While looking at stuff for the recovery.gov scandal, I found some interesting reference to a "ten standard deviation event".
Interesting reading.
Where did all the money go to last year? How could all that money disappear from Wall Street and some banks and nobody notice?There are some interesting papers I have not seen referenced before, that seem to explain the problem, causes, and offer some wisdom.
The 2008 AICPA National Conference on Current SEC and PCAOB Developments was held December 8–10, 2008, in Washington, D.C. At the Conference, speakers explained the likely effects of current economic conditions on financial reporting and disclosures, including fair value measurement and its application in illiquid markets. They also addressed the convergence of IFRS and U.S. GAAP, standard-setting priorities, preliminary findings from the SEC’s mark-to-market study, the role of reasonable judgment in accounting, and considerations for future changes in U.S. regulatory schemes.
He further discussed the following audit challenges:
• Financial misstatement due to fraud – Incidents of fraud tend to increase when there is a downturn in the economy. The PCAOB inspections in 2009 will be looking at specific indicators of fraud such as related parties, complex agreements, transactions outside the ordinary course of business, accounting for transactions that is inconsistent with their economic substance, unanticipated expenses offset by unanticipated revenues, and last-minute transactions.
• Auditor judgment – While the inspectors will respect professional judgment, auditors should expect the PCAOB to question critical judgments. Inspectors will review judgments to ensure they are made by appropriately qualified staff, based on a full understanding of facts and circumstances, grounded in applicable professional literature, and documented in accordance with Standard 3.
How did all the money disappear? Is there documentation? Financial reports?
http://www.404institute.com/docs/IssuesInDepth08-01_12-19-08.pdfBob Herz
FASB
September 18, 2008Lessons Learned, Relearned, and Relearned Again from the Credit Crisis—
Accounting and Beyond
Over the past twenty years, we’ve experienced several major financial and economic crises, including the S&L crisis, the reporting scandals and dot.com bubble in 2001-2002, and now, over the past year, the ongoing crisis in the credit and financial markets.
Each time there are a number of lessons to be learned from these events. But, unfortunately, some of the lessons seem to be forgotten and have to be “relearned” again and again multiple times. Anyone think Congress, and those in the Treasury, and Federal Reserve will DO ANYTHING to stop the boom and bust cycle? The crisis cycle of profit and destroy?
…Keep the Golden Rule of ‘doing unto others as they would do to you’ in mind. If you are a lender, don’t make loans that people may not be able to pay off just because you can sell or securitize them. And if you are in corporate reporting, don’t succumb to the temptation to try to structure around the standards or fail to properly communicate risks to your investors and the markets, just because there is no specific FASB or SEC requirement.
And, very importantly, as I have tried to stress in my comments today, I feel that all of us in the capital markets must devote ourselves to understanding the underlying causes of these problems, to learning the lessons they afford, and to taking the actions necessary to avoid repeating them in the future. Maybe then we can begin to break the boom/bust cycle and propel the economy, our nation, and the global markets to new levels of economic growth and prosperity…
http://www.fasb.org/news/09-18-08_herz_speech.pdfDidn’t someone, anyone realize all those loans were going bad? I know of people who got those sub-prime loans and couldn’t afford to make the first payment.
I know realtors who used to provide some basic information to families about qualifying for a loan, and loan affordability. They indicated they stopped because the rules changed and mortgage / banks told the families they ‘could have’ qualified for much more…
Testimony of Richard Bookstaber
Submitted to the U. S. House of Representatives,
Committee on Science and Technology
Subcommittee on Investigations and Oversight
For the Hearing:
“The Risks of Financial Modeling: VaR and the Economic Meltdown”
September 10, 2009
Mr. Chairman and members of the Committee, I thank you for the opportunity to testify today. My name is Richard Bookstaber. Over the past decade I have worked as the risk manager in two of the world’s largest hedge funds, Moore Capital Management and, most recently, Bridgewater Associates. In the 1990s I oversaw firm-wide risk at Salomon Brothers, which at the time was the largest risk-taking firm in the world, and before that was in charge of market risk at Morgan Stanley.
I am the author of A Demon of Our Own Design – Markets, Hedge Funds, and the Perils of Financial Innovation. Published in April, 2007, this book warned of the potential for financial crisis resulting from the growth of leverage and the proliferation of derivatives and other innovative products.
Although I have extensive experience on both the buy-side and sell-side, I left my position at Bridgewater Associates at the end of 2008, and come before the Committee in an unaffiliated capacity, representing no industry interests.
My testimony will discuss what VaR is, how it can be used and more importantly, how it
can be misused…With all the red flags at Fannie/Freddie within the past five years, why wasn't there reform? Why would Barney conclude that Freddie/Fannie are sound?
These are the same folks that DO NOT want a robust audit of the Federal Reserve?
Why sholdn't the Fed be audited? Who is minding he national check book? Who profits from all the wheeling and dealing in Washington?
