Saturday, March 28, 2009

Off Balance Sheet Items: Big for Banks

While FASB cratered to political pressure on mark to market accounting, off balance sheet items continue unabated. Credit derivatives and forward looking contracts imploded seemingly sound companies, sometimes overnight. Fed Governor Elizabeth Duke inadvertently pointed to the huge scope of off balance sheet items in her Congressional testimony before the House Financial Services Committee.
In 1950, banks' share of financial intermediation was about 50 percent, it fell and then rose to about 48 percent in the mid-1970s, then declined to about 33 percent at the turn of the century. If one adjusts the data to include "credit equivalents" for the off-balance-sheet activities of banks, then the adjusted market share of financial intermediation for banks would remain above 40 percent in recent years.
From a national standpoint, seven percent (1/14) of bank financial intermediation is in credit equivalents and sits off balance sheet. From an institutional perspective (7/40), almost 20% of credit lies off bank balance sheets. Investors have no true idea of the company's exposure. Add the mark to market change and financial statements may not be worth the paper they occupy. Poor quality killed Wall Street, Congress and the White House, and endangers the accounting profession. None of the aforementioned groups has the citizen's back. They have their hands in each other's pocket. (The graphic above is from CitiGroup.)
Update 2-21-22: Wall Street on Parade noted "the largest global firms — Deloitte, EY, KPMG, and PwC— and the largest next tier firms such as Grant Thornton, BDO, and RSM, are less focused on performing their public duty of auditing and more interested in playing all sides of client opportunities to optimize their payday."