The Peter Principle is for Real

Hmmm.

The head of the UN Framework Convention on Climate Change, Yvo De Boer, is resigning that position to go to work for KPMG.

KPMG. The company that was auditor for New Century Financial.

You remember New Century? They went bankrupt because of their practices with respect to subprime mortgage lending. Then the bankruptcy court examiner accused KPMG of helping hide the accounting irregularities. To quote directly from Final Report of Michael J. Missal, Bankruptcy Court Examiner in re: United States Bankruptcy Court for the District Delaware, Chapter 11, Case No. 07-10416(KJC),

"The increasingly risky nature of New Century's loan originations created a ticking time bomb that detonated in 2007. Subprime loans can be appropriate for a large number of borrowers. New Century, however, layered the risks of loan products upon the risks of loose underwriting standards in its loan originations to high risk borrowers. For example, more than 70% of the loans originated by the Company had low initial 'teaser rates' that were highly likely to increase significantly over time. A senior New Century officer noted in 2004 that borrowers would experience 'sticker shock' after the teaser rates expired. More than 40% of the loans originated by New Century were underwritten on a stated income basis. These loans are sometimes referred to as 'liars' loans' because borrowers are not required to provide verification of claimed income, leading a New Century employee to tell certain members of Senior Management in 2004 that 'we are unable to actually determine the borrowers' ability to afford a loan.' Another common loan product offered by New Century that had a high degree of risk was the '80/20' loan, which involved two separate loans for the same transaction: a first lien mortgage loan with an 80% loan to value ratio and a second lien loan with a 20% loan to value ratio, resulting in a combined financing of 100% of the value of the mortgaged property. One Senior Officer of New Century noted in early 2006 that the performance of these 80/20 loans in 2005 was 'horrendous.'"

"The Examiner has completed his investigation and files this Final Report, The Examiner recognizes that the subprime mortgage market collapsed with great speed and unprecedented severity, resulting in all of the largest subprime lenders either ceasing operations or being absorbed by larger financial institutions. Taking these events into consideration and attