Accounting, JPM, Qwest. Alles wird gut, oder?

verfasst von XERXES, 15.02.2002, 09:06

Perusing Suspect Partnerships
Head of Accounting Board Says Off-Balance-Sheet Alliances Are Common



By Kathleen Day and Jackie Spinner
Washington Post Staff Writers
Friday, February 15, 2002; Page E01



Off-balance-sheet partnerships, which can allow companies to hide debts and boost profits, are widely used, the head of the organization that sets the country's accounting standards said yesterday.

"The use of these vehicles is fairly widespread" among U.S. companies in many industries, Edmund L. Jenkins, chairman of the Financial Accounting Standards Board, said in an interview.

The collapse of Enron Corp. has focused attention on the practice of companies to use these partnerships to disguise problems. FASB is considering a plan to increase the amount of outside investment a partnership would be required to have before a company could remove it from the balance sheet.

Jenkins's comments in the interview came after hours of testimony in Congress, where he and other accounting experts defended accounting standards as essentially sound but constantly in need of adjustment, especially in the wake of the Enron scandal.

"Our financial reporting system has long been considered the best in the world, and is one of the underpinnings of our capital markets," Robert K. Herdman, the SEC chief accountant, said in testimony before a subcommittee of the House Energy and Commerce Committee."However, certain aspects of the system can and should be improved so changes to accounting standards can be implemented more quickly."

That adjustment process is often impeded by congressional meddling on behalf of businesses opposed to FASB's attempts to close loopholes, some experts and lawmakers said yesterday.

"Standard setting has become too political," said Thomas J. Linsmeier, an accounting professor at Michigan State University."Opponents of FASB's proposals have found that complaints to Congress have been quite successful in impeding FASB's progress."

Jenkins said pressure from Congress had delayed FASB decisions in the past.

FASB, for example, has been grappling for more than a decade with what the rules should be for off-balance-sheet partnerships, with corporations and accounting firms fighting each proposed change.

Recently, in response to Enron's problems, the Securities and Exchange Commission ordered FASB to develop new rules on off-balance-sheet partnerships by June. The SEC oversees FASB, a private-sector organization that is funded by publicly traded companies and the accounting industry.

Jenkins said FASB has not decided how it will implement the rules, although he hopes the changes will be made in time to cover transactions made in 2003. He noted that ordinarily FASB does not apply new rules retroactively.

He added that many companies already are voluntarily reviewing their accounting practices in light of the Enron case.

Rep. Cliff Stearns (R-Fla.), chairman of the Subcommittee on Commerce, Trade and Consumer Protection, and Rep. Edolphus Towns (D-N.Y.), the ranking subcommittee member, both questioned whether FASB should be funded by accountants and corporations.

At a Senate Banking Committee hearing, Chairman Paul S. Sarbanes (D-Md.) also said he wanted to examine the funding of FASB and the International Accounting Standard Board (IASB), a body created to establish uniform global accounting rules.

"The private interests go hard at FASB, and if they don't seem to be getting anywhere, then they go hard at the Congress and get the Congress to go hard at FASB," Sarbanes said."If we can get a structure [in which] the financing can maintain independence, it would be an important contribution."

FASB gets money from sales of documents, subscription and licensing fees, the accounting profession and business organizations. The IASB is funded both by the sale of its standards and by contributions from the industry.

An internal e-mail from the Arthur Andersen accounting firm that was released Wednesday by Sen. Carl M. Levin (D-Mich.) suggested that Enron was interested in influencing international rule-making bodies.

The e-mail said that a year ago, Paul A. Volcker, chairman of the International Accounting Standards Committee Foundation, asked Enron if it would contribute $500,000 over five years to the IASB. Volcker said yesterday that Enron agreed to donate half that amount. Volcker said the IASB sent Enron an invoice but has not yet received the money.

Sarbanes said the e-mail nonetheless"obviously raises the question of how do we fund these boards."

Volcker said possible funding conflicts were less of a problem then political lobbying."I'm not so worried or worried at all about influence of individual companies -- which is so diluted," he said,"but to the extent that I, as chairman of the trustees of this effort, have been under any design pressure at all has come from the political process."


© 2002 The Washington Post Company




Traders Edgy About Morgan Chase Loans
_____JP Morgan Chase_____


By Ben White
Washington Post Staff Writer
Friday, February 15, 2002; Page E01



NEW YORK, Feb. 14 -- Executives at J.P. Morgan Chase & Co. and some analysts say the financial picture at the nation's second-largest bank is just fine. Investors, however, are far from convinced.

The bank's stock has fallen about 25 percent in the last two months, closing at $30.21 today. And on the bond market, yields on the bank's $2 billion worth of notes maturing in February 2011 have risen to 6.47 percent from 6.16 percent in the past month.

Investor concerns include the bank's exposure on loans to Enron Corp., Kmart Corp., Global Crossing Ltd. and Argentina, all of which have defaulted on their debts; large potential losses on loans to Qwest Communications International Inc. and Tyco International; and its heavy reliance on complicated derivatives investments and use of off-balance-sheet financing.

