Banking Law

A couple of weeks ago, we mentioned that blogger Francine McKenna of re:The Auditors has been on the case of the nation's largest accounting firms about their failure to properly catch and force clients to disclose a major risk of mortgage banking: repurchase risk. Yesterday, she had some more to say about the subject and none of it was good for KPMG and its auditing cohorts.

If you are a regular reader of this site, you may remember the first time I warned you about the poor disclosure practices surrounding repurchase risk.  It was all the way back in March of 2007 and I was referring to the lack of disclosures surrounding New Century Financial.

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New Century failed. There was a very detailed, well-done bankruptcy examiner?s report on that one, too.pointed the finger at KPMG for not heeding the advice of their own experts, a la Andersen/Enron. Instead of the KPMG partner telling the client that their models for estimating potential losses were flawed, the partner told the staff to shut up and move on. Mr. Missal

KPMG is now being sued for $1 billion for its sins at New Century.

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I warned you again seven months ago that another KPMG client, Wachovia/Wells Fargo, has the same poor disclosure of repurchase risk.

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The latest announcements of potentially material losses due to forced repurchases of mortgages from Fannie Mae (Deloitte) and Freddie Mac (PwC) were made JP Morgan and Bank of America ? both audited by PwC.

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Maybe ya?ll should kick the tires a little more on Citibank?s big comeback.  Citi is the only big money center bank left that is audited by KPMG. Recent testimony before the Financial Crisis Inquiry Commission says their underwriting standards fell apart between 2005-2007.

This rock has just been overturned and what is crawling out from underneath it is not favorable for the nation's largest auditing firms. Francine's warning us that not only will large financial institutions who originated and sold subprime, Alt-A, option ARMs and other wounded ducks to Fannie, Freddie and other investors (and who are still solvent) during the height of the craziness in the early-to-mid 200s continue to suffer for their sins, but so will their auditors. In fact, the auditors will suffer more, because while many of their sick-mortgage originating clients like New Century have gone to dwell in the land of fire and brimstone, the big accounting firms are still standing, still insured, and--for now--still possessed of deep pockets. There's nothing more a plaintiff's trial lawyer loves than a defendant with deep pockets and a paid up malpractice policy.

If "ya-all" (or "y'all") are interested in keeping up with this train wreck as it continues to play out, keep following Francine.