U.S. Accounting for the Fiscal Response to the Financial Crisis - - PowerPoint PPT Presentation

U.S. Accounting for the Fiscal Response to the Financial Crisis

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Principal Entities Involved in Fiscal Response

• Department of the Treasury
• FASAB standards (The Federal Accounting

Standards Advisory Board)

• September 30 year-end
• Federal Deposit Insurance Corporation
• FASB standards
• December 31 year-end

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Principal Entities Involved in Fiscal Response

• Federal Reserve
• not part of the federal government reporting entity
• Financial statements prepared in conformity with

accounting principles established by the Board of Governors – comprehensive basis of accounting other than GAAP

• generally follow FASB standards, except for

securities in SOMA (amortized cost versus market value) and omission of Statement of Cash Flows

• December 31 year-end
• variable interest entities – consolidated under FASB

standards

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Federal Government GAAP

• Many of the Federal Government’s transactions occurred

after September 30, 2008 and have not yet been reported on a GAAP basis

• FASAB statements do not directly address some of these

transactions because they are new to the federal government.

• In such cases, agencies follow the GAAP hierarchy to

determine the appropriate accounting principles to be applied.

• FASAB is developing a new accounting standard that

generally will adopt the GAAP hierarchy currently contained in auditing standards.

• Also, the FASAB has a current project on the definition of

the federal entity

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FASAB Credit Reform Accounting - Loans and Loan Guarantees

• loans receivable - present value of expected net cash

inflows from the loans.

• liability for loan guarantees - present value of estimated net

cash outflows due to the loan guarantees.

• adjusted for modifications made during the year to loans

and guarantees outstanding and for reestimates made as of the end of the year

• discount rate – interest rate of marketable Treasury

securities with similar maturity to the cash flows, applicable to the period during which the loans are disbursed/ guaranteed

• for budget purposes, Troubled Asset Relief Program

(TARP) transactions are to follow modified credit reform, where the discount rate is adjusted for market risks.

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FASAB - Contingent Liabilities

• Contingent liabilities - recognized when all of the

following three conditions are met:

• A past event or exchange transaction has occurred
• A future outflow or other sacrifice of resources is probable (more

likely than not)

• The future outflow or sacrifice of resources is measurable
• If a range and some amount within the range is a better

estimate than any other amount within the range, that amount is recognized. If no amount within the range is a better estimate than any other amount, the minimum amount in the range is recognized and the range and a description of the nature of the contingency should be disclosed.

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FASAB - Contingent Liabilities

• Contingent liability disclosed if any of the

conditions for liability recognition are not met and there is at least a reasonable possibility that a loss or an additional loss may have been incurred.

• “Disclosure” in this context refers to reporting

information in notes regarded as an integral part of the basic financial statements.

• Disclosure should include:
• the nature of the contingency
• an estimate of the possible liability, an estimate of the

range of the possible liability, or a statement that such an estimate cannot be made.

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Treasury Capital Purchases (Preferred Stock and Warrants)

• Fannie Mae and Freddie – recorded as of

September 30, 2008

• Investment valued at cost, with allowance for

impairment

• Stock and warrants received in exchange for

guarantee (cost = fair value at acquisition)

• Warrants – Black-Scholes Option Model
• Preferred stock - interpolation of market prices for

(i) Fannie Mae and Freddie Mac subordinated debt, as adjusted for the tax advantage of stock dividends compared with taxable interest, and (ii) Fannie Mae and Freddie Mac preferred stock.

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Treasury’s Troubled Asset Relief Program (TARP)

• Budget
• Initially recorded 100% of payments as budget

expenditures

• Changed to modified credit reform accounting

(discount rate is adjusted for market risks)

• Proposed GAAP basis
• Modified credit reform
• Need to evaluate impact on true loans receivable and

loan guarantees

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TARP Investments

• Purchase of preferred stock and stock warrants
• Loans
• Asset guarantees
• Public-private investment program – planned
• Other programs - Making homes affordable –

costs related to facilitating affordable mortgage modifications

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Mortgage Backed Securities (MBS)

• Under the authority of the Housing and Economic

Recovery Act of 2008 (HERA), Treasury makes MBS purchases (issued by GSE’s) in the open market.

• As of September 30, 20008, Treasury planned to hold its

portfolio of MBS to maturity unless, based on mortgage market conditions, sales are necessary.

• The MBS program is accounted for under traditional

credit reform accounting.

• For fiscal year 2008, GSE MBS subsidy rate was

negative, indicating Treasury expects to earn a return on its investments in these securities, and resulting in recognition of a gain on such securities.

