Is it possible to "audit" banks ?

[kentuck]

Why can't we have a regulatory force that goes into the office of every bank president in America and asks about their financial condition? Would that not give us an idea of the extent of the problem? If the banks are sound, there are no reasons not to be able to offer credit to their customers. The problem would be with the Federal Reserve, not with the banks, if they cannot offer credit to credit-worthy customers.

It seems this would be a good place to start fixing this system. If we have sound banks, we need to re-assure them that the US Government stands behind them. The problems with the credit system lies elsewhere.

Also, we would need to break up this billion dollar mortgage security scam into single mortgages and put them into our commercial banking system, fully back by our Government.

Then they need to reform all these special default and leverage dealing that these investment firms have been practicing. There must be constant oversight of our banking system. They cannot be permitted to operate in the dark. There must be strict regulations.

This would be my solution for resolving this crisis. But there is still a big price to pay for what has been done to our economy by these criminals.

[BlooInBloo]

1. That's 100% irrelevant to what happened here.

[kentuck]

3. How so?

Irrelevant?

[sandnsea]

5. It's very relevant

If somebody had been honestly examining the value of these loans, they wouldn't have been sold and traded and insured, etc etc.

[BlooInBloo]

6. They did. The value changes second by second.

[sandnsea]

8. No, they did not honestly value these loans

at the beginning. Just on the basis of using stated income, alone, should have been a huge red flag. No regulations and bank examiners who just didn't care.

[BlooInBloo]

10. (shrug) Go lodge a fraud complaint with the SEC then. They'll be fascinated to learn of this.

[sandnsea]

11. Are you serious?

You're denying that ignoring good banking principles is the root of the problem?

[Selatius]

14. There are horror stories from urban areas that attest to what you say.

They did very little in terms of a credit check or even verifying income. Some of these inner-city bank branches and fly-by-night lenders were nothing short of criminally negligent. Sure, some people will point the finger at the debtors and say they were stupid to take the loan in the first place, but it takes two to tango, and the banks should rightly get assigned the blame as well for being so insanely concentrated on short-term cash flow and profits at the expense of long-term viability.

Yeah, you might have twice the number of people paying on mortgages now because money was thrown out there, but come a few years later, half of them have defaulted. There goes long-term viability of your business, and if the worst comes, your bank fails as a result.

[sandnsea]

18. I live in all white rural America and they did it here too

What a racist piece of shit post.

[Selatius]

38. Where did I mention race or racism?

[coalition_unwilling]

36. Banks made sub-prime and alt-A loans and then sold those loans into

the secondary market (like Fannie and Freddie), thereby gaining capital necessary to fund reserves so that the banks could make more loans. The bad loans sold by the banks were subsequently bundled up with good (aka 'prime') loans into bonds in the $5-10 million dollar range or higher. Those $5-10 million dollar bonds could then be broken up into smaller slices (or tranches) and made available for sale to the bond markets worldwide.

So the bad loans that the banks made did not stay on their books for very long, at least as I understand it. And any audit of a given bank would probably not have revealed much (at least if my understanding of these transactions is correct).

The bonds that were issued subsequent to the sale of the loans into the secondary markets were rated 'investment grade' by rating agencies like Moody's. To me, this is one of the dark, little secrets of this scandal. The bond rating agencies clearly screwed the pooch, whether through insider conflict-of-interest or pure, utter Bushian incompetence. Ironically, the same agencies that initially rated the bonds 'investment grade' subsequently lowered their ratings on these self-same bonds, thereby triggering the various flights to safety that have occurred among insitutional investors in the past 6 months.

[sandnsea]

39. But they should have been audited

If the source of revenue is not sustainable, a bank examiner ought to uncover that. That's what really happened, they put their entire "business model" on bundling these loans, and had to write worse and worse risks to keep having bundles to sell. Bank examinders should have caught it and stopped it.

[pnwmom]

32. Actually, it's 100% relevant to the issue of credit swaps.

Credit swaps are a vast, unregulated, unreported -- i.e. off the books -- threat to our economy.

[whistle]

2. Not before Sec. Paulson signs and distributes $700 billion in bailouts

[sandnsea]

4. Bank examiners

But when you have a government who doesn't believe in regulations, and loose regulations to begin with, then the bank examiner doesn't mean very much.

[MannyGoldstein]

7. Exactly What FDR Did In 1932

Closed every bank, and reopened them one by one only after auditors could certify solvency.

[kentuck]

9. Bingo!

Also, it would give people confidence in the economy. A bank holiday?

[sandnsea]

13. The FDIC does that already

That's how banks end up on a "Problem List". The warnings were out there, they just lied to us like they always do.

http://calculatedrisk.blogspot.com/2008/02/fdic-releases-quarterly-report.html

[NNN0LHI]

12. They are audited but the auditors are crooked too

Remember Arthur Andersen?

Don

[kentuck]

15. Yes, these will have to be independent auditors...

working in the interests of the taxpayers with no special connections to those that have caused the problems.

[donco6]

17. They're supposed to be independent now.

But auditors have to rely on the truthfulness of the auditee at various points. It's not terribly difficult to hide things if you're large and have an army of accountants who have no scruples.

[kentuck]

20. Is that criminal?

to hide that type of information from auditors? Could they not be imprisoned for such actions?

