Commentaries

Go away Hank

The Securities and Exchange Commission’s settlement with Hank Greenberg over allegations that he permitted the use of accounting tricks to manipulate earnings at American International Group comes way too late.

Oh sure, it’s great the SEC managed to squeeze $15 million out of Greenberg before agreeing to settle the more then four-year-old civil investigation. But if the SEC really had the goods on Greenberg, it should have gone after him years ago–settlement or not.

If the SEC had brought an enforcement action against the former AIG chieftain last summer, it might have saved us from watching Greenberg make frequent appearances on CNBC to  regularly boast about his skills as a risk manager. For months now, Greenberg has been going on CNBC to claim the giant insurer never would have gotten into so much trouble, if he was still running the show.

In Greenberg’s world, if it wasn’t for former New York Attorney General Eliot Spitzer driving him out of AIG in 2005, the big government bailout of the insurer never would have happened. Why? Well, according to Greenberg, he would have stopped AIG Financial Products from writing those reckless credit default swaps on tens of billions of dollars of now worthless CDOs.

And, as we all know, it was because of all those CDS contracts that the federal government had to come rushing in last September to prop-up AIG and prevent a global financial meltdown.

But here’s the hard truth that Maurice “Hank” Greenberg never liked to talk about during his seemingly endless roadshow to promote himself: he appointed Joe Cassano, the man most responsible for letting AIG Financial Products run the insurer into the ground.

Of course, Greenberg, 84, says if he had remained at the helm of AIG, he never would have permitted the kind of swaps writing that Cassano’s team was doing. And, to be fair, some of the worst CDS deals were done by AIG Financial Products in the latter part of 2005.

from Neil Unmack:

Losses slow on UBS’ dodgy assets

Losses seem to be slowing on the 26 billion swiss francs of leveraged loans, asset-backed debt and other exotica UBS shifted last year from its trading to its loan book to avoid having to mark them to market.

UBS, Deutsche and other European banks made good use of this accounting trick introduced in October to avoid taking losses on volatile assets. The justification was that market dislocation exaggerated the assets' true risk. Of course, it was only a temporary dodge as assets still have to be written down over time as borrowers default or forecast cashflows decline.

UBS's second quarter results are encouraging. Credit losses on the reclassified assets fell to 208 million swiss francs, down from 565 million in the first quarter and 1.3 billion at the end of last year.

There is a downside to avoiding marking the assets to market. As the assets were already booked at prices above their market levels, UBS missed out on 1.3 billion swiss franc gain in the assets' fair value in the second quarter. Still, that's small beer compared to the 1.2 and 4.2 billion losses it would have taken in the first and fourth quarters had it not reclassified them.

from Neil Unmack:

Accountants to the rescue

Moody's has published some interesting research on how European companies’ pension deficits have emerged from the last few months of financial mayhem, and the impact of accounting practices on calculating their current deficits. Top of the list for investment nous comes Rolls Royce, whose pension assets gained eight percent in 2008 after the company reduced exposure to equities in 2007. Bottom of Moody’s 20-strong sample was Shell, whose pension assets tumbled 29 percent, according to the rating company's estimates. The average decline was 14 percent. This decline means that European companies’ pension obligations are on average 93 percent funded -- more or less in line with the agency’s forecasts, and far ahead of their U.S. counterparts. But let’s not get too jubilant just yet. Moody’s notes that the results have been boosted by accounting rules that allow European companies to discount their pension obligations at a rate derived from high-quality corporate bond spreads—very handy given the spike in yields last year. This crops up as an actuarial gain in the pension footnote. One European company booked a reduction in its pension deficit of between 15 and 20 percent as a result of actuarial gains, Moody’s notes, while 14 of the 20-strong sample booked reductions of 5 percent or more. (Actuarial gains, of course, aren’t limited to changes in the discount rate, Moody’s stresses).  Nonetheless, the concern is that falling real bond yields, if not matched by rising asset prices, will cause companies' pension funding levels to fall further—forcing them to record larger deficits and stump up more cash.