Friday 27 August 2010

Fatally Flawed – The Next Lehman.

Baltic Dry Index. 2703 -70

LIR Gold Target by 2019: $3,000.

A large Bank is exactly the place where a vain and shallow person in authority, if he be a man of gravity and method, as such men often are, may do infinite evil in no long time, and before he is detected. If he is lucky enough to begin at a time of expansion in trade, he is nearly sure not to be found out till the time of contraction has arrived, and then very large figures will be required to reckon the evil he has done.

Walter Bagehot. Lombard Street. 1873.

British banks are unsafe!!! So thinks a man who ought to know. Below the Telegraph covers the fatally flawed UK accounting rules. The next Lehman is out there and probably British.

The whole history of civilization is strewn with creeds and institutions which were invaluable at first, and deadly afterwards.

Walter Bagehot.

UK bank accounting rules 'fatally flawed', warns influential watchdog

The Government has been warned of a “regulatory fiasco” in which British banks have apparently adhered to flawed reporting standards for more than five years.

By Louise Armitstead Published: 6:00AM BST 26 Aug 2010

An influential watchdog has written to the Department of Business listing a catalogue of staggering regulatory errors that allegedly contributed to the collapse of several banks in 2008 – and still threatens the system today.

While reviewing the proposed expansion of the International Financial Reporting Standards for accounting, Tim Bush, a member of the “Urgent Issues Task Force” that scrutinises the work of the Accounting Standards Board (ASB), claims to have uncovered “fatal” and “dangerous” flaws in the system.

The City veteran has argued that applied to banks, the standards “produced false profits and overstated capital” which have “misled creditors, misled shareholders, the Bank of England, FSA and others”.

In a devastating assessment, Mr Bush alleges the regulations, and specifically the way they have been implemented in the UK and Ireland, have led to “mistakes [being made] of such severity that it is difficult to overstate”.

His letter, written on August 19 and sent to the BIS as well as the ASB and other accounting bodies, claims:

* The ASB has “not fully understood” the IFRS accounting standards and implemented them in a way that even contravenes the Companies Act. As a result, UK and Irish banks have wrongly relied on a different – and flawed – financial reporting system from the rest of Europe.

* The application distorted bank’s company accounts, giving “false assurances”, and hampered the directors and regulators from seeing the build-up of leverage and other risks.

* The system is still “causing direct business risk” in the banks and will do the same if applied to other companies too.

* The dangers are set to spread to small and medium-sized businesses under proposals to roll-out the accounting system further.

According to Mr Bush, who was formerly a fund manager at Hermes, the root of the “fatal flaw” lies in the adoption of the new IFRS accounting system to work alongside the Companies Act, whose rules had applied to financial reporting in Britain since 1879.

Although the IFRS system was introduced in the wake of the Enron scandal to combat accounting fraud, it has been widely criticised by accounting experts across Europe.

Mr Bush has argued that the standards preclude the principle of “prudence”, or the likelihood of money being repaid, disguising, for instance, a bad loan until it actually fails. But Mr Bush has claimed that while European banks applied the standard at group level, Britain’s ASB said that all bank units and subsidiaries should use the same measures, too.

The standards also applied to the Republic of Ireland, where the ASB is one of the last remaining British bodies to have any jurisdiction.

In his letter, Mr Bush wrote: “Although IFRS had been rolled out across the EU, the UK and Ireland implemented it so extensively that the impact was different. It has been a ‘double dose’ to the extent of being a deadly dose, by removing what had underpinned banking solvency for over 120 years.”

He said the system produced figures that hid instability in banks, so that directors and regulators of the banks could look at the audited figures and conclude that banks were not just solvent but had excess cash.

As for banks in the lead-up to the financial crisis: “They did not have the capital that they presented, and they were not going concerns. The true situation was that business models were loss-making and actually consuming capital.”

-----He said the system is still flawed and urged the Government to scrap plans to extend the standards. “In my view, the direction that the ASB took, and is still taking, is… causing direct business risk.”

He added: “The proposed further roll-out of full IFRS and the IFRS for SMEs has the same fundamental flaws as what has gone so badly wrong in the banks, a level of apparent compliance that undershoots what the law requires. It is difficult in the extreme to envisage Parliament knowingly assenting to a model of company accounts that dilutes the responsibilities of auditors at the same time as offering less for directors, creditors and the wider public interest.”

http://www.telegraph.co.uk/finance/newsbysector/banksandfinance/7964816/UK-bank-accounting-rules-fatally-flawed-warns-influential-watchdog.html

It was the best of times, it was the worst of times, it was the age of wisdom, it was the age of foolishness, it was the epoch of belief, it was the epoch of incredulity, it was the season of Light, it was the season of Darkness, it was the spring of hope, it was the winter of despair, we had everything before us, we had nothing before us, we were all going direct to Heaven, we were all going direct the other way

A Tale of Two Cities. Charles Dickens.

Normal service resumes on Monday. Check with the blog for the weekend update. Have a great weekend everyone.

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