• CNBC’S Carney Highlights McKenna And Forbes On Bank of America

    By • Aug 28th, 2011 • Category: Pure Content, Where I've Been

    I can say I’ve known John Carney who runs the NetNet Blog at CNBC for a while – since his days at Henry Blodget’s Business Insider – but that would not be strictly true. We have never met in person. We’ve gotten to know each other via Twitter. My trips to New York City and his schedule have not yet aligned. When they do, we’ll surely share a big steak and a bottle or two of good red wine.

    But, I guess, I’m “real” enough for now for Carney.

    John gave me an early shot at wider press attention when he asked me to write something about the Satyam scandal for Clusterstock, a blog of Business Insider.  Yes, of all things, he asked me to write about the Satyam scandal, bless his Irish heart. The Satyam story was swirling after it broke in early 2009 but, of course, no U.S. based media outlet was covering it in any detail or consistently because it was happening in India. John was going on vacation and needed a fill-in.

    I wrote, “Satyam’s Bollywood Tragicomic Soap Opera,” in April of 2009.

    Then John asked me to write something to explain what I was saying about New Century and repurchase risk in terms of Wells Fargo and Wachovia.

    That was in September of 2009. “Did Wells Fargo’s Auditors Miss Repurchase Risk?” was prescient.

    Wachovia, now owned by Wells Fargo, recently settled a very large class action lawsuit related to the misrepresentation of the risk of their portfolio of subprime sludge to Wells Fargo bondholders. KPMG, auditor of both banks, kicked in $37 million to the settlement.

    Attorney David Kessler of Kessler Topaz Meltzer & Check, LLP, co-lead counsel to the class, reminded me that this was the third settlement by KPMG for subprime sins, after New Century and Countrywide.

    Kevin LaCriox at D&O Diary: In what is the largest settlements so far to arise out of the subprime meltdown-related securities class action litigation wave, and apparently the largest settlement ever of a securities suit filed solely under the Securities Act of 1933, the parties to the consolidated Wachovia Preferred Securities and Bond/Note Litigation have collectively agreed to settle the suit for a total of $627 million. The settlement is subject to court approval. The lead plaintiffs’ August 5, 2011 memorandum in support of the motion to approve the settlement can be found here, and the parties’ settlement stipulation can be found here.

    The settlement amount of $627 million represents two different settlement funds: $590 million on behalf of the Wachovia defendants, including 25 former directors and officers of Wachovia, as well as 72 different financial firms that underwrote bond offerings for Wachovia between 2006 and 2008; and $37 million on behalf of Wachovia’s auditor, KPMG. According to data from Institutional Investor Services, the collective $629 million settlement, if approved, would represent the fourteenth largest securities class action settlement of all times.

    Last November, John Carney recognized my early call on these lawsuits – and the auditors’ role and responsibility in the allegations.

    Where does the confidence in the map come from? It could be that Citi is taking assurance from the work of its auditors, KPMG. But this assurance could be misleading. As Francine McKenna of the blog Re:TheAuditors points out, KPMG has a long history of approving poor disclosures when it comes to repurchase risk.

    McKenna first reported on poor disclosures at a KPMG audited company in 2007. That company was New Century. It hadn’t disclosed anything about repurchase risk in earlier filings with the Securities and Exchange Commission. But, suddenly, it was revealing that banks were demanding that it buy back mortgages it had sold. If all the mortgages were put back to the company, New Century said it would be on the hook for $8.4 billion.

    Later, in an article for Business Insider, McKenna reported that Wells Fargo was not reporting the quantity and quality of its repurchase risk.

    Carney and I shared the virtual stage recently – although neither of us knew it at the time that we were both being interviewed  – on the Background Briefing program on Australian National Radio, “Auditing the Auditors.”

    But it was the unexpected endorsement of my most recent column on Forbes.com, “Bank of America Buys Time Via Buffett Effect,” that I wanted you to see today. I have never “pitched” John. I have never asked him to notice my work and he doesn’t have to ask me to notice his. He’s just the kind of guy who does things like this without being asked, cajoled, bribed, or for any other reason than that he is watching the news closely and, every once and a while, sees my take on it as worthy of notice.

    If you read one thing about Bank of America today, I hope it will be Francine McKenna’s fine column in Forbes.

    She notes that the Bank of America bulls, including the estimable John Hempton of Australia’s Bronte Capital, seem to be counting on is: 1) that the government will backstop any bank as big as Bank of America and 2) that accountants will never make Bank of America deliver seriously bad news about the value of its assets or the likely costs of its legal liabilities…

    Please read the rest of John Carney’s fine column, “Bank of America’s Auditors Taken to Task,” here.

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