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KPMG audits more US banks than any other firm. This article is like saying that all dead people drank water before their demise.

maybelsyrup 3y ago
Yeah could be https://daily.jstor.org/john-snow-and-the-birth-of-epidemiology/ https://daily.jstor.org/john-snow-and-the-birth-of-epidemiol...
akira2501 3y ago
And so it would somehow be imprudent to check the quality of that source of water?
koolba 3y ago
If they all drank from the same well or had the same servant fetch them, or attest to the quality of, the water…
- Kranar 3y ago
  That would still not be sufficient to make any kind of inference. Plenty of people who die drank from the same well shortly before their death. Everyone in the city of New York who died in the past week drank water from the same source shortly before their death.
- s1artibartfast 3y ago
  It's like testing the well water when there's a bloody knife on the table. We know exactly why banks are failing. Federal rate increases pushed their long-term Holdings underwater and account holders made a run on the bank.
  - voisin 3y ago
    > We know exactly why banks are failing. Federal rate increases pushed they are long-term Holdings underwater and account holders made a run on the bank. No, they failed because the banks didn’t hedge interest rate risk whatsoever. It isn’t the Fed’s fault for doing it’s job to tame inflation. It is the banks’ fault for not doing basic risk reduction at the expense of some profit. They optimized for profit and not resiliency.
    - pempem 3y ago
      They didn't hedge for something that is a once in the history of our nation's experience basically and quite literally freezing one of the most investable markets, housing. The increases have been relentless and its unclear that it is stemming inflation driven by corporate greed at all
      - voisin 3y ago
        Betting that rates would never ever rise again is idiotic. Regardless of whether it is once in history (hint: it isn’t).
        s1artibartfast 3y ago
        I think that's overly simplistic and a bit misleading. Banks weren't betting that rates would stay low, they were betting that their depositors wouldn't run in Mass. How many of your customers will flee is much more difficult to Gauge then if rates will go up. This is why we see winners and losers. Most banks have the same exact Long-term securities and will continue to make money off of them. It isn't as much about the investment as it is the investor. I might make 5% putting money in a CD account. You might put money in the same account and lose 5% because you have to pull out early. The difference is our situation, not the account
        voisin 3y ago
        > Banks weren't betting that rates would stay low, they were betting that their depositors wouldn't run in Mass. I think you are confusing causality. The depositors fled because of the bad bet that rates would stay low. As a bank your entire existence depends on confidence. Make risky bets that rates will stay low forever, and you are eventually going to be proven wrong and then confidence in your institution will drop and depositors will flee.
        s1artibartfast 3y ago
        Yep there are banks happy sitting on billions of dollars of low interest MBS and securities happily making profit. The assets themselves turn profit no matter what the current interest rate is. You only lose the "bet" when there is a run, not when interest rate Rises. If there is no run on your bank, the MBS will always add to your profit no matter what the Fed rate is.
  - kurthr 3y ago
    I agree with the sentiment that it's not the auditors, but actually the Fed only drives short term interest rates, while what is cause issues is duration on long term interest rates (particularly mortgages/MBS with 10+ year duration). Those rates are mostly set by the market and inflation expectations. So actually, quickly lowering inflation is key to keeping long term rates from going way up! In that sense what the Fed is currently doing is actually keeping the value of the bonds/MBS higher than otherwise (by driving the economy into recession). Now where you could argue that the Fed made a mistake was in buying MBS (lowering net interest margin) during 2020 early in the pandemic. That drove mortgage rates down right when fiscal stimulus was increasing bank reserves and everyone who could refinanced.
    - sitkack 3y ago
      Isn't the fed driving rates high to encourage unemployment to put pressure on inflation? Everything else is a byproduct of that move. I think the mortgage rate move was planned for an upcoming reset in housing prices.
    - s1artibartfast 3y ago
      There is a big difference between bonds and MBS that have already been issued and future ones. What the FED is doing now is tanking the value of securities with lower fixed interest issued in the past.
      - kurthr 3y ago
        But that value depends on their duration and the current interest rate on bonds of similar duration. If bond/MBS buyers don't believe that the Fed will beat inflation back down to 2% then rates at 5-20year will rise very significantly! They have been doing this over the past year by setting the Fed Funds rate (and by QE buying bonds/MBS etc in extreme circumstances like 2020 and 2008 and then eventually unwinding with QT). So, if they don't convince traders they will stop runaway inflation 5-20y rates could go to 10% or higher (inflation rate + net interest margin), which would absolutely crush long duration bond values! If you think a 10% fall in value is big, it could easily be 50% down and that would be a big deal for all banks. https://www.ustreasuryyieldcurve.com/ https://www.ustreasuryyieldcurve.com/ Go look and see how long rates at 10y have changed with expectations over the last year as short 6mo have consistently risen.
