46r

Continuing my rehash of the mortgage crisis, I want to discuss an accounting rule known as FIN 46r. That rather innocuous sub-section tells the story of why a big company like Citigroup got in trouble. The centerpiece of this relates to SIV’s or structured investment vehicles. I just love the way they name these things. It sounds so mundane it couldn’t possibly cause any problems. 46r laid out the guidelines determining whether a company had to include SIV’s on its balance sheet. In other words the current value of the SIV had to be part of the companies report. As a person interested in investing in a company you would like to know about such things but the company might prefer to keep them secret. Citigroup was accumulating large amounts of mortgage bundles and attempted to hide them inside of SIV”s. Citigroup like many others large banks sold paper certificates to investors who wanted to buy into these mortgage bundles. Since these bundles offered a handsome return they had lots of buyers. Citigroup transferred these bundles to the SIV’s and they no longer appeared on the Citigroup company statement. When asked about these SIV’s Citigroup responded by saying they had no explicit obligation to back these certificates, meaning they had no contractual arrangement to back them. What was not said is that they may have an implicit obligation. That question was answered when the mortgage crisis began to unfold and people began to sell the certificates they had in these SIV’s. Citigroup was forced to sell off the mortgages to pay back the investors and as they sold the prices began to drop and they took huge losses. As these previously unreported debts began to appear, the investors in Citigroup were astounded. The company began massive layoffs and its value shrunk from 300 billion to 6 billion and it was ready to go under. The government stepped in with a 300 billion bail-out and the company was saved from bankruptcy. Their deceptive accounting practices were revealed but no one was prosecuted even though it caused their investors to lose millions.