Published January 15, 2013
NEW YORK – The group that sets U.S. accounting standards proposed tightening an accounting rule that brokerage MF Global used to obscure its exposure to risky European sovereign debt ahead of its bankruptcy filing in 2011.
The change, proposed on Tuesday by the Financial Accounting Standards Board, would make it harder for a company to use a particular kind of repurchase agreement - a form of short-term borrowing - to move debt off its balance sheet.
MF Global, which was led by former New Jersey Governor Jon Corzine, collapsed after investors and customers became rattled over the firm's $6.3 billion bet on European sovereign debt.
The case became a political flash point as investigators in Congress and elsewhere tried to identify the source of an estimated $1.6 billion hole in customer trading accounts.
MF Global used repo accounting to keep sovereign debt off its books, making the firm look less risky than it was.
"What the FASB has proposed has significant potential to close the accounting loophole that MF Global exploited," said Bruce Pounder, a director of professional programs at SmartPros, which provides education to accounting professionals.
COMPLEXITY OF RULE CRITICIZED
In a repurchase agreement, or repo, a company uses assets as collateral to borrow cash, with an agreement to buy the assets back. Normally, the repos are recorded as borrowings and do not move assets off balance sheets.
MF Global used a variation on repo agreements called a "repo-to-maturity." In a repo-to-maturity, the repurchase agreement expires at the same time that the collateral matures. MF Global recorded the repos as sales, not borrowings, keeping them off the balance sheet.
FASB's proposal would make it much harder for companies to account for those kinds of repos as sales.
The board is seeking comment on the proposal by March 29.
One problem with repo accounting is that it has become overly complex, which "invites mischief," said J. Edward Ketz, an accounting professor at Pennsylvania State University.
Even with the proposed changes, new firms would be able to come up with different abuses, he said.
FASB spokeswoman Christine Klimek said the board is encouraging feedback before the standard becomes final.
FASB has amended repo accounting before. In April 2011, it closed a different loophole, one used by Lehman Brothers Holdings to hide leverage ahead of its 2008 bankruptcy, which helped spur a global financial crisis.
(Reporting By Dena Aubin; Editing by Kim Dixon and Steve Orlofsky)