And You Thought SOX Was Bad

The globally interconnected financial system has been referred to as a house of cards. Bear Stearns, the investment bank whose sudden and impending bankruptcy was threatening to crash the system (and whose chairman, Jimmy Cayne, is appropriately a nationally ranked bridge player), will be sold to JP Morgan Chase in a transaction backed by the Federal Reserve.

Bear Stearns Cos. agreed -- after prodding by the federal government -- to be sold to J.P. Morgan Chase & Co. for the fire-sale price of $2 a share in stock, or about $236 million. Bear Stearns had a stock-market value of about $3.5 billion as of Friday -- and was worth $20 billion in January 2007.

The diminution of Bear Stearns’ shareholder value by 99% (!!) over one year is Enron-like in rapidity. The subprime / foreclosure / credit crunch mess may ultimately include among its victims the accounting profession, which is suffering through its second debacle this decade.

Sarbanes-Oxley legislation was enacted at great expense to prevent more Enrons. More internal controls and stricter rules against off-balance sheet debt and profit recognition were put in place so that management couldn’t “cook the books”.

Yet Bear Stearns audited balance sheet of November 30, 2007 may as well be a work of fiction. $11.8 billion of book equity has melted to $236 million in a scant three months.

BSC's 10-K from www.sec.gov (click image to enlarge)

One can understand the source of the accountants’ predicament—for example, fair value is a different measure in orderly versus fire-sale markets—and even sympathize, but I fear that the people and their representatives have stopped listening. © 2008 Stephen Yuen