Where there is smoke- there’s fire. Where there is obfuscation – there is something to hide.  Bloomberg’s effort to make the FED disclose firms benefiting from the bailouts is being dragged out by the guilty FED and its chief, Ben Bernanke.   This is why we need to pass Paul’s Audit the FED bill post haste.  We need to know what’s going on with the FED.

The FED has lost (so far) in the Bloomberg suit to force it to reveal details about firms who received FED support during the financial crisis.  Will the FED appeal? We doubt it.  Too much negative publicity and little chance of winning.  However, will they stall until after Helicopter Ben is reappointed? -it’s likely…

Bloomberg said in the suit that U.S. taxpayers need to know the terms of Fed lending because the public became an “involuntary investor” in the nation’s banks as the financial crisis deepened and the government began shoring up companies with capital injections and loans. Citigroup Inc. and American International Group Inc. are among those who have said they accepted Fed loans.  “When an unprecedented amount of taxpayer dollars were lent to financial institutions in unprecedented ways and the Federal Reserve refused to make public any of the details of its extraordinary lending, Bloomberg News asked the court why U.S. citizens don’t have the right to know,” said Matthew Winkler, the editor-in-chief of Bloomberg News. “We’re gratified the court is defending the public’s right to know what is being done in the public interest.”

Bloomberg (emphasis added):

Myron Scholes and Robert Merton shared the 1997 Nobel price for economics, and they are now united in calling for banks to give more accurate valuations on their illiquid assets….Banks that oppose new accounting standards on asset values want to conceal depressed prices, Merton wrote in the Financial Times yesterday. He composed the column with Robert Kaplan, a professor at the Harvard Business School along with Merton, and Scott Richard, a professor at the University of Pennsylvania’s Wharton School.

From the FT comment by Merton (emphasis added):

Legislators and regulators fear that marking banks’ assets down to fair-value estimates will trigger automatic actions as capital ratios deteriorate. But using accounting rules to mislead regulators with inaccurate information is a poor policy. If capital calculations are based on inaccurate values of assets, the ratios are already lower than they appear. Banks should provide regulators with the best information about their assets and liabilities and, separately, allow them the flexibility and discretion to adjust capital adequacy ratios based on the economic situation. Regulators can lower capital ratios during downturns and raise them during good economic times.

Bank regulators (FDIC and the Federal Reserve) don’t listen to Nobel prize winners much – they don’t have enough political clout and are not usually big hitters in the banks that control them.  The regulators are obviously in cahoots with the banks to “conceal depressed prices” – so it’s inaccurate to think that the regulators are “mislead”.  The banks and the regulators will, of course, fight Merton’s and Scholes’ suggestions to the death – perhaps (in a financial survival sense) literally…

There is some evidence that analysts can see through earnings smoothing that companies employ to reduce the volatility of reported earnings (see here and here, for example). But what about analyst efforts to make company earnings look smoother, or even better, than they actually were? David Pauly’s opinion piece on Bloomberg today reminds us of the vested interest that security analysts have in not just perpetuating earnings lies, but creating them.  Sure, the analysts argue, they are just “smoothing” the earnings for things that don’t happen all the time.  But what they are really doing is choosing to ignore items they failed to include in their previously released esimates of the companies’ earnings – so they won’t look so stupid. Since, its difficult (but not impossible) for companies to cook the books and still stay with GAAP, the analysts are effectively doing it for them:

…Stock analysts continue to promote corporate earnings lies, insisting that net income isn’t really what investors need to know.

Instead, their earnings estimates ignore often huge expenditures that can’t help but affect a company’s health.

In analystspeak, Intel Corp. wasn’t hit with a $1.45 billion fine from the European Union in the second quarter for anticompetitive practices.

Google, according to generally accepted accounting principles, earned $1.48 billion, or $4.66 a share, in the period. Not enough for Wall Street, which prefers to say the company earned $5.36 a share, leaving out the cost of stock options..

So, if GAAP accounting doesn’t give enough earnings to hype more trading, analysts simply restate the companies numbers according to GAAS…General Analyst Accomodation Shenannigans. Then the financial media dutifully reports what the analysts want America to hear.

Like Yogi, David Tice, founder of the Prudent Bear Fund, may be smarter than the average bear.  He talks with Deirdre Bolton at Bloomberg about his outlook for stocks, calling a low for the S&P 500 at 400 later this year. (ht Truveo.com)

Swamp Report would not be the first to say “takes one to know one”.  24/7 Wall St. reports that Friday, May 1,  JP Morgan issued a negative bank research call for the major money center and super-regional banks:

“Bank of America Corporation (NYSE: BAC), Citigroup, Inc. (NYSE: C), U.S. Bancorp (NYSE: USB), Wells Fargo & Company (NYSE: WFC), SunTrust Banks, Inc. (NYSE: STI), and others were all hit by the note.  Analysts do not actually cover their own companies, but you can’t really get away from the notion that the analyst downgrade also throws JPMorgan under the bus as well.”

Effectively, JP Morgan has labeled several of its fellow money center banks as goats and contrary to 24/7′s opinion, wants us to think that JP Morgan is a sheep.  Richard Ramsden of Goldman Sachs boldly called Citigroup a goat,  er, sell on April 20, citing Citigroup’s looming credit losses.  But of course, Goldman is a sheep, after all “we can sell bonds to suckers, er, public investors without government gaurantees”. An earlier, April 3 Bloomberg quote of Ramsden:

The relaxation of fair-value accounting rules won’t prevent bank shares from falling because growth in bad loans is accelerating, according to Goldman Sachs Group Inc.  “Our core view is that banks will not bottom until underperforming asset growth decelerates,” Richard Ramsden, a New York-based analyst at Goldman Sachs, wrote in a report today. “Loans are going bad faster than banks earn money.”

Estimates of Ramsden from a still earlier Bloomberg report on April 1:

A March 24 report from Goldman Sachs Group Inc. analyst Richard Ramsden [ ] estimated that Bank of America Corp., Citigroup Inc. and JPMorgan Chase & Co. are all carrying commercial mortgages at 100 percent of face value. Yet commercial mortgages may be the next shoe to drop for banks. “Commercial credit losses are likely to be quite onerous during 2009,” Friedman Billings Ramsey Group Inc. analyst James Abbott wrote in a report this week. These losses “will be significantly larger than what most are expecting.”

Apparently, a sheep can call a goat a goat, but a goat can’t call itself a sheep, unless a bonifide sheep backs him up.  The market didn’t really react on  Friday to JP Morgan’s call… So, is JP Morgan a bonifide sheep?  What about Goldman?

Bloomberg elaborates on the FED’s losses from the Bear Stearns bailout:

In its biggest disclosure of the securities accepted to stabilize capital markets, the Fed said yesterday it had unrealized losses of $9.6 billion on the assets as of Dec. 31. The bonds, swaps and notes were taken in from Bear Stearns, once the fifth-biggest Wall Street firm by capitalization, and AIG, which had been the world’s largest insurer.

“The numbers basically confirm that Treasury is going to have to take some TARP money and reimburse the Fed,” said Whalen, whose financial-services research company analyzes banks for investors. “It is essentially up to the Treasury to get the Fed out of this.”

Bloomberg is doing the taxpayers a favor by suing the government to force disclosure of  the names of the obligors of the collateral held by the FED.  We should all be supporting them in their effort!

Here’s a link to Bloomberg’s interview with Martin Feldstein this morning.