reminder of our top stories this hour. the u.n. general assembly is discussing the situation in syria right now with some strong statements coming out as the chief says president assad has lost all legitimacy. no mandate for syria intervention the u.n. security council. global political focus shifts to the east where delicate iranian and afghan issues are discussed in beijing as meets with the country's leaders. and increased cases of assaults on women in egypt's tahrir square revealed the plight of female protesters whose hopes for democratic change is fading. well to our washington studios now as promised capital account with that is next.

good afternoon and welcome to capital account i'm laurin the store here in washington d.c. these are your headlines for wednesday june sixth two thousand and twelve j.p. morgan's two billion dollar london whale trading losses can be blamed on inadequate risk management that's according to one of the bank's main regulators who we've heard from today on capitol hill that will no kidding but whose job is it to police that it's the regulators so what does the relatively new comptroller of the currency say is the ready. strong executive supervision which is a theme that flows through my testimony and will mark my turn your as comptroller. will we know talk is cheap but wall street's groups are not so we'll talk about how and why regulations are being enforced and which other dogs refuse to bark also accounting is supposed to keep track of positions it's supposed to very literally

account for but do the latest m.f. global trustee report show how accounting has become the means used to hide risk and expand leverage in person to profit accounting watchdog francine mckenna is here to answer that and tell us what can be done about it and is it a sign of the times a bearish indicator we'll talk about the new survivalist a reality show or the winner gets a bunker let's get to today's capital account. so we heard from the head of the office of comptroller of the currency on capitol hill today as he testified before a senate panel now the o.c.c. is one of j.p.

morgan's made regulators that presumably blew it on catching the london whale trade despite having sixty five full time regulators on site at j.p. morgan now the o.c.c. is reportedly looking at whether the company provided regulators with adequate information and they're considering whether or not they're going to claw back money paid to the traders and executives responsible for this trading loss but it's a story we've heard before we've heard all this from j.p. morgan to m.f. global and throughout the financial crisis of course too much risk taking hiding that risk expanding leverage too much complicit complicity and wrongdoing with too little oversight so what is going on is this i don't know the ford pinto phenomenon remember the car with the infamous exploding engine you see there crash test found it was faulty but the assembly line was already made and the company found it would cost them less to deal with the liability of settlements than to recall or to

repair the cars so is that what we're seeing here with management and traders at these firms not to mention those who audit them it's just a bigger payoff to go along with and hide a massively risky trade even though it could very well blow up the liability of a lawsuit or whatever the fallout may be will simply cost less mana now but francine mccann is here to help us answer that and and talk about much more of this she's author of the blog read the auditors and a columnist for forbes and american banker and she's known as the accounting watchdog so we are so happy to have you in studio now down there you are with good well let's get right in this let's start with the m.f. global trustee reports that have come out from both of the trustees james givens who represents customers and louis freeh on behalf of. the creditors now they get this report didn't really have any new bombshells i mean i guess it's good that now we know he thinks he can pursue claims against john and some other executives for

negligence and fiduciary duty but the question is where is the customer money one point six billion dollars it's still missing one report i saw someone thought that it could take six years to get it back anything in these reports to indicate where it is. i read the reports i didn't see anything new there were a couple of soundbites liquidity. things like that a lot of people are reporting but in terms of facts in terms of actually who has the customer money we're not hearing anything new and they're not telling us they may have good reasons for that but it's satisfying and as far as. the trustee what else they insinuate about those counter parties which you say are really named there and there is some confusion about whether or not the trustee could sue them because of safe harbor provisions could that come into play here well there's always the possibility that they can say with m.f.

global in good faith that they were owed the money that they took the margin perhaps. legitimate trades they were owed money the problem is that we don't know really if that's what the customer money was used for that the customer money was used for. redemptions i saw a number that was larger than anything anybody in chicago and from chicago ever said in terms of friday the twenty eighth redemptions hundreds of millions of dollars wire transfer that's just incredible to me so those last minute money transfers and other kinds of transfers we're not really sure if that's legitimate but they can say those other side can say that they got the money of good faith and that makes it very very difficult but we don't know who they are we still don't know who the counter parties were for the report to maturity transactions no one is saying no one is saying so it's a big unanswered question let's talk about how those counter parties presumably got

