I wanted to discuss a few things today as stocks take another drop this morning. I want to focus on a STARTLING report from Bloomberg discussing how the Enron accounting standards were never really changed, and they are now being abused all throughout Wall St.
Lets first get to the markets real quick. All eyes are on oil and the existing home sales report. Oil is on its way back up and is now sitting close to $134 /barrel.
Home sales again looked grim as inventories rose to an all time record of over 11 months. Prices dropped 8% which is the second highest price drop ever recorded. Here is a little blurb about housing on Bloomberg:
"May 23 (Bloomberg) -- Sales of previously owned homes in the U.S. fell in April, matching a record low and signaling no let-up in the housing recession.
Purchases declined 1 percent to a higher than forecast annual rate of 4.89 million from 4.94 million in March, the National Association of Realtors said today in Washington. The median price dropped 8 percent from April last year, the second- biggest decline."
``There is no indication that things are improving,'' said Christopher Low, chief economist at FTN Financial in New York, who forecast sales would drop to a 4.9 million pace. ``Inventories will stay out of balance at least until the end of 2009 and prices will keep falling.''
Sales were down 18 percent compared with April 2007.
The number of previously owned unsold homes on the market at the end of April jump to 4.55 million, up from 4.12 million in March. The total represented 11.2 months' supply at the current sales pace, the highest on record and up from 10 months at the end of the prior month.
The median price of an existing home fell to $202,300 from $219,900 in April 2007."
Quick Take:
Do I really even have to say anything here? These numbers are horrific. We are near time highs in inventory and price drops. The bursting of the housing bubble is showing no signs of slowing down. The whole debacle is just terrible, and Wall St. should be ashamed of itself. This is going to take years to straighten out.
Lets get the the Enron Accounting:
This is another HousingTimeBomb must read. When I read this article I was both angry and shocked at how bad Wall St. is cooking the books. I knew the fraud was historic, but I had no idea how lax the accounting standards were.
Here is the Bloomberg article. Please read the whole thing. Some of the key highlights below(sorry its long, its important).
"May 22 (Bloomberg) -- Citigroup Inc. created a $2.5 billion mortgage-backed security called Bonifacius Ltd. in August as capital markets seized up and panic swept Wall Street.
The issue took the name of a general, called by historian Edward Gibbon the ``last of the Romans,'' who fought and died for a fading empire. The bonds were created from subprime home loans as demand evaporated. Within six months, Bonifacius collapsed as homeowners fell behind on their payments in record numbers.
Citigroup, Merrill Lynch & Co., UBS AG and other banks created more than $1.5 trillion of collateralized debt obligations like Bonifacius, keeping an undisclosed amount in off-balance-sheet funds called variable interest entities. Bonifacius and $190 billion of similar securities have gone bust since October, spotlighting loopholes the Financial Accounting Standards Board failed to close when Enron Corp. went bankrupt in 2001 after disclosing investments that weren't on its books.
``They never got the real problem fixed after Enron,'' said Lynn Turner, the chief accountant for the Securities and Exchange Commission when the Enron scandal was exposed. ``When people find out how little FASB did, they're going to be shocked. FASB needs to be taken out behind the woodshed and given a good whoopin'.''
The biggest underwriters of defaulted CDOs are New York- based Merrill, with $39 billion, followed by Citigroup at $35.1 billion and UBS in Zurich with $20.1 billion, according to S&P and Bloomberg data. They sold almost half the CDOs that were either in default or in so-called acceleration mode as of May 12, the data show.
FASB restricted the use of off-balance-sheet accounting in the wake of Enron, once the seventh-biggest U.S. company by sales. More than 5,000 jobs and $1 billion in employee retirement funds were wiped out when Enron plunged into bankruptcy after widespread accounting fraud was revealed.
After, FASB wrote rules that permitted such transactions only if banks had minimal discretion over the activities of the ventures and brought them back on their books if they were obligated to absorb a majority of expected losses.
One way banks comply with the rules is by placing the AAA, or ``super-senior,'' pieces of CDOs into VIEs and selling the riskiest portions to investors. The AAA portions are typically the largest part of a CDO.
Good Fate
The strategy is backfiring because mortgage defaults are rising so fast -- home foreclosure rates in the U.S. increased 65 percent in April from a year earlier, according to RealtyTrac Inc. --that banks can no longer argue they have the least at stake, forcing them to bring failing assets of VIEs back on their books."
Final quick take:
The FASB and the banks are both at fault here. The fact that we didn't learn our lessons from Enron will end up costing this country trillions. The FASB knew that the financials found a loophole to get around the tightening of accounting standards post Enron, and they decided to look away.
The banks got around it by selling off the risk to investors and claimed the stuff they have on their books was AAA and very low in risk so it shouldn't have to be on their balance sheet. Well guess what, since housing blew up everything on the balance sheets looks risky.
There is going to be a blowup here folks. As this garbage is forced onto the balance sheets by the FASB there will be massive writedowns. $1.5 trillion of this crap was created by the banks. Since its subprime based, most of it is most likely worthless.
We have a long way to go to sort out this mess. Shame shame shame Wall st.! This is outright fraud people. Most of these pigmen should be in prison over this.
The news keeps getting worse, and equities will pay the price.
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