[donco6]

30. Yes and Yes.

But proving it is really hard. We've seen that with Enron and Qwest, et al.

Honestly, I think some entities get so large and involve so many subsidiaries and component units and spin offs that at some point it really becomes impossible to prove anything.

I believe stronger antitrust laws are one solution.

[Cleita]

24. Another reason why privatization doesn't work instead of a government

agency to do it. Read my post #23 below. When I worked at banks bank in the days BR (before Reagan) state bank examiners did the job and efficiently too because they had the clout to impose fines and penalties for violations.

[Liberal Gramma]

16. FDIC DOES audit banks

That's how they get their watch lists.

[kentuck]

19. Well, we should know exactly which banks are sound...?

and which are not? Do you think they have been doing a good job auditing? Would this not be good information for the people to have, to instill confidence in the system, to know that their bank was sound? Or is the entire banking system unsound?

[jpgray]

21. Are you talking commercial banks or investment banks?

[kentuck]

22. There are no more investment banks.

This would be commercial banks.

[jpgray]

25. In what aspects do you think current FDIC practices are particularly lacking?

[kentuck]

26. I have no idea...

Are they auditing the banks regularly and efficiently? If so, to restore confidence in the system, they need to let the people know more about the soundness of the commercial banking system, in my opinion.

[jpgray]

27. They -do- audit commercial banks regularly, but the effiicacy is open to question

Now let me preface this by saying I am no expert. I've just tried to read as much expert opinion on this as I can. I imagine many DUers are in the same boat, so take -nothing- I say as a pretense of primacy or superior knowledge. Check it out for yourself if you doubt or question me! I'm coming from no white tower of unquestionable knowledge here, but I've tried to at least learn the basic facts. The DU debate on this would be helped by a lack of this insulting condescension and pretense of superiority on these murky matters.

But based on what I've read, this goes back to Glass-Steagall's repeal--commercial banks horned in on investment bank turf. To compete, investment banks started to get wild with derivatives and other risky investments since they were, unlike commercial banks, largely free of comparative FDIC oversight.

Now, I've also read that FDIC oversight of commercial banks is lacking and ill-funded, and that accounting practices in particular play a shell game with auditors. In this case I see your point, but in many ways the auditors, -even if they did their jobs excellently-, may not have been able to prevent this particular crisis.

If all you're saying is we need more stringent auditing in the future, I agree 100%.

[kentuck]

28. All I'm saying is that it would be a good start...

I apologize if I said anything that was "insulting" to you. I tried to emphasize that this is my opinion. Nobody seems to have a solution to this problem. We are only trying to spur discussion and hope for some enlightenment.

[jpgray]

29. No no! You said nothing insulting--I was worried that -I- was sounding insulting

Others in this thread (and many threads besides) are coming at this with such a superior and unassailable tone that this issue has almost become a petty personality war, where one pretense of ultimate knowledge butts heads with another. I don't think your posts have been an example of that at all.

[Liberal Gramma]

31. Commercial banks

I don't know what the process is for investment banks

[pnwmom]

33. They do audit official books of banks. But credit swap derivatives, which are

a form of debt at the bottom of this crisis, are not officially regulated or reported -- and do not show up on the official auditing books.

[Cleita]

23. Yes, it is.

When I worked in banks back in the 1960s, we lived in fear of the state auditors, who descended on the bank unannounced. The fines for finding irregularities could be stiff. Of course this is when banks could only be chartered by state meaning they couldn't operate in any other state except one. Also, foreign banks and out of state banks could only have offices to service their own customers while traveling interstate or abroad within the USA. It kept even the largest banks small. Also, when I worked at the Bank of America, they had their inside auditors who came by once a year and made sure that each branch was in tippy top shape in case the state auditors arrived. They were tougher than the state examiners. When Reagan became governor he began the dismantling of these safeguards that he would continue on a federal level when he became President which essentially amounts to practically no regulations and no audits by a government agency.

[pnwmom]

35. Unfortunately, the deregulation laws that passed in the meantime

mean that at least one form of debt -- credit swap derivatives -- are not regulated and not reported. They aren't included on the official auditing books because the govt. doesn't require them to be.

[lumpy]

37. Yes, that's the way it used to work when I was in banking.

The State and Feds were very thorough in their auditing. True, those safeguards were dismantled by the Reagan administration that is when greed began to take over. This was the GOP plan all along, to do away with those safeguards. This has allowed corporations to go hog wild and broke the back of the banking system. That system worked quite well thanks to FDR. Thanks for posting this.

[TexasObserver]

34. Federal bank examiners work for the Office of the Comptroller of the Currency.

Their job is to review the loan port folios and practices of banks, and to flag problem or non performing loans, and to identify loans in excess of a particular officer's limits, or in excess of the limit on amount of loans that can be out to a particular borrower. They are the auditors who can make the case to shut the bank down.

They are limited in how often they can audit a bank, and the bigger the bank, the more likely the bank can withstand the efforts of a single auditor. I'm certain that a bank like WAMU was better able to see that it continued in business than Anytown USA Bank of Commerce would have been able to with similar problems.

As with any regulation, it comes down to who the people at the top are, what mandate they have, who they hire, and how many they have to do the job.