The discussion surrounding the financial condition of the failed hedge fund/brokerage MF Global shows that many people don’t recognize the prominent role that off-balance sheet accounting plays in banking. These creative accounting techniques hide bad assets and worryingly large liabilities outside the company, often in shell companies nominally owned by independent investors. Recent commentary suggests that some observers and journalists had imagined that this was merely an accounting fraud employed by the likes of Enron and Worldcom. In fact, though, off-balance sheet accounting is a recognized and pervasive part of the banking industry. Among other things, the U.S. credit card business would not exist without off-balance sheet accounting.
MF Global’s accounting maneuvers appear to be legal, at least in their details released so far, and not so different from accounting practices at its competitors. MF Global hid, or at least deemphasized, the extent of its exposure to sovereign debt. Other banks, brokerages, and funds, you may safely assume, use the same approach to hide other categories of weak assets, and the public may never notice until the company goes under.
Too big to jail: The term “bankster” used by political activists to describe shady and self-serving bank executives is often an exaggeration, but not in Spain. The government there has decided to pardon a convicted criminal, Alfredo Saenz, so that he can continue to serve as CEO of Banco Santander, that country’s largest bank. Santander’s holding company is also the parent company of Boston-based Sovereign Bank, one of the United States’ banking giants. The presence of a felon in the executive suites of a bank is not as significant as the specific crime Saenz was convicted of. In the 1990s, Saenz and two other bank executives fabricated accusations to send four customers to jail (though all were released when the truth was discovered) in an attempt to squeeze an extra €4 million out of them. Banking regulators in Spain could still take action to bar Saenz from the banking industry based on his criminal record, but that would have been automatic if Saenz had been sent to jail.
On Wednesday, the NCUA liquidated BCT Federal Credit Union, of Binghamton, New York. It had 3,900 members. Member accounts were transferred to Visions Federal Credit Union.
Another credit union was liquidated tonight. It was O.U.R. Federal Credit Union of Eugene, Oregon, with 1,379 members. Member accounts were transferred to Northwest Community Credit Union.