belter 3y ago
Your analogy fails. Its not about every dead person drinking water. A better analogy would be: If everybody drinks the same brand of bottled water, poisoning the source would affect a lot of people. "...KPMG alumni have also gone on to play significant roles in the banking sector, including at former clients. The chief executives of Signature and First Republic were both former KPMG partners..."
- swalling 3y ago
  That still doesn’t prove that accounting audits should prevent a bank run. The more likely culprit here is what the FDIC called out in its report, namely a failure of oversight and a loosened regulatory regime.
  - belter 3y ago
    Not entirely. Also from the article: "...The Fed’s report last week revealed the extent of weaknesses in SVB’s risk management and internal audit functions, both of which need to be assessed by a company’s external auditors. Jeffrey Johanns, a former PwC partner who teaches auditing at the University of Texas at Austin, said that could raise a question of whether KPMG should have highlighted these failings to investors as material weaknesses that could affect the financial results..."
Clubber 3y ago
Moody's also AAA rated a bunch of housing derivatives in 2008. Could it be like that? Maybe, maybe not, but someone should look into it. https://truthout.org/articles/the-indisputable-role-of-credit-ratings-agencies-in-the-2008-collapse-and-why-nothing-has-changed/#:~:text=As%20housing%20prices%20began%20to,even%20the%20most%20conservative%20investors https://truthout.org/articles/the-indisputable-role-of-credi....
- NickC25 3y ago
  Moody's gave them AAA ratings because just like the Moody's rep in The Big Short, Moody's has competition - a big bank doesn't like the rating Moody's gave their bonds? Oh, well, they'll just go to a competitor of Moody's, who is more than happy to give said bank the desired rating. Effectively the financial version of judge shopping.
  - Clubber 3y ago
    Wouldn't KPMG have similar incentives?
    - jsmith99 3y ago
      Yes but countries generally have rules that require rotating auditors and inspection of a sample of audits by a regulator.
      - MilStdJunkie 3y ago
        A regulator who might have his eye on a swanky corner office at KPMG? That tight little ring-less executive assistant . . I say this without judgement; if there's any industry where the revolving-door policy has utterly destroyed value, it's mine. The good' ol military industrial complex. Hell we practically invented the revolving door. So anything I say here is going to be next-level hypocrite, givn where my checks come from.
        NickC25 3y ago
itronitron 3y ago
Alternatively, it's like saying that there are more US banks that are going to fail...
rcme 3y ago
The water analogy is thus: everyone who dies drinks water, but lots of people drink water and don't die, therefore water is unlikely to be the cause of death. However, some estimate that over half of U.S. banks are insolvent. That's like half the population dying after drinking water. At what point do you start worrying about the water?
- mikestew 3y ago
  However, some estimate that over half of U.S. banks are insolvent. Some people don't understand fractional reserve banking, and consequentially make inaccurate estimates that make for clickable headlines but not useful analysis: https://www.investopedia.com/terms/f/fractionalreservebanking.asp https://www.investopedia.com/terms/f/fractionalreservebankin...
  - makomk 3y ago
    They absolutely are useful analysis. The fact that under fractional reserve banking, banks do not have enough cash on hand to pay out all their deposits at once does not make them insolvent. Every time a bank writes a loan they create an asset (the loan) and a matching liability (the bank deposit created when that money was loaned out). Their inability to pay everyone out at once is a liquidity problem, not one of solvency; they have the assets to cover their liabilities so long as their loans are still good. (The banking system isn't actually fractional reserve anyway, but the exact details of why that's wrong aren't particularly important here.) The problems that've been happening recently - duration mismatches on ultra-safe assets like treasuries together with record rates of interest rate rises from record low levels - do actually make banks insolvent. The actual present-day market value of their assets is less than their liabilities to depositors because the fact that investors can get higher interest rates elsewhere means they'll only buy those assets at a discount that reflects the lower interest rate. Alternatively, the banks would have to pay more in interest to convince depositors to keep their money there until the assets reach maturity than they'd receive in interest themselves. Either way they're in deep trouble.
    - candiodari 3y ago
gamblor956 3y ago
KPMG audits more US banks than any other accounting firm because it is more willing to sign off on weak financial statements than any other accounting firm. They've been fined by the PCAOB for this several times and have lost several major clients (Skechers, Herbalife) in the Los Angeles area alone due to severe audit practice issues.
1letterunixname 3y ago
Yep. Exactly. Or they all had electricity. Correlation != causation.

