Tag Archives: political economy

“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.

NPR’s New Label

Posted on by
Reply

Twitter has applied a US state-affiliated media label to National Public Radio‘s Twitter account. Twitter’s label defines such media as

outlets where the state exercises control over editorial content through financial resources, direct or indirect political pressures, and/or control over production and distribution[.]

What interests me, though, aside from the fact that there is a measure of affiliation just from the fact that the Federal government provides some funding to NPR, is the reaction to the label by NPR‘s CEO John Lansing in his statement—which he posted on Twitter:

NPR and our Member stations are supported by millions of listeners who depend on us for the independent, fact-based journalism we provide[.]

This is mostly irrelevant to whether NPR is state-affiliated. Voice of America, for instance, also is state-affiliated, and it provides fact-based journalism to the world—along with a strong measure of state-provided propaganda.

Mostly irrelevant: there’s this claim from NPR‘s Web site [emphasis in the original]:

Federal funding is essential to public radio’s service to the American public and its continuation is critical for both stations and program producers, including NPR.

And yet, just above that claim is this graph delineating NPR‘s funding sources as recently as its2020 fiscal year:

Plainly, NPR‘s support does come primarily from Lansing’s millions of listeners. Only 8%, plus a taste, of his funding comes from the Feds. That level may well be important, but it’s far from essential.

Lansing can’t even keep his stories consistent with each other. Which makes his objection even more irrelevant, both on substance and on the funding question.

Even so, that funding gives the Federal government that measure of influence over NPR‘s editorial decisions. And there’s the Federal government’s empirical use of its power to pressure Facebook’s Meta’s and pre-Trump Twitter’s editorial decisions. State-affiliated is warranted.

Sort of aside: it seems likely to this poor, dumb Texan that those State and local governments listed in the graph above, being much closer to Lansing’s millions of listeners than the Federal government, could well fill any shortfall were the Federal government to reduce or eliminate its funding share. That is, if the listeners resident in any of those more localized jurisdictions agreed that NPR was worth their tax money.

Update: As of 12 April, NPR has decided to no longer actively maintain its flagship @NPR Twitter account or any other official NPR accounts on Twitter over the site’s attaching the state-affiliated media label to its posts.

Buh by, luv ya, mean it. Watch out for that door closing behind you.

Ignore Them

Posted on by
Reply

The People’s Republic of China’s latest weapon in its economic war against the West, and against the United States in particular, is to slow-walk merger approvals on anti-trust grounds when either party to the merger, or its result, does or would do business within the PRC.

As preconditions for approving some of the transactions, the people said, officials at the State Administration for Market Regulation, China’s antitrust regulator known as SAMR, have asked companies to make available in China products they sell in other countries—an attempt to counter the US’s increased export controls targeting China.
The Chinese demands could put US companies in an impossible position as Washington has enacted legislation restricting American companies’ ability to sell to China and expanding certain types of production there.

And this, especially [emphasis added]:

For multinationals, it doesn’t take much for a merger to trigger a Chinese antitrust review. For instance, if two companies in a deal have revenue of more than $117 million a year from China, the merger needs Beijing to sign off.

This is an easy enough conundrum to solve. The two companies, along with the merged result, could simply stop doing business within the PRC and with businesses domiciled within the PRC, rendering that nation’s slow-walk irrelevant from the PRC’s lack of standing to object.

Companies should already be stopping doing business inside the PRC or with businesses domiciled in the PRC, so a merger agreement that asserts “no business to be done in the PRC” seems completely straightforward.

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.