Category Archives: regulation

“Auditors Didn’t Flag”

Posted on by
Reply

Silicon Valley Bank’s third-party auditors did not mention the underlying risk to SVB’s viability in its report, which the group issued two weeks before the bank’s collapse.

When KPMG LLP gave Silicon Valley Bank a clean bill of health just 14 days before the lender collapsed, the Big Four audit firm flagged potential losses on loans as a so-called critical audit matter. But the audit opinion was silent on what actually brought down the bank—its unrealized bond losses and ability to hold them given a reliance on potentially flighty deposits.
“The auditors failed to mention the fire in the basement or the box of dynamite on the first floor, but they did point out the peeling paint on the flower box,” said Erik Gordon, a University of Michigan business professor. “How could they miss the interest-rate risk?”

And this from Martin Baumann, ex-Chief Auditor at the Public Company Accounting Oversight Board and who had a leading role in designing the new measure:

Silicon Valley Bank’s unrealized losses in its bond portfolio appear to “meet every definition of a possible critical audit matter[.]”

A critical audit matter is a tool intended to help investors decode risks and uncertainties buried in financial statements, to make audit opinions actually useful.

Thus, how could the auditors have missed the larger risk? Why did they?

Or did they? Maybe this is a demonstration of the weakness of auditors being paid by the auditees for the audits.

One apparent weakness in the PCAOB’s existing requirements, though, is that banks can hide the risks in their portfolios by (re)characterizing some or all of their bond holdings as “hold to maturity” rather than as marketable and so required to report their (fluctuating) market value. But when the bonds are being held in even partial satisfaction of reserve requirements, maybe those “hold to maturity” bonds still should have their current market value reported to the public. After all, SVB had no intention of selling even its “marketable” long-term bonds. That is, until it began to experience deposit withdrawals at rates it could not fill without selling those long bonds immediately, and so at losses driven by the environment’s rising interest rates.

So—again I ask: why did SVB’s auditors not report that interest rate risk? KPMG may well have a valid reason for its silence on that risk, but it should say what that risk is.

In any event, it would be useful to see the timesheets of those auditors—when I worked as a defense contractor, my timesheets were required to be submitted with 10-minute intervals—so we in the public can know what those auditors were doing instead of their jobs.

Typical Arrogance of the “Experts”

Posted on by
Reply

US District Judge Matthew Kacsmaryck, of the Northern District of Texas, has ruled that the FDA’s approval of the abortion drug mifepristone must be withdrawn and the drug pulled from the market while an existing court case makes its way through, and he made his ruling nation-wide.

The Court does not second-guess FDA’s decision-making lightly. But here, FDA acquiesced on its legitimate safety concerns—in violation of its statutory duty—based on plainly unsound reasoning and studies that did not support its conclusions[.]

No, no, no—leave our precious technocrats alone is the Leftist Lawyer cry. Only Government knows best. How dare anyone challenge Government’s experts. Areta Kupchyk, ex-FDA Associate Chief Counsel:

If the court does not defer to FDA, it would undermine FDA’s authority and set a precedent for second-guessing by judges wholly unqualified to evaluate scientific data[.]

This is the typical arrogance of Government “experts.” No one but these bureaucrats who hold one or another science degree are qualified to reign over the scientific world—and over us citizens.

No. It’s time Chevron Deference-style foolishness was done away with. It’s time our Article III courts acted like the coequal branch of our Federal government that they are instead of meekly bowing and subordinating themselves to junior agencies of a separate coequal branch.

That doing-away may finally be beginning.

A String’s Attached

Posted on by
Reply

President Joe Biden (D) and his DoEd Secretary Miguel Cardona are trying to rewrite the Title IX statute to bar States from categorically ban[ning] transgender students from participating on sports teams consistent with their gender identity.

Never mind that the actual statute, enacted those decades ago, is explicitly designed to give women a fair and reasonably equal opportunity to play sports: if a State school or a local school district has a men’s program, that school or district must fund and provide for a substantially similar program for women.

Now the Biden/Cardona DoEd is proposing a rule that would ignore the sex-based Title IX statute and require biological men be allowed to compete in women’s sports in those schools that get Federal funding.

The proposed rule would establish that policies violate Title IX when they categorically ban transgender students from participating on sports teams consistent with their gender identity just because of who they are[.]