But traders say the exposures themselves are less dangerous than the increased bond yields they may be helping to create. Those could put the bank at a serious competitive disadvantage with its competitors, particularly its biggest rival, Citigroup. The yield on J.P Morgan Chase's 10-year debt is now the highest of the nation's 10 largest banks.

"Obviously, J.P. Morgan can survive these short-term hits," said Jim Cusser, senior bond trader at Waddell & Reed Investment Management Co."But in the longer term, if these spreads widen it gives Citigroup and other major lenders a big leg up in the cost of funds, which is the bread and butter of these banks.... If Citigroup can get its cost of funds 30 basis points less than J.P. Morgan's, they can be that much more aggressive in making loans."

A 30-basis point difference in yield means an increase of $3 million in interest costs per every $1 billion borrowed. A basis point is one-hundredth of a percentage point.

J.P. Morgan Chase held a conference call with analysts today to rebut fears about the multiple exposures and to address questions about possible ratings downgrades, a potential cut in dividend payments to stockholders, and off-balance sheet activities.

Acknowledging that the bank is under"heavy scrutiny" by ratings agencies, Chief Financial Officer Dina Dublon said she hoped the agencies"would very much look to the financial strength of the company, both capital position as well as earnings power."

"I don't think there is any issue at all about the overall financial strength of the company," she said, adding that no dividend cuts were planned.

Dublon said all the"special-purpose entities" used by the bank have been thoroughly vetted by an internal committee consisting of legal, tax, accounting and risk-management personnel. She said most of the SPEs are"plain vanilla" and consist largely of bundling large amounts of consumer credit card debts into securities for sale to specialized investors. Dublon also said the company sometimes similarly packages large amounts of mortgage debt.

J.P. Morgan Chase announced last month that it had written off $456 million of trading losses and loans to Enron and still has exposure of as much as $2 billion to the energy-trading firm, which is in bankruptcy. According to a report in the Wall Street Journal, J.P. Morgan Chase also has among the biggest exposures to Tyco, which is struggling with a falling stock price and questions about its accounting practices.

And today, Qwest, shut out of the short-term commercial paper market, said it would exhaust a $4 billion credit line set up by J.P. Morgan Chase and Bank of America. J.P Morgan also wrote off $351 million in losses from exposure to Argentina.

The company's heavy reliance on derivatives for earnings has worried analysts and investors as well. The bank is suing Enron to recover $1 billion related to a commodities swap. But beyond that transaction, the bank is involved in a vast array of other derivatives investments, complicated financial contracts that include interest rate and currency swaps.

"You've really got several issues here," said Michael Mayo, who follows J.P. Morgan for Prudential Securities and advised clients to sell the bank's stock last May.

Mayo said questions remain about the wisdom of last January's mega-merger, which saw Chase purchase J.P Morgan for $32 billion. Since then, company executives have been struggling to integrate Chase's traditional lending practices with J.P. Morgan's investment banking business, which makes its money underwriting stock and bond issues and advising on mergers and acquisitions.

"And you've got all of these potential losses related to Enron and other large corporations, as well as an ongoing Securities and Exchange Commission investigation into off-balance-sheet subsidiaries and risk management practices generally," Mayo said.

But while some analysts are skeptical of J.P Morgan Chase's multiple exposures and the risks posed by increased bond yields and a possible credit downgrade, others say the bank's stock is greatly undervalued.

"We did an analysis of capital and earnings capacity last week which showed [the bank's position] to be very strong," said Ruchi Madan, who follows J.P Morgan Chase for Salomon Smith Barney."If you look at the numbers, there is no reason to expect a dividend cut or a downgrade.... [The ratings agencies] would have to expect more multibillion-dollar write-downs, which I don't think you can argue for right now."


© 2002 The Washington Post Company


Short-Term Lenders Cut Off Qwest's Cash
Western Phone Company, Under Fire for Accounting Practices, Resorts to Bank Credit Lines




By Christopher Stern
Washington Post Staff Writer
Friday, February 15, 2002; Page E01



Qwest Communications International Inc., the dominant local telephone company in 14 Western states, found itself in a cash crunch yesterday as its short-term creditors refused to continue lending money amid concerns about the carrier's past accounting practices.

Qwest said it was forced to seek alternative financing by tapping credit lines totaling $4 billion from two major banks. The move showed how even local telephone giants, once thought to be islands of financial stability, are being reassessed by lenders after Enron Corp.'s collapse and a steep downturn in the telecommunications sector.

Yesterday's action came as Standard & Poor's and Fitch Inc. reduced Qwest's short- and long-term credit ratings because of the company's dwindling financial flexibility. Investors drove down Qwest's shares by $1.10, to $7.49, a decline of 12.8 percent, to their lowest price since August 1997.

"This is really scary," said Scott Cleland, an analyst with the Washington-based Precursor Group."The fourth-largest local telephone company, which provides lifeline service to over 10 million homes, is seeing its solvency questioned."

