OT: US Banks Face Major Problems
If you thought it was just Japanese Banks that
were facing major problems, guess again. If
financial sector is weak, overall market will
have very hard time making headway. This article
doesn't even address the derivatives exposure
and losses faced by banks like JP Morgan & Bank
of America. Peter
Posted on Tue, Feb. 12, 2002
Banking industry hit hard by recent uncertainty
Figures indicate that bank failures will cost government-run insurance funds nearly $1 billion, 10 times more than last year.
By Joseph N. DiStefano / Philadephia Inquirer Staff Writer
Hundreds of millions of dollars in corporate profits have vanished in the last two weeks, in a series of embarrassing disclosures that have left regulators, accountants and investors jittery amid the accounting scandals that bankrupted Enron Corp.
Banks have taken a particular drubbing, in a series of admissions that the double-digit profit growth of the last several years, while charming Wall Street mutual funds, pension plans, and other big investors, papered over billions of dollars in hidden losses.
On Jan. 29, PNC Financial Services Group, Pennsylvania's biggest bank, said federal bank examiners forced it to disclose $155 million in venture capital and corporate loan losses it did not report last year - just nine days after the bank disclosed an additional $326 million in loan and investment losses. PNC said federal agencies were investigating its actions.
On Feb. 6, Allfirst Bank, one of the biggest lenders in central Pennsylvania, acknowledged losing $750 million in what it called a fraudulent employee cover-up of losses on its Baltimore currency-trading desk over a period of months, and possibly years. Federal agents also are investigating what happened at Allfirst.
The federal Office of Management and Budget last week projected bank failures will cost industry-funded, government-run insurance funds nearly $1 billion this year - 10 times what it suffered last year. The government's seizure of online credit-card lender NextBank on Thursday marked the fourth bank failure of 2002 - a number that already equals the total that collapsed in all of 2001.
Also on Thursday, the federal General Accounting Office blamed faulty accounting practices in the biggest bank failure of the last two years - the 2000 collapse of Superior National Bank.
And on Friday, Bank of America Corp. agreed to pay $490 million to settle investors' lawsuits accusing the company of failing to disclose $372 million in losses from its D.E. Shaw & Co. hedge fund subsidiary. Chairman Kenneth Lewis called the bank's conduct "appropriate" but added that "it was best to get this litigation behind us."
Some investors worry the nation's largest banks, such as J.P. Morgan Chase & Co. and Bank of America, may also face massive undisclosed losses on their own complex financing arrangements. "You've got to look at them - will the government decide they're too big to fail?" asked Delaware investor Gary Hindes, who specializes in the bonds of troubled companies.
Why weren't these problems caught earlier by the companies' internal and outside auditors and financial managers?
Accountants say their profession is partly to blame. "Undoubtedly, the accounting profession buried its head in the sand and pretended for far too long that no conflicts of interest exist," as they sold both strategic advice and auditing services that were supposed to evaluate the effect of that advice to the same clients, said Edward Nusbaum, Philadelphia-based CEO of national accounting firm Grant Thornton L.L.P.
On Dec. 19, PNC Bank fired Ernst & Young as its auditor, citing potential conflicts with the firm's role as a PNC business consultant.
PNC later said Ernst & Young auditors had blessed its plans to keep some of its losses off the books. PNC spokesman Jeep Bryant said last week that Ernst's removal in December was not connected to the hidden losses. Ernst & Young remains a PNC business consultant, and the firm has denied its work for the bank was tainted by conflicts of interest.
The day after PNC's announcement, Mellon Bank Corp. chairman Martin McGuinn said PNC's disclosures had "painted the whole industry" in a negative way, and driven bank stocks down.
But didn't Mellon do something similar in the late 1980s, when it shoveled its own bad loans into a special subsidiary?
"There's no comparison," McGuinn said. Mellon set up a separate company, sold distressed loans at a discount, reported the loss, and raised new capital to "put in the hole," McGuinn said. By contrast, "PNC didn't write their assets down. They tried to shift them off the balance sheet" where investors would not see them.
Financial accounting "isn't a science. There is an art to it. Two professionals can come to a different conclusion," said James E. Hogan, chief financial officer of Sovereign Bancorp.
Sovereign's own complex purchase of hundreds of branches in New England two years ago, which the bank says has been completed successfully, might have been rejected by bank regulators if it were proposed today, Hogan said: "People in today's environment are going to be a lot more cautious" than during the late 1990s boom years.
The problem at Allfirst, the U.S. arm of Allied Irish Banks, looks all too familiar to Philadelphia investment banker James Calla, who now is Sovereign's treasurer.
Calla said most banks had developed elaborate processes for preventing fraud or cover-ups. For instance, they will require every trader to take a two-week vacation so his or her work can be checked by colleagues.
When a trader starts losing a client's money, "the trader's first instinct is to say, 'I'm still right, this [market] will reverse,' " Calla said. "Traders can be very dominant people. It takes a very strong compliance department and a very strong back-office manager to protect your [company]."
Still, Calla, like other bankers, insists most bank accounting statements "have all the i's dotted and all the t's crossed."
They'll need to, said Nusbaum, Grant Thornton's CEO. "There is increased scrutiny in all industries. We've never encountered this level of magnitude before," he said, blaming the Enron debacle for most of the new attention. "It is an interesting time to be running an accounting firm." |