Never mind that a transgender woman is a man by his biology, by his genes, by his XY chromosome pair.

Never mind that a transgender man is a woman by her biology, by her genes, by her XX chromosome pair.

This is the Biden administration’s open war on women.

My advice to the States: don’t take the Federal funds. The strings attached are more like chains.

It’s Everybody Else’s Fault

Posted on by
Reply

That’s the claim of Treasury Secretary Janet Yellen, as described in Sunday’s Wall Street Journal editorial. The editors are correct as far as they go, but I do have a quibble and a more serious disagreement with some of the things they said.

First my quibble:

Yet here we are with major banks failing, and the government having to bail out uninsured depositors and offer lifelines to protect bank assets that are underwater.

No, the government most certainly did not have to “bail out” uninsured depositors or offer lifelines to other banks. The Biden administration, through Yellen, chose to do those things. By doing so, though, they set the ugly precedent of bailing out everyone else in all other banks without regard to whether those depositors are FDIC insured and without regard to the risks other banks may or may not be running, the Biden-Yellen blather to the contrary not withstanding. By doing so, Biden and Yellen have indemnified uninsured depositors and careless bankers from risk, laying that risk off onto us taxpayers instead.

My more serious disagreement:

The main culprit [regarding Silicon Valley Bank and the deposit runs at midsize banks] was duration risk from the failure to properly hedge against rising interest rates…. …. There’s no excuse for the examiners at the San Francisco Federal Reserve not to have acted on the problem as the West coast bank regulator.

Again, no. There’s certainly room to decry the failure of the SF Fed regulators to regulate, and those worthies should be terminated for cause over their negligence.

However, the first, proximate, and last responsibility for SVB’s failure and those other banks’ problems lies with the managers of those institutions. Interest rate risk, which underlies duration risk, is the risk taken when buying a debt instrument: when market interest rates rise, the debt instrument’s market price falls, and that reduces the value of the debt instruments already bought—for instance, the long Treasury bonds SVB’s managers had bought in satisfaction of its reserve requirements. Any first year economics student learns that, if he hadn’t already learned it in high school.

Duration risk, which matches long term debt assets with short term debt obligations (or not…) is something that same first-year economics student learns later in that same semester. And it’s something about which any first-year Finance student learns early in the first semester.

It was those managers’ decision to ignore those risks, or their careless laziness in not bothering to deal with those risks, or some combination of the two, that lay at the heart of the failure of the one and the problems of the others. The San Francisco Fed’s failure to act was only a (actually quite minor, given where the primary responsibility, and initiative, lies) contributing factor.

“Orderly Implementation”

Posted on by
Reply

Judge Katherine Menendez, of the Federal District of Minnesota, has ruled a Minnesota State law barring 18-20-yr-olds from obtaining handgun carry permits in Minnesota to be unconstitutional.

Based on a careful review of the record, the court finds that defendants have failed to identify analogous regulations that show a historical tradition in America of depriving 18- to 20-year-olds the right to publicly carry a handgun for self-defense. As a result, the age requirement prohibiting persons between the ages of 18 and 20 from obtaining such a permit to carry violates the Second Amendment.

She based that argument on the Supreme Court’s New York State Rifle & Pistol Ass’n v Bruen ruling in which the Court explicitly required a showing of a national history of regulation of the type contemplated in this or that gun control legislation.

What’s of particular interest here, though, is Minnesota Attorney General Keith Ellison’s reaction to Menendez’ ruling. He wants the judge to stay her ruling pending a potential State appeal, or in the alternative, a stay for 60 days to allow for its orderly implementation.

The first is common enough and not entirely unreasonable. It’s normal to stay a ruling that has a chance of being overruled on appeal in order to prevent the harm that can be done to the ultimately winning side before it wins the appeal.

The last is utterly disingenuous, though. It doesn’t take 60 days to stop blocking 18-20-yr-olds from exercising their Constitutional rights. It doesn’t take a day to do that, with the possible exception of a Sunday, when legal firearm sellers are closed and might need until Monday to receive the rescission of the State law. After all, nothing has changed in any of the other, still in place, requirements surrounding obtaining a firearm; all that’s happening is the removal of one of those requirements.