose of the program if the cost were passed on to the homeowners. The new HARP loans could instead go in the portfolios of Fannie and Freddie, but remember they have a mandate to shrink these. According to the FT, one more potential resting place for these assets is being “mooted in Washington”: the Fed. Look for an angry letter from Ron Paul in 5… 4... 3... 2….

New York Times

The same consumer groups that objected to Capital One’s deal to buy ING Direct are now also protesting its plan to acquire HSBC’s U.S. credit card business, “DealBook” reports.


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