customer money to begin with this report talks about some of these differences and regulatory reporting methods the alternative method versus the net liquidating method which were just spewed out and how they could use them which which they kind of shows between and there's also a distinction between how these. regulatory reporting methods apply to us segregated funds various say is segregated funds a broader foreign security account so you kind of explain how that all came into play accounting is difficult enough but when you start talking about regulatory reporting in this kind of environment in the futures commission merchant broker dealer it gets very very complicated remember a global was spun out of a million financial which bought refco this is a firm that's been around for a long time have been under the scrutiny of regulators for a long time so if they thought that they were able to identify how much they had to work with how much customer assets they could use potentially to fund the

proprietary trades by using various methods or looking at it in alternative way looking at intraday versus end of day balances they probably tried to do everything they could in order to squeeze a little bit more out so that they could send money york to london to cover the margin requirements the. transactions and i think that's what they do it it may have been strictly within the confines of either the u.k. or u.s. law the problem is they were on the edge that they went very close to the edge and perhaps over the edge then they came back then they probably went completely off the deep end by the end of that week before the bankruptcy so is this unquestionably regulatory arbitrage taking advantage of loopholes and regulations that's what it looks like to me i think we saw that they're able to do the multi-step process to take customer assets and customer funds and. proprietary

funds or house funds and then use those house spawns in such a way to potentially pay off margin requirements to pay off redemptions or to do other kinds of transactions with other counter parties that's you know something that's only possible in that we've seen possible another set. because of sending money outside of the united states and getting sort of the chain of custody of those funds and the characterization of who they really belong to a little bit confused or at least getting it to the point where someone is not asking as many questions what role does london play in this because this is something we see not just in m.f. global but it was on lehmann brother as we've seen in other cases we see it over and over again and if you recall lehman brothers there's still still waiting for the money. many many are still waiting for their money it's not a situation and some of the same banks of are involved and so the same trust is a good it's yeah i'm so these are people that know what they're doing they're

people that knew what they were doing when the fact that these transactions and now they're people that are trying to find them that have seen these things before the problem is why haven't the regulators put a stop to with a long time ago well why have they i want to bring up what another analyst said it was quote and making capitalism this was. michael mann's and he said the regulators could have shut him down on day one using intercompany accounting to game the regs is compliance one o one step so the regulators can't claim they were bamboozled by the slick ass guy in town is that you're a bigger company accounting is a classic. i think that. it's one of those things where it's very easy to make things confusing and i think we're seeing over and over again that regulators are two four six eight ten steps behind the bankers so what do you do it may be that you have to put the regulations and because there is no way the o.c.c.

spokesman said today that you can actually monitor or watch over it they don't know what they're looking at so what's the solution it's not more regulation we have plenty of them they're not being enforced. i think that they're not being enforced at all i think when you start to see the same things happening over and over again it is interesting comparison because you recall we heard some comments recently that the f.c.c. might not bring somebody with actually gives the executives that's the same situation they had regulatory personnel in lehman they knew that it was problematic they had people there it must be very difficult to be a regulator and try to come back later and say we were there we were sitting right next. we may have been having lunch with them and we completely missed it. let's talk about how this bamboozling happens with this repo to maturity trade their risk officer who was raising the red flag was fired half

a year after he expressed concerns regarding liquidity in the republic of maturity portfolio that was back in may of two thousand and ten and then september two thousand and eleven exposure was more than four and a half times and left global equities so break down for us how you go from a maneuvering a sixteen point five billion dollar debt into treating it as a sale as was done with these refer to maturity trades well reproach of maturity is not some kind of newfangled technique this is something that was global before only using treasuries very very very risky. and so the accounting for it is really pretty straightforward it's established in the same way that the report went to five accounting was established for leave that it's not the accounting it's the disclosure. we're not seeing really full disclosure and we're not seeing that appreciation of what is disclosed. the information that was out there for m.f.

global for a long time said that the company was having difficulty they were not making money there should have been a lot of scrutiny over how they were going to potentially bring back profitability avoid ratings downgrade it doesn't look like there was so so what does this tell us about off balance sheet risk more broadly and what's lurking around out there in the financial system that's not accounted for i think that there's still plenty of opportunity for companies especially the banks to take. liabilities in other kinds of problematic transactions off the balance sheet the problem is that even when they do disclose it's so difficult to understand and we're not focusing in on one of the most salient points was that they disclose the information about these trades and it wasn't until the wall street journal article came out about a month later that anybody paid attention to it there's something wrong with that picture and it shouldn't be that the regulators get

a clue about what's going on from the newspapers either yeah it certainly shouldn't be especially when it's right under their nose and they are working that when we get back i want to talk about all of this as it applies to j.p. morgan and get to the auditors by the way and j.p. morgan share the same one we will have much more after the break francine mckenna author of the blog the auditor. also still ahead survival less are prepping for more than just the end of the world they're going to be on t.v. we'll give you our three cents on the grand prize a new reality show is offering up but first your closing market numbers.