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Deposit Insurance and Debt Guarantees

• FDIC Deposit Insurance limits of coverage were

raised in 2008 from $100,000 to $250,000 per depositor through December 31, 2009

• Revenue is recorded based on quarterly

assessments from insured depository institutions.

• Such assessments may be raised to allow FDIC

to maintain reserve ratios with statutory ranges.

• Currently, FDIC has levied a special assessment
• n insured depository institutions to raise reserve

ratios.

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Deposit Insurance and Debt Guarantees

• FDIC records a contingent liability and a loss

provision for FDIC-insured institutions that are likely to fail within one year of the reporting date, absent some favorable event such as obtaining additional capital or merging, when the liability becomes probable and reasonably estimable.

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Deposit Insurance and Debt Guarantees

• FDIC established new Temporary Liquidity

Guarantee Program (TLGP)

• Debt guarantees – eligible newly issued senior

unsecured debt

• Full deposit insurance coverage for non-interest

bearing deposit transaction accounts

• Separate fee charged
• FDIC will make additional assessments on FDIC-

insured depository institutions to recover any excess

• f costs of the TGLP over fees received.
• FASB guarantee accounting

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Other Guarantees

• Citigroup
• Treasury and FDIC to share losses with Citigroup on

an asset pool for any losses in excess of $39.5 billion.

• Treasury and FDIC have a maximum exposure to any

losses that may be offset by the value of the preferred stock issued to them by Citigroup.

• Bank of America
• Treasury and FDIC to share losses with Bank of

America on an asset pool for losses in excess of $10 billion.

• Treasury and FDIC have a maximum exposure to any

losses that may be offset by the value of the preferred stock and the warrants issued to them by Bank of America

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Legacy Loan Program

• Under this program, FDIC will, for a fee,

guarantee debt of public-private partnerships to be established to purchase loans from financial institutions.

• Treasury will contribute partnership equity equal to

private sector equity

• FDIC will make additional assessments on FDIC-

insured depository institutions to recover any excess

• f costs of the TGLP over fees received.

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Status of Fannie Mae and Freddie Mac

• Under HERA, on September 2008, the U.S. government

placed Fannie Mae and Freddie Mac under conservatorship.

• The Office of Management and Budget (OMB)

determined that, at that time, the GSE’s would not be included in the budget.

• Statement of Federal Financial Accounting Concepts

(SFFAC) No. 2 provides conclusive and indicative criteria to be used in determining whether an entity should be consolidated in the federal government’s GAAP financial statements.

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Status of Fannie Mae and Freddie Mac

• Fannie Mae and Freddie Mac were not consolidated in

the federal government’s financial statements as of September 30, 2008.

• it is not included in the budget (the conclusive

criteria),

• the control was deemed temporary
• consistent with treatment of conservatorships and

receiverships at FDIC.

• this position will be reevaluated, based on any change

in conditions.

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AIG

• Convertible preferred shares held in trust for the

sole benefit of the federal treasury

• Accounting treatment to be determined

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Federal Reserve Valuation Basis - Loans

• outstanding principal balances net of unamortized

commitment fees

• interest income is recognized on an accrual basis.
• loan commitment fees are generally deferred and

amortized on a straight-line basis over the commitment period, which is not materially different from the interest method.

• Allowance for loan losses equal to the difference

between the recorded amount of the loan and the amount expected to be collected after consideration

• f the fair value of the collateral.

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Federal Reserve Valuation Basis – Commercial Paper held by the CPFF

• amortized cost under SFAS 115
• positive intent and the ability to hold the

securities to maturity

• amortization of premiums and accretion of

discounts on a straight-line basis

• not materially different from the interest method.
• Allowance for any impairment in value that is

deemed other than temporary

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Federal Reserve Valuation Basis – ML (Bear Sterns Assets)

• fair value option elected for all eligible assets

(SFAS 159)

• Other financial instruments, including derivatives

contracts, are recorded at fair value (SFAS 133)

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Federal Reserve Valuation Basis – ML II and ML III (AIG-related assets)

• all investments are recorded at fair value (SFAS

157)

• non-registered investment companies under

American Institute of Certified Public Accountants' Audit and Accounting Guide for Investment Companies

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Federal Reserve Valuation Basis – Longer-Term Securities

• Government-sponsored enterprise (GSE) debt

and mortgage-backed securities held in SOMA account

• Longer-term Treasury securities
• Amortized cost
• Differs from GAAP fair value
• Gains and losses are incidental to open market operations

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Federal Reserve Valuation Basis – Citigroup Loan Commitment

• Accounted for in accordance with FASB

guarantee accounting (FIN 45)

• As of December 31, 2008, both the probable loss

and the fair value of the Bank's loan commitment were deemed to be zero, because under a range

• f scenarios it is unlikely that the Bank will be

required to make the loan.

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Questions?