Several analysts said Qwest is in little danger of filing for bankruptcy. Local phone service accounts for 80 percent of its revenue, and the company has significant assets it can sell, such as a profitable phone directory business.

But Qwest has been the subject of several reports questioning its accounting practices, including the way it accounted for deals in which it traded access to its networks with other companies.

During a conference call with analysts last night, chief executive Joseph P. Nacchio said Qwest had followed all generally practiced accounting rules in recording the transactions, which are commonplace in the industry."We have no other unusual deals," he said."What you see is what you get."

Nacchio blamed the lenders' skittishness on heightened concerns in"the very nervous post-Enron market." He said he would take the unusual step of holding a conference call once a week to reassure investors and analysts about Qwest's financial health.

"We are not going to allow rumor and innuendo to drive the value of our company," Nacchio said.

To generate cash, Nacchio said, the company is considering selling its wireless phone business, its phone directory business and some rural telephone networks.

Qwest is one of several large telecommunications companies criticized for accounting practices similar to those Enron used.

In addition to being an energy-trading company, Enron sold capacity on the huge fiber-optic network it built over the last decade. Like Enron, Qwest participated in deals in which telecommunications companies would swap access to each other's networks, sometimes recording such transactions as revenue even though no money was exchanged.

Nacchio said the arrangements helped Qwest conserve cash while giving it access to telecommunications networks around the world.

In one such case, Nacchio said, he gained permission from Qwest's board to spend $400 million building networks in Asia. But Qwest never had to do so because it swapped capacity with companies that owned networks in Japan and China. It was through a series of similar arrangements that Qwest was able to create a network that links 32 countries.

How such arrangements were accounted for in financial reports has drawn scrutiny from regulators. The Securities and Exchange Commission has ordered Qwest to hand over documents relating to its transactions with Global Crossing Ltd., a telecommunications company that recently went into bankruptcy.

Roy Olofson, former vice president for finance at Global Crossing, claimed that Global Crossing used swaps with Qwest to inflate its revenue by $100 million during the first half of last year.

"Global Crossing was giving the impression that it was generating cash revenues when, in actuality, these transactions did not increase the cash position of the company," Olofson's lawyer wrote in a letter that was released to news media.

Olofson, who is suing Global Crossing because the company fired him, said each company accounted for the identical transactions differently -- even though they had the same outside auditor, Arthur Andersen. Andersen also was an auditor for Enron.

Susan Kalla, a telecommunications industry analyst with Arlington-based Friedman, Billings, Ramsey & Co., said it is nearly impossible to quantify how much capacity has been swapped among telecommunication companies.

During the late 1990s, as various companies built fiber-optic networks, they also began to sell capacity to each other in units known as"indefeasible right of use." The IRUs were long-term contracts, some for as long as 15 years. The sales gave a company based in one part of the country access to a elsewhere in the nation or overseas.

Kalla said that in 2001, the telecommunications industry claimed as much as $1.5 billion in revenue from selling capacity between companies. Some of those transactions were one-way sales from one company to another, others were swaps. While the total revenue from the transactions is a small fraction of what the industry generates overall, individual companies were able to use the swaps to significantly boost their revenue.

Analysts have been aware of the practice since last year, when several companies -- including Global Crossing and Qwest -- began revealing details about IRU-related revenue in the footnotes of their financial statements.

Debate over the accounting practices comes as the telecommunications industry faces fundamental problems.

Some of the biggest players -- such as Qwest -- didn't exist 10 years ago. They grew quickly as Wall Street sent their shares soaring on the expectation that the growth of the Internet would lead to an exponential surge in demand for high-speed data networks.

But much of the expected demand never materialized, and many of the upstarts are saddled with mountains of debt they took on to build their networks.

Qwest was founded in 1995 and went public in 1997. It used its high valuation to engineer a stock deal to buy US West, a former local Bell Telephone company with roots that went back 120 years. Bidding against Qwest was Global Crossing, a company founded in 1997 whose market capitalization reached more than $50 billion by 1999 -- making it bigger than General Motors.

Global Crossing collapsed after the need for data capacity never lived up to expectations, a situation that was made worse as a growing number of companies tried to enter the field. Last month, Global Crossing filed for bankruptcy protection.

Qwest's data and long-distance business also has yet to live up to the expectations it set at the time of the merger with US West.

Drake Johnstone, an analyst with Davenport & Co., said that in the current Enron-tainted environment, some investors may overreact to any negative news from Qwest, leading them to overlook its thriving local telephone business, which generated almost $20 billion in revenue last year. Instead, they are punishing the company for what seems to be aggressive accounting.

"Because of its past, it's paying the price now," he said.





© 2002 The Washington Post Company




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• Accounting, JPM, Qwest. Alles wird gut, oder? - XERXES, 15.02.2002, 09:06
  • Re: Accounting, JPM, Qwest. Alles wird gut, oder? -- Frage: - Fischli, 15.02.2002, 09:50