with. science technology innovation all the moves developments around russia we've got those huge earth covered. thank you. welcome back we're talking about massive risk taking and the leverage expansion that leads to firms going bankrupt or losing a lot of money stealing from customers in some cases just the right now as in a systemic only important or does detrimental disaster is institution depending on how you look at it in the case of j.p. morgan we're talking to francine mccann as she is the accounting watchdog author of

blog the auditors columnist for forbes american banker she's talking about how this all is allowed to go down and how the regulators are not catching it so one other factor in here that we haven't touched on yet is the auditors it's hard to imagine that the auditors didn't know what was going on at a firm like m.f. global and they signed off on it so i think we're talking about m.f. global we're talking about j.p. morgan interesting lou they have the same auditor you see press wire house coopers . institution that audit firm is filled with j.p. morgan since the sixty's isn't necessarily complicity i think it's more complacency long long relationships very lucrative relationships level of comfort with people like jamie diamond who is a very you know savvy person over time i think the auditors become very complacent and they've missed something because they decided they're not going to look that much harder with somebody reassures them or tells them there's nothing they're

similar to the regulators and are they held accountable because looking back to enron when you think enron you also think the accounting firm anderson that was very much why ound up and that you don't hear about the accounting firms anymore really or the auditing firms so sunroom i think the accounting firms of very very good neutral playing switzerland helping with these investigations they're probably working in the background talking to both congressional investigators law enforcement and other investigators but they've done a good job of convincing everyone. the facts these frauds are the facts these manipulations and they're just there to sort of report of this but tells them if they end up getting duped well. there's not much that they can do about that we didn't know the same thing that everybody says so as far as what management does say let's look at the example of jamie dimon and j.p. morgan we'll see jamie dimon on the hill next week this week they just talked about

it with the regulators but he called this the london whale trade and we even heard regulators today say it's too preliminary to judge whether or not this would have violated the volcker rule which is supposed to eliminate proprietary trading at these federally insured banks but as far as jamie dimon calling it a hedge why don't we look at the language of business as you were telling me is this. officially an accounting well from a for the reporting perspective from the q. from the. credit default swaps were not treated with accounting rules they did not qualify for hudson county which is why you had losses without a direct offset and they use something else in their back pocket that is available for sale securities where they realize and they've mitigated the losses that they have but in general those two are not tied together except for now in history.

right so do you buy what we said at the top of the show that accounting is used to hide risk and to expand leverage and not to account for things very efficiently and also that it's a choose your own adventure and you can you can choose to go with the accounting when you want and choose to not look at the accounting when it suits you better. as we were discussing the length of business but it should really be dictating what you're saying about your business and i think too often it's used as a tool when you want to make things look better than you choose something that makes it look better when you want to make something the. looking to good look a little less that you can try to mitigate using the accounting there's a certain amount of flexibility a certain amount of judgment and that's also the thing that auditors will say is that well our judgment. judgment it's very difficult to second guess that after the fact is this a system that regulations can't control looking because it just seems like there's

a way around everything well i'm certainly in favor after the crisis of going back and simplifying i don't think that federally insured institution should be making proprietary bets in particular when you're talking about the chief investment office of j.p. morgan. you see the auditor should've looked at that and said what's going on here why do we have traders making you the normal amount of money for the bank getting paid an enormous amount of money this is supposed to be a very simple administrative function of investing deposits this is not supposed to be well done will the london based trading operation and so they should have asked questions they should have looked to see what kind of procedures policies controls are in place they would have probably seen that that group was to go wild yeah in order to make profits and as far as punishments whether we see clawbacks in that case or whether we see criminal charges in the case of john corazon or any of these actors at m.f.

global that very well look like they stole customer money it looks like there could be criminal fraud charges or at least a case do you think we'll ever see that because you actually said that looking at another firm at sentinel where we have now seen a criminal indictment but you years later you compared them and you said yeah of course i could get charges just might take a long time sentinel is a case that's very similar to global much smaller scale they were actually a futures commission broker. visor that was their customers their customer base and when i talked about that in relation to global that he said well but there were mistakes and there were errors and there was a. commingling of customer funds with the house the codes but nobody was ever indicted nobody was ever charged you know these things happen and things get sloppy however five six years later now the same day the mortgage agreed to return some of the money some of the global's money and we came out and they will charge the c.e.o. and the c.f.o.

