Student Loan Changes

[iamshack]

Can we be grandfathered in?

Oh, so it doesn't count for existing loans? Just future loans?

[Chisoxfn]

It is all related. Because of SOX when a bank makes a loan, they have to always have the value of their loan reported on their books. If they are giving out loans below market value, they have to report them as losses, which is counted as a negative against their capital requirements with the FDIC. The subsidy is the payment from the government to make up the difference so that the banks can stay in business while making these sorts of loans. The federal government isn't subject to SOX, so it doesn't matter what the loan's actual worth is. They don't need the subsidy in other words.

Hey Mike

 

What you are referring to above has no relevance to SOX. Sox was purely something created to ensure companies evaluated there controls and ultimately appropriately had the necessary controls in place to prevent from Fraud. IT also added a lot of responsibility to upper management to sign off and basically was set-up as a giant CYA for things like Enron.

 

I'm a little confused as to what accounting guidance you are referring to Mike, but my assumption is you are thinking about the mark-to-market?

[southsider2k5]

I see what he is saying about the asset accounting, but its unrealized P&L, so it doesn't matter here (that's where I agree with you).

 

The key parts as to cash flow, and as to taxpayer dollars, is the lack of subsidy (as SS pointed out), and it sounds like the interest amounts go to the Fed Gov't now as income to the D of Ed. Feds still take on default risk in either case, so that is no difference. Implementation costs will rise now however, which will negate SOME of those savings.

 

SOX is all about unrealized P&L. Think about the upsidedown real estate loans putting banks out of business. Its the same idea.

[southsider2k5]

Hey Mike

 

What you are referring to above has no relevance to SOX. Sox was purely something created to ensure companies evaluated there controls and ultimately appropriately had the necessary controls in place to prevent from Fraud. IT also added a lot of responsibility to upper management to sign off and basically was set-up as a giant CYA for things like Enron.

 

I'm a little confused as to what accounting guidance you are referring to Mike, but my assumption is you are thinking about the mark-to-market?

 

Mark to market comes about because of SOX. Companies have to report asset valuations accurately in real time.

[BigSqwert]

Hey Mike

 

What you are referring to above has no relevance to SOX. Sox was purely something created to ensure companies evaluated there controls and ultimately appropriately had the necessary controls in place to prevent from Fraud. IT also added a lot of responsibility to upper management to sign off and basically was set-up as a giant CYA for things like Enron.

 

I'm a little confused as to what accounting guidance you are referring to Mike, but my assumption is you are thinking about the mark-to-market?

QFT

[southsider2k5]

I'll bet dollars to donuts the subsidy existed before Sarbanes-Oxley. The loans still needed to be subsidized so that the banks would loan at below market rates (and so that student wouldn't be charged interest while they're in school). Why you're obsessed with the accounting angle is a mystery to me.

 

People are asking where the savings comes from, and why the subsidy is needed. That's where the accounting stuff comes from. Its not an obsession, is the the explanation.

[iamshack]

How the changes affect future and current loans

 

How will the new student loan reform bill affect graduates attempting to pay back their loans?

 

It will make it easier for future graduates to pay back their student loans. Starting with federal student loans taken out in 2014, future graduates will be able to sign up for an "income-based repayment" plan that will cap their monthly payments at 10 percent of their income. Anyone paying back federal student loans now can sign up for the current IBR program that caps payments below 15 percent of a graduate's income.

[Chisoxfn]

Mark to market comes about because of SOX. Companies have to report asset valuations accurately in real time.

Sox had nothing to do with mark to market. Mark to Market Accounting began in 1993 with FAS 115 (well before Sox). It was than superseded by FAS 157 which came out in 2006 (4 years after Sox).

 

FAS 157 came out due to the situation's associated with the beginning of the Mortgage/Real Estate crisis, not Sox. FAS 157's big impact was associated with the disclosures and types of analysis that needed to be performed on those hard to "value" securities which don't have readily determined market values.

 

I'm really really familiar with FAS 157 because I was in charge of auditing the entire mortgage loan portfolio with a company which had 111B in total assets, 4B of which were mortgage loans.

[Chisoxfn]

QFT

The key things that came out of SOX:

 

1. SOX 404 - Companies had to attest to there control environment (read up on COSO to learn more about the Control Environment) and the auditors than evaluated the controls as well and issued an opinion on the controls (much like we issue an opinion on the financial statements).

 

2. Public Accounting Oversight Committee - The audit firms actually got audited by a public department (in the past they were peer reviewed). Those public findings are documented and failures can become public knowledge (thus impacting our business).

 

3. Management had additional responsibility and the answer "We didn't know about it" wasn't good enough.

[BigSqwert]

The key things that came out of SOX:

 

1. SOX 404 - Companies had to attest to there control environment (read up on COSO to learn more about the Control Environment) and the auditors than evaluated the controls as well and issued an opinion on the controls (much like we issue an opinion on the financial statements).

 

2. Public Accounting Oversight Committee - The audit firms actually got audited by a public department (in the past they were peer reviewed). Those public findings are documented and failures can become public knowledge (thus impacting our business).

 

3. Management had additional responsibility and the answer "We didn't know about it" wasn't good enough.

Oh I know. I've been an Internal Auditor since 2001.

[Chisoxfn]

Oh I know. I've been an Internal Auditor since 2001.

What company you work for again? I've just moved into internal audit from external? Did you work in public prior to going into IA?

[BigSqwert]

What company you work for again? I've just moved into internal audit from external? Did you work in public prior to going into IA?

Currently at True Value and never went the public accounting route. I always valued work/life balance.

[bmags]

if any of you want an assistant i can type fast. I'll probably be on soxtalk all day though, i can give you updates.

[NorthSideSox72]

Mark to market comes about because of SOX. Companies have to report asset valuations accurately in real time.

Not in real time - on a daily basis. Real time marks on all assets are not possible.

 

And as others have said, the Unrealized P&L aspect, risk and asset valuation, are not what cause the savings here.

 

[RockRaines]

The key things that came out of SOX:

 

1. SOX 404 - Companies had to attest to there control environment (read up on COSO to learn more about the Control Environment) and the auditors than evaluated the controls as well and issued an opinion on the controls (much like we issue an opinion on the financial statements).

 

2. Public Accounting Oversight Committee - The audit firms actually got audited by a public department (in the past they were peer reviewed). Those public findings are documented and failures can become public knowledge (thus impacting our business).

 

3. Management had additional responsibility and the answer "We didn't know about it" wasn't good enough.

You forgot something:

 

$$$$$$$ for software companies.

[StrangeSox]

Currently at True Value and never went the public accounting route. I always valued work/life balance.

 

OT: consider the IRS route. My dad worked in the corporate world for years and had 60-80 hour weeks for a couple of months every year. Hasn't had anything close since going to the IRS, plus he gets to work from home a lot.

[southsider2k5]

Sox had nothing to do with mark to market. Mark to Market Accounting began in 1993 with FAS 115 (well before Sox). It was than superseded by FAS 157 which came out in 2006 (4 years after Sox).

 

FAS 157 came out due to the situation's associated with the beginning of the Mortgage/Real Estate crisis, not Sox. FAS 157's big impact was associated with the disclosures and types of analysis that needed to be performed on those hard to "value" securities which don't have readily determined market values.

 

I'm really really familiar with FAS 157 because I was in charge of auditing the entire mortgage loan portfolio with a company which had 111B in total assets, 4B of which were mortgage loans.

 

mark to market is the standard by which those controls are judged.

[southsider2k5]

Not in real time - on a daily basis. Real time marks on all assets are not possible.

 

And as others have said, the Unrealized P&L aspect, risk and asset valuation, are not what cause the savings here.

 

Banks can't make this loans without showing a loss. Banks can't take losses on assets because of their capital requirements. Not having to subsidize these loans is absolutely what the savings comes from.

[Chisoxfn]

mark to market is the standard by which those controls are judged.

No it is not. I know mark-to-market accounting like the back of my hand and there is zero correlation between mark-to-market accounting and SOX.

 

Do you need controls to ensure you perform mark-to-market accounting on your investments, definitely. But you also need controls to ensure you safeguard your cash and a bagillion other things associated with revenue cycles, payroll cycles, etc.

 

SOX did not create new accounting guidance (ie, how you account for something). SOX looked at things from the operational perspective to ensure controls were in place to prevent fraud, follow GAAP, and basically prevent significant mistatements.

 

A Change to mark-to-market accounting solely has to do with an adjustment to GAAP (Generally Accepted Accounting Principles).

 

As I mentioned, FASB 157 was the latest and greatest on mark to market accounting and SOX had zero impact on why FASB 157 came out.

 

157 came out because we were at a time where numerous companies were invested in securities, derivatives, mortgage loans which were under value and had very difficult to determine market values. Therefor we needed to find better ways to disclose and account for these investments and 157 did that.

 

The 157 disclosure in the 10K's (Annual Financials) are now very massive and the reason is to make the investments very transparent.

 

I was on calls for hours and hours at a time while we were speculating on what the "White papers" were going to say regarding 157 because I tested and audited investment's for a few years.

 

Our financials of the company we audited literally changed 30 times because the disclosure requirements kept getting adjusted before everything was finally finalized.

 

 

[southsider2k5]

No it is not.

 

Then how are they judging if the asset valuations are accurate?

[Chisoxfn]

Then how are they judging if the asset valuations are accurate?

To determine whether an asset value is correct, it depends on a whole slew of things and has to do with the valuation rules regarding investments (again part of FASB 157 and 117).

 

It depends heavily on the type of security.

 

If it is a publicly traded stock, easy, it is the ticker. If it is an equity fund that isn't readily traded, you typically get audited financial statements and utilize those to help determine the value of your investment (3 month lag is acceptable so if I was a company I'd most likely be utilizing the 9/30 interim statements as my mark to market for my 12/31/09 financial's; However a company needs to have a written policy if they are following that).

 

Depending on the degree of difficulty you might need to go to an independent pricing service who will appriase the security and give you a rough estimate as to the value of the stock and than the company will document why they took the price they did (and we the auditors would than review it).

 

If it is something where the intent to hold it is long-term, than it is a little different as you'd do a recover-ability test looking more at the future cash flow's, etc, but other triggers might force you to ignore the future cash flows and still write down to present value based upon various analysis).

 

None of the above things I say have anything to do with SOX. Sure, under SOX, the company needs to document the controls they have in place to ensure that all of there securities are appropriately valued, but they only have to do that because guidance exists (and existed well prior to SOX) that you need to mark to market.

 

Mark-to-market changed a bit in 2006 (mainly relating to the support needed and how to value investments without a readily determinable fair value) as did the disclosure requirements, but it also existed well before SOX was ever out there.

[Chisoxfn]

Then how are they judging if the asset valuations are accurate?

I actually edited my original post to include more info and have made a 2nd post on the subject.

[Chisoxfn]

And the real reason mark-to-market accounting became such a hot-ticket item is that in the past we had never had companies in a position where they were going to get absolutely f***ing destroyed because of the "un-realized" losses they were going to take.

 

A lot of people felt that if you didnt' intend on selling this investments and if you could maintain and hold long-term that it was really really stupid for people to have to completely write-off the investments value, thus creating even worse financial statements, and when those reports come out, they'll continue to push the economy further and further into the s***ter.

 

And that is where the hardest part lied, these investments that aren't readily traded that have estimated values which are only being sold in distressed markets so companies were claiming geeze, I got to right off 20B just to get to the value, but that is the value of a distressed market and the actual value really (If I held and utilized my cash-flows i'd earn) is 40B.

 

That is why we heard all about mark-to-market for a while during the initial crash.

[southsider2k5]

To determine whether an asset value is correct, it depends on a whole slew of things and has to do with the valuation rules regarding investments (again part of FASB 157 and 117).

 

It depends heavily on the type of security.

 

If it is a publicly traded stock, easy, it is the ticker. If it is an equity fund that isn't readily traded, you typically get audited financial statements and utilize those to help determine the value of your investment (3 month lag is acceptable so if I was a company I'd most likely be utilizing the 9/30 interim statements as my mark to market for my 12/31/09 financial's; However a company needs to have a written policy if they are following that).

 

Depending on the degree of difficulty you might need to go to an independent pricing service who will appriase the security and give you a rough estimate as to the value of the stock and than the company will document why they took the price they did (and we the auditors would than review it).

 

If it is something where the intent to hold it is long-term, than it is a little different as you'd do a recover-ability test looking more at the future cash flow's, etc, but other triggers might force you to ignore the future cash flows and still write down to present value based upon various analysis).

 

None of the above things I say have anything to do with SOX. Sure, under SOX, the company needs to document the controls they have in place to ensure that all of there securities are appropriately valued, but they only have to do that because guidance exists (and existed well prior to SOX) that you need to mark to market.

 

Mark-to-market changed a bit in 2006 (mainly relating to the support needed and how to value investments without a readily determinable fair value) as did the disclosure requirements, but it also existed well before SOX was ever out there.

 

This exactly what I am talking about with discounted loan valuations.

[kapkomet]

Sox had nothing to do with mark to market. Mark to Market Accounting began in 1993 with FAS 115 (well before Sox). It was than superseded by FAS 157 which came out in 2006 (4 years after Sox).

 

FAS 157 came out due to the situation's associated with the beginning of the Mortgage/Real Estate crisis, not Sox. FAS 157's big impact was associated with the disclosures and types of analysis that needed to be performed on those hard to "value" securities which don't have readily determined market values.

 

I'm really really familiar with FAS 157 because I was in charge of auditing the entire mortgage loan portfolio with a company which had 111B in total assets, 4B of which were mortgage loans.

 

 

That's not entirely true, Jason. You can make the leap that mark to market (FAS 157) came about as a result of Enron, because of two reasons. 1 - the market that Enron established was falsely valued and 2 - the off balance sheet crap (which is what is now being debated by FASB and IASB). Mark to market would have come about, but not because of SOX but it's certainly intertwined as to the reasons behind it. And mark to market is not just mortgage loan portfolios. It's only a small portion of the FAS.

 

ETA: I see you sort of addressed this but I still maintain what I said here, which makes a slightly different point then you were making.

Edited March 31, 2010 by kapkomet