By Malcolm Maiden
MARK to market accounting is causing mayhem in this financial crisis, as banks and investment vehicles bring the book value of compromised assets back to either their traded prices, or an accounting guesstimate of what that traded value might be.
But there's one asset on the US Government's book that is it not being marked to market, and if it were there might be a bit more optimism about America's ability to dig itself out from under.
The US Government's gold reserves stood at 8133.5 tonnes at September last year.
That's about three quarters of the world's gold held in foreign exchange reserves. Other countries have run down their holdings of physical gold and replaced them with foreign currency holdings, mainly in US dollars, and on a combined measure, the US is an also ran, with reserves of about $US71 billion.
China tops the list, with reserves of $US1.95 trillion at the end of last year. Japan has reserves of about $US1 trillion, the eurozone has reserves of about $US430 billion and Russia has reserves of about $US382 billion.
But gold is booked for reserve calculations at the old Bretton Woods price of $US35 an ounce. At gold's current price of about $US935 an ounce, America's 8133.5 tonne or 261.5 million ounce stockpile is worth about $US245 billion. Mark it to market, and US reserves leap to $US306 billion — still less than China and Japan, but in the same league as Europe.
It is still not a lot compared with the amount the US Government is throwing at the crisis: the Obama Administration intends to spend $US3.6 trillion and run a $US1.75 trillion domestic deficit in its 2009-10 September fiscal year, pushing America's total debt load beyond $US11 billion.
More than half that debt is in the form of US Government bonds and notes - the paper that other governments, including China and Japan, are overwhelmingly invested in: the hidden value in America's gold vaults and faith that the US will always be good for its debts may help explain why US bonds continue to be bought, even though America is Crisis Central.
IT'S worth comparing APRA's response to NAB's $360 million foreign exchange loss crisis in 2004 with last week's ASIC response to ANZ's Opes Prime affair.
The Australian Securities and Investments Commission, the securities regulator, conducted the Opes probe because shares and margin loans were at the heart of the debacle. The Australian Prudential Regulation Authority (APRA), the bank regulator, maintained a watching brief, but was not directly involved.
ASIC has extracted an enforceable undertaking from the ANZ that requires the bank to fix what ASIC says are weaknesses in its custodian services and securities lending unit, the branch that was the conduit for Opes funding. The weaknesses include compliance breakdowns and inadequate resourcing and risk management.
ANZ and Opes' other lender, Merrill Lynch, have been granted a waiver from legal action subject to their completion of a proposed settlement that will see $253 million paid to Opes' liquidator.
However, ASIC says it could decide to launch legal action if the proposed settlement falls through, and says that it could also decide to qualify ANZ's financial services licence if the bank fails to deliver on the terms of its enforceable undertaking.
The remedies and ASIC's comments were a public reprimand for ANZ, but they do not suggest, however, that the regulator has concluded that the Opes affair has revealed group-wide structural flaws and systemic risk inside the ANZ.
A much more sweeping verdict was handed down after NAB's foreign exchange loss debacle.
After examining what happened, APRA, in March 2004, ordered NAB to totally overhaul its internal risk assessment and reporting systems, and told the bank that, pending the successful completion of that task, NAB was to scrap its internal risk assessment model, lift its total capital adequacy ratio from about 9.7 per cent to 10 per cent, and close its foreign currency trading desk to corporate business and principal trading.
One key difference was where the problems were located.
The Opes affair centred on finite loan exposure of about $1 billion for ANZ and Merrill that was secured by shares.
NAB's currency losses were minor relative to NAB's size, but the errors in reporting and oversight and the culture of fast profits that produced them had the potential to create a crater.
Similar reporting and oversight problems inside a French bank, Societe Generale, resulted in a lone trader, Jerome Kerviel, running up losses that were estimated early last year at €4.7 billion or $US7.1 billion at the going exchange rate.
APRA stated in March 2004 that the problems it had identified inside NAB did not threaten the bank's viability.
But in its report on the affair, it stated that NAB's internal control systems failed at every level - line management, back office, middle office, risk committees, internal audit and at board and board committee level - to detect and halt the rogue trading. "That this could occur is symptomatic of an organisational culture that did not have sufficient regard to risks attendant," it observed.
With APRA looking in on the examination of the Opes collapse, ASIC could have come out with similarly sweeping criticisms of ANZ. Instead, it confined its criticisms to ANZ's custodian services and securities lending business, and, by implication, the institutional division that controlled it.
One conclusion, encouraging in these difficult times, is that the oversight and risk control issues Opes Prime revealed inside ANZ were aberrational - or, at least, are aberrational now: ANZ quit securities lending in the wake of Opes, and completed an in-house probe last August that ordered up much the same remedial work that ASIC is now enforcing.
The Maiden family owns NAB shares.