A Fifty-Percent Write-Down: Discounting Debt Insurance?

In “Europe’s Rescue Plan,” The Economist (October 29, 2011) opines on the “fixes” that had been announced just days before by E.U. leaders on the public debt crisis. I find three points of note that are particularly worth elaboration. 

The full essay is at "Essays on the E.U. Political Economy," available at Amazon.

Britain at a Crossroads?

The prime minister of the state of Britain faced a “rebellion” in his own party on October 24, 2011 as eighty conservatives backed a nonbinding referendum on whether the state should secede from the union. “I don’t vote against the government lightly, but I think when there is a matter of principle then that must come first,” Nick de Bois said. “We have a considerably changing dynamic [in the E.U.] and given that . . . and the fact that anybody under 54 has not had a chance to vote on [whether Britain should secede from the E.U.], it is appropriate to set in motion that opportunity,” he said.[1] De Bois’ sentiment mirrors that of Thomas Jefferson, who argued that each generation should have the opportunity to affirm or cancel the social contract of the generation before.

The full essay is at "Essays on the E.U. Political Economy," available at Amazon.

1. Alistair MacDonald, “Tories Split on Role in Europe,” The Wall Street Journal, October 25, 2011.

Hedge Fund Lobby: Breaching Ethics

In a rule adopted by the SEC on October 26, 2011, hedge funds over a certain size must report information—the amounts required depending on the fund’s size. The devil, as it were, is in the details. In this case, they reflect the intense lobbying of hedge funds and their advocates. As a result of the lobbying, according to The New York Times, the “changes call for only the largest funds to report the most detailed information, eliminate any penalty of perjury for misleading reports and delay for six months the initial reports for all but the largest funds.”[1] Whereas the matter of the amount (and type) of information required involves or potentially puts at risk the funds’ secret strategic competitive advantages and the matter of a start date involves technical points such as how much effort is needed to cull the required information, the elimination of any penalty for perjury does not correspond to any legitimate business concern. Indeed, it makes on sense to require information if it can be misleading with impunity. It is as if the SEC regulators had told the hedge funds, You will have to submit information to us but it can be misleading. The fund managers would be apt to reply, Oh, ok.


The full essay is in Cases of Unethical Business, available in print and as an ebook at Amazon.com.  

1. Edward Wyatt, “Rule Allows Regulators a Look at Hedge Funds,” The New York Times, October 27, 2011.

Deloitte: A Culture of Least Resistance

On October 17, 2011, the Public Company Accounting Oversight Board issued a statement saying audits should protect investors. “The board therefore takes very seriously the importance of firms making sufficient progress on quality control issues identified in an inspection report in the 12 months following the report,” the statement said. Not having seen such progress at Deloitte, the board made its 2008 report on the firm public. The report “cited problems in 27 of the 61 Deloitte audits it reviewed, including three where the issuing company was forced to restate its financial statements.” This was “an unprecedented rebuke to a major accounting firm. In too many instances,” the report stated, inspectors from the board “observed that the engagements team’s support for significant areas of the audit consisted of management’s views or the results of inquiries of management.” In some cases, “Deloitte auditors did not bother to even consider whether accounting decisions made by companies were consistent with accounting rules. Instead, auditors accepted management assertions that the accounting was proper, the board’s report said.”[1] As a very young auditor at that firm, I was told to do just that.  

The full essay is at "Deloitte: A Culture of Least Resistance" in Institutional Conflicts of Interest, which is available at Amazon.

1. I took the quotes for this paragraph from: Floyd Norris, “Accounting Board Criticizes Deloitte’s AuditingSystem,” The New York Times, October 17, 2011;  and Floyd Norris, “Audit Flaws Revealed, AtLong Last,” The New York Times, October 21, 2011