The 7th Circuit Court of Appeals recently rendered a decision which held that an accounting firm would not be held liable for giving an auditing opinion involving a purchaser company shortly before it acquired a dot.com-based business.

Before reviewing the decision itself it is quite interesting to read what the 7th Circuit stated about Trustee suits in general. First, the Court notes that unlike an ongoing business, a Trustee does not have to concern himself about “future relations with suppliers, customers, creditors, and other persons with whom the firm deals ... and by the cost of litigation. [W]hile the management of a going concern has many other duties besides bringing lawsuits, the trustee of a defunct business has little to do besides filing claims.” The Court of Appeals goes on to conclude that Bankruptcy Courts must be diligent to assure that Trustees do not bring frivolous claims and then reminds the Court of their power to sanction Plaintiff Trustees who bring frivolous suits!

The Court also noted that the damages claimed by the Trustee in his suit was greatly in excess of the amount owed the debtor’s creditors. Thus, the result of a successful suit would be to enrich the debtor’s stockholders. “US web cannot be at once the cause of the bankrutpcy and its principal beneficiary.”

As to the decision to find KPMG not liable for its auditing on the eve of the dot.com stock market debacle, the Court held that the cause of the decline in the value of stock (which was the basis for the damage claim) was market wide and had nothing to do with the audit. The Court also noted that it was not the duty of the auditor to advise on whether the company’s corporate acquisition was a good or bad risk (it turned out badly because of the stock market decline in 2000).

Here is a link to the case:
http://www.ca7.uscourts.gov/tmp/D40ND5S1.pdf

Michael

Despite the unorthodox moves by the Federal Reserves to open the federal lending window higher and make it available for more cash starved financial companies, not just banks, news comes today that Citicorp offered stock which raised 4.5 billion. "The sale [of stock today] represents about 3 percent of Citigroup's shares outstanding as of March 31. The world's biggest banks, grappling with more than $300 billion of losses on mortgages, bonds and loans, have sought new capital to stave off credit rating downgrades that might jeopardize client relationships and access to financing. Companies usually try to avoid forced stock sales because they dilute the earnings power of current shareholders.

"They need the additional capital," said Ben Wallace, an analyst at Grimes & Co. in Westborough, Massachusetts, which manages $800 million including Citigroup shares. "The dilution factor is a secondary concern these days." …

In total, the bank's capital raising has diluted current shareholders by about 20 percent, Wallace estimated."

Here is a link to the whole article: http://www.bloomberg.com/apps/news?pid=20601087&sid=aEdkikTTTWwA&refer=home

Michael

According to the S&P index, “the home price of 20 cities fell by 12.7 percent in February versus last year, the largest decline since its inception in 2001.” David Blitzer, chairman of the index committee at S&P said, “There is no sign of a bottom in the number” “noting that all 20 metro areas have declined for six straight months.”

The hardest hit states were Nevada, Florida and California facing foreclosure according to the 1Q results from RealtyTrac. “What would normally alleviate the foreclosure situation in a normal market is people starting to buy properties again," said Rick Sharga, RealtyTrac's vice president of marketing.”

“However, the unavailability of loans for people without perfect credit and a significant down payment is slowing the process, he said.

It's a cycle that's going to be difficult to break, and we're certainly not at the breaking point just yet," Sharga added.

The surge in foreclosure filings also suggests that much-touted campaigns by lawmakers and the mortgage lending industry aimed at helping at-risk homeowners aren't paying off.”

You can read the full articles regarding home prices and the growing foreclosures at:
http://biz.yahoo.com/ap/080429/home_prices.html?.v=4
http://biz.yahoo.com/ap/080429/foreclosure_rates.html?printer=1

Michelle

“U.S. bank failures could be on the rise as a weakening economy puts pressure on badly underwritten loans.” John Dugan, who is the comptroller of the currency for about 1700 national banks, said “the growing problems for lenders follows a period of almost four years in which no institution regulated by its agency had failed.” Dugan said “it is a natural consequence of the economy going from historically exceptionally benign credit conditions to something that is more normal to something you would get in a downturn.”

Mr. Dugan’s comments come at a time when U.S. banks report big spikes in expected losses on consumer and small business loans. “The largest U.S. banks, including Citigroup and Bank of America, have seen loan losses increase as more consumers fall behind on home equity, credit card, automotive and other consumer loans.” However, Mr. Dugan said he did not “expect failures to rise as high as during the late 1980’s when 534 banks failed in 1989 alone”. He said that “banks are now better capitalized, have better underwriting standards and did less speculative lending than during the late 1980’s and early 1990’s.”

Here is the link to the full article:
http://www.ft.com/cms/s/0/c4e0c530-10b1-11dd-b8d6-0000779fd2ac.html?nclick_check=1

Yameena

Rep. Barney Frank and Sen. Chris Dodd “calls for up to $300 billion in loan guarantees from the Federal Housing Administration to refinance loans that homeowners can't afford as long as the original lender reduces the principal on the loan to 85% of the home's current market value.”

“Backers say borrowers would get out from under unworkable debt and original lenders would get back more than they would foreclosing. It would also prevent 1.5 million foreclosures and halt home-price declines since it would keep more houses from flooding an already battered market.”

A Yale economist, Robert Shiller “thinks the plan will do little to stop the slide in housing prices.”

“Shiller notes that prices shot up 85% when adjusted for inflation from 1997 through mid-2006 and have fallen only about 15% since then.

Shiller adds that when compared to measures such as rents and household income, housing prices are still out of equilibrium.”

In addition, the FHA would be left with a large portfolio of loans backed by houses worth less than the mortgage. In other words, instead of banks facing foreclosure risk, the government (and hence taxpayers) would be on the hook for billions of dollars in bad loans.”

Here is a link to the full article:
http://money.cnn.com/2008/04/22/news/economy/housing_rescue/index.htm

Michelle