maybelsyrup 3y ago

Yeah could be https://daily.jstor.org/john-snow-and-the-birth-of-epidemiology/ https://daily.jstor.org/john-snow-and-the-birth-of-epidemiol...

akira2501 3y ago

And so it would somehow be imprudent to check the quality of that source of water?

koolba 3y ago

If they all drank from the same well or had the same servant fetch them, or attest to the quality of, the water…

Kranar 3y ago
That would still not be sufficient to make any kind of inference. Plenty of people who die drank from the same well shortly before their death. Everyone in the city of New York who died in the past week drank water from the same source shortly before their death.
s1artibartfast 3y ago
It's like testing the well water when there's a bloody knife on the table. We know exactly why banks are failing. Federal rate increases pushed their long-term Holdings underwater and account holders made a run on the bank.
- voisin 3y ago
  > We know exactly why banks are failing. Federal rate increases pushed they are long-term Holdings underwater and account holders made a run on the bank. No, they failed because the banks didn’t hedge interest rate risk whatsoever. It isn’t the Fed’s fault for doing it’s job to tame inflation. It is the banks’ fault for not doing basic risk reduction at the expense of some profit. They optimized for profit and not resiliency.
  - pempem 3y ago
    They didn't hedge for something that is a once in the history of our nation's experience basically and quite literally freezing one of the most investable markets, housing. The increases have been relentless and its unclear that it is stemming inflation driven by corporate greed at all
    - voisin 3y ago
      Betting that rates would never ever rise again is idiotic. Regardless of whether it is once in history (hint: it isn’t).
      - s1artibartfast 3y ago
        I think that's overly simplistic and a bit misleading. Banks weren't betting that rates would stay low, they were betting that their depositors wouldn't run in Mass. How many of your customers will flee is much more difficult to Gauge then if rates will go up. This is why we see winners and losers. Most banks have the same exact Long-term securities and will continue to make money off of them. It isn't as much about the investment as it is the investor. I might make 5% putting money in a CD account. You might put money in the same account and lose 5% because you have to pull out early. The difference is our situation, not the account
        voisin 3y ago
        > Banks weren't betting that rates would stay low, they were betting that their depositors wouldn't run in Mass. I think you are confusing causality. The depositors fled because of the bad bet that rates would stay low. As a bank your entire existence depends on confidence. Make risky bets that rates will stay low forever, and you are eventually going to be proven wrong and then confidence in your institution will drop and depositors will flee.
        s1artibartfast 3y ago
        Yep there are banks happy sitting on billions of dollars of low interest MBS and securities happily making profit. The assets themselves turn profit no matter what the current interest rate is. You only lose the "bet" when there is a run, not when interest rate Rises. If there is no run on your bank, the MBS will always add to your profit no matter what the Fed rate is.
- kurthr 3y ago
  I agree with the sentiment that it's not the auditors, but actually the Fed only drives short term interest rates, while what is cause issues is duration on long term interest rates (particularly mortgages/MBS with 10+ year duration). Those rates are mostly set by the market and inflation expectations. So actually, quickly lowering inflation is key to keeping long term rates from going way up! In that sense what the Fed is currently doing is actually keeping the value of the bonds/MBS higher than otherwise (by driving the economy into recession). Now where you could argue that the Fed made a mistake was in buying MBS (lowering net interest margin) during 2020 early in the pandemic. That drove mortgage rates down right when fiscal stimulus was increasing bank reserves and everyone who could refinanced.
  - sitkack 3y ago
    Isn't the fed driving rates high to encourage unemployment to put pressure on inflation? Everything else is a byproduct of that move. I think the mortgage rate move was planned for an upcoming reset in housing prices.
  - s1artibartfast 3y ago
    There is a big difference between bonds and MBS that have already been issued and future ones. What the FED is doing now is tanking the value of securities with lower fixed interest issued in the past.
    - kurthr 3y ago
      But that value depends on their duration and the current interest rate on bonds of similar duration. If bond/MBS buyers don't believe that the Fed will beat inflation back down to 2% then rates at 5-20year will rise very significantly! They have been doing this over the past year by setting the Fed Funds rate (and by QE buying bonds/MBS etc in extreme circumstances like 2020 and 2008 and then eventually unwinding with QT). So, if they don't convince traders they will stop runaway inflation 5-20y rates could go to 10% or higher (inflation rate + net interest margin), which would absolutely crush long duration bond values! If you think a 10% fall in value is big, it could easily be 50% down and that would be a big deal for all banks. https://www.ustreasuryyieldcurve.com/ https://www.ustreasuryyieldcurve.com/ Go look and see how long rates at 10y have changed with expectations over the last year as short 6mo have consistently risen.

belter 3y ago

Your analogy fails. Its not about every dead person drinking water. A better analogy would be: If everybody drinks the same brand of bottled water, poisoning the source would affect a lot of people. "...KPMG alumni have also gone on to play significant roles in the banking sector, including at former clients. The chief executives of Signature and First Republic were both former KPMG partners..."

swalling 3y ago
That still doesn’t prove that accounting audits should prevent a bank run. The more likely culprit here is what the FDIC called out in its report, namely a failure of oversight and a loosened regulatory regime.
- belter 3y ago
  Not entirely. Also from the article: "...The Fed’s report last week revealed the extent of weaknesses in SVB’s risk management and internal audit functions, both of which need to be assessed by a company’s external auditors. Jeffrey Johanns, a former PwC partner who teaches auditing at the University of Texas at Austin, said that could raise a question of whether KPMG should have highlighted these failings to investors as material weaknesses that could affect the financial results..."

Clubber 3y ago

Moody's also AAA rated a bunch of housing derivatives in 2008. Could it be like that? Maybe, maybe not, but someone should look into it. https://truthout.org/articles/the-indisputable-role-of-credit-ratings-agencies-in-the-2008-collapse-and-why-nothing-has-changed/#:~:text=As%20housing%20prices%20began%20to,even%20the%20most%20conservative%20investors https://truthout.org/articles/the-indisputable-role-of-credi....

NickC25 3y ago
Moody's gave them AAA ratings because just like the Moody's rep in The Big Short, Moody's has competition - a big bank doesn't like the rating Moody's gave their bonds? Oh, well, they'll just go to a competitor of Moody's, who is more than happy to give said bank the desired rating. Effectively the financial version of judge shopping.
- Clubber 3y ago
  Wouldn't KPMG have similar incentives?
  - jsmith99 3y ago
    Yes but countries generally have rules that require rotating auditors and inspection of a sample of audits by a regulator.
    - MilStdJunkie 3y ago
      A regulator who might have his eye on a swanky corner office at KPMG? That tight little ring-less executive assistant . . I say this without judgement; if there's any industry where the revolving-door policy has utterly destroyed value, it's mine. The good' ol military industrial complex. Hell we practically invented the revolving door. So anything I say here is going to be next-level hypocrite, givn where my checks come from.
      - NickC25 3y ago

itronitron 3y ago

Alternatively, it's like saying that there are more US banks that are going to fail...

rcme 3y ago

The water analogy is thus: everyone who dies drinks water, but lots of people drink water and don't die, therefore water is unlikely to be the cause of death. However, some estimate that over half of U.S. banks are insolvent. That's like half the population dying after drinking water. At what point do you start worrying about the water?

mikestew 3y ago
However, some estimate that over half of U.S. banks are insolvent. Some people don't understand fractional reserve banking, and consequentially make inaccurate estimates that make for clickable headlines but not useful analysis: https://www.investopedia.com/terms/f/fractionalreservebanking.asp https://www.investopedia.com/terms/f/fractionalreservebankin...
- makomk 3y ago
  They absolutely are useful analysis. The fact that under fractional reserve banking, banks do not have enough cash on hand to pay out all their deposits at once does not make them insolvent. Every time a bank writes a loan they create an asset (the loan) and a matching liability (the bank deposit created when that money was loaned out). Their inability to pay everyone out at once is a liquidity problem, not one of solvency; they have the assets to cover their liabilities so long as their loans are still good. (The banking system isn't actually fractional reserve anyway, but the exact details of why that's wrong aren't particularly important here.) The problems that've been happening recently - duration mismatches on ultra-safe assets like treasuries together with record rates of interest rate rises from record low levels - do actually make banks insolvent. The actual present-day market value of their assets is less than their liabilities to depositors because the fact that investors can get higher interest rates elsewhere means they'll only buy those assets at a discount that reflects the lower interest rate. Alternatively, the banks would have to pay more in interest to convince depositors to keep their money there until the assets reach maturity than they'd receive in interest themselves. Either way they're in deep trouble.
  - candiodari 3y ago

gamblor956 3y ago

KPMG audits more US banks than any other accounting firm because it is more willing to sign off on weak financial statements than any other accounting firm. They've been fined by the PCAOB for this several times and have lost several major clients (Skechers, Herbalife) in the Los Angeles area alone due to severe audit practice issues.

1letterunixname 3y ago

Yep. Exactly. Or they all had electricity. Correlation != causation.