On April 24, 2013, the Securities and Exchange Commission ("SEC") charged Capital One Financial Corporation (Ticker: COF), former Chief Risk Officer Peter A. Schnall, and former Divisional Credit Officer David A. LaGassa with understating millions of dollars in auto loan losses incurred during the months leading into the financial crisis. In anticipation of the institution of proceedings, the three respondents submitted Offers of Settlement (the "Offers") which the SEC accepted. The settlements were undertaken without admitting or denying the findings. Respondents consented to the entry of cease-and-desist orders and civil monetary penalties of:
SIDE BAR: Frankly, when folks in accounting start blaming failed computer modeling on high fallutin' "exogenous" things, it's a fairly strong hint that there is probably something fundamentally wrong with the assumptions and algorithms upon which the programming is based. For an interesting riff on a variation of this theme about going to the numbers when everything you believed proves wrong, see Joshua Brown's 'I'm Right, The Market Is Wrong' As Josh notes in his article: "The fancier the math one uses to justify an entrenched investment opinion, the more obscure and arcane the indicators employed, the more desperate and wrong that person is. . ."
Beginning no later than October 2006, Capital One started to face higher, unexplained loan charge-offs and delinquencies than it had forecast in virtually all of its consumer lines of business, including the credit card business, COAF, Global Financial Services and U.K. division. COAF continued to experience significant higher actual losses than forecast, referred to internally as adverse or negative variances, for the next four consecutive months. Moreover, COAF experienced negative variances across both dealer and direct lines of businesses and across both prime and subprime credit segments. Given the magnitude and broad scale of the losses, COAF was concerned that it was experiencing a credit turn, which was understood within the company to mean a phenomenon where there is a general worsening in the credit environment in a way that drives credit losses for consumer lending businesses.
Had Capital One incorporated the full exogenous worsening in COAF, its consolidated third quarter provision for loan losses would have been $647 million, an increase of 9% over the $596 million that was actually reported. Further, consolidated net loss for the quarter would have been $115 million, a 41% increase over the reported net loss of $82 million. For COAF, the provision for loan losses would have been $296 million, which is 21% higher than COAF's $245 million reported loan loss expense for the quarter. COAF's $4 million reported net loss would have been more than nine times greater than reported, or approximately a net loss of $37 million.
[T]he SunTrust whistle-blower complaint, which I reviewed, contends that company financial filings of recent years misrepresented the bank's exposure to risky no-documentation mortgages that it underwrote from 2006 to 2008. Many were sold to Fannie Mae and Freddie Mac, the taxpayer-backed mortgage finance giants.Shareholders have not been aware, the complaint says, that many mortgages SunTrust was selling to Fannie and Freddie in this period were so-called liar loans, with little to no documentation of borrowers' income or assets. The bank maintained that it had little exposure to low-documentation loans, the complaint says. . .