so it's never too late it takes an awful long time we have to have the norm this amount of patience which as you said by the time it happens it may not be the deterrent as five years from now people may be going well yeah i kind of remember m.f. global when really those signs need to be set now arguably we have to leave it there for today i really appreciate you being on the show real pleasure to get your insight on all of this and your expertise that was francine mckenna author of the blog read the article. all right let's wrap up with loose change because it's the recent cases of cannibalism in the news have you worried about it zombie apocalypse which we've talked about and economic terms before there is good news for you actor and former

saturday night live cast member andy samberg made a p.s.a. about it it's important to remember that whatever they look like you shouldn't. i mean the samberg internet personality and spokesman for citizens are not naturally adjusted by american sleep or cannibals. or if you're really worried and you're also worried about some of the other impending issues economically or otherwise this spike television network will be airing a new show this fall called the last family on earth is a survivalist show and if you when you get an underground bunker and undisclosed location we're not joking and the reason we bring this up is because dimitri you are an amazing producer but i would understand if you tried out for this show because actually it would be a good fit for you because the audience probably doesn't know this but you're a bit of a survivalist yourself why do they think that you're

a proper artist and i want to know if you're properly it is true i have a unit and i have one years of the food supply but i won't tell you words on the occasion but all of a bumper bunker and that's. expensive right so i would love to have one of those things as well as the there's no hurry to get there if you and all of our call me i could do a timeshare maybe. doesn't cut it but you know maybe we can do. this is interesting i mean i think is a good idea i don't know sharon sharon was talking about how much she wanted to have is that right shannon actually i don't want to have a bunker but i will say that there's supposed to be some sort of social media viewership voting that will help decide who the winner of the show is if either of you want to go on the show i think our viewers would help out with you know when in a bunker look it's good to have a bunker it's good but i mean if you if you can afford it it's great to have a survival strategy because this whole argument that i hear that you are right where you can holler for which was which was. i don't want to live anywhere sort of

and work that way watch the road to see the road ok you'd be better off having a bunker being somewhere safe you've got to be by cannibals true in your face off running around with your gasoline ok as well as the sky i'm toast so let's move on bidding for more in buffett's charity luncheon is live on e-bay this week it's got off to a slow start this year reportedly but here's what last year's winner paid. how about lunch for two point three million dollars that's what someone paid for a private lunch with billionaire investor warren buffett but here's the catch buffett will talk about everything except this future stuff. so why are people spending millions of dollars for lunch with worry about that they don't even get a stock big come on you got to be kidding right you know what how this works right this is not this is post capitalism and warren buffett was made to be. spot a kid ok and all of a ruling elite all right if you lowered our boy remember right so this is probably

where you are all of those per million dollars of most of the it's a great for the quarter of them called their good news good graces and maybe mary's daughter up to his youngest you know nephews cousins pizza delivery boy and they could have lived in omaha nebraska or shannon knows why people would shell out that much money to go to lunch with them one guy i think it was like two years ago got a job weren't offered offered him a job however i don't know if i would be willing to pay as much money as he did in order for warren buffett hire me two million dollars but had to pass must be higher as it actually does it or it's prefer not to care anything if you don't have much wanted to have dinner with some guy to give you a job that's a job that's better let's move on because a new report by the congressional budget office says rising health care costs will continue as a main factor contributing to us debt but we want to remind you because a lot of people are running with this report before you believe anything that c.b.s.

says at face value remember what the whistleblower on our show said just last week about whether or not we should be questioning their political motivations as her experience showed listen to land family she said this on our show last week so this is a question that i put to the public for them to the congress. and see if you. who it is that this is and that's because she was fired in her view because she wouldn't pay a rosier picture of the housing sector the banking sector then what this cvo wanted or what the wall street advisors wanted so go watch her interview again see a whistleblower land family before you read anything coming out of the cvo and that's it for our show today thank you so much for watching and be sure to come back tomorrow and in the meantime you can follow me on twitter please do at lauren lyster and give us feedback on the show and subscribe at youtube dot com slash

capital account c s n h d on hulu and come back tomorrow for another show have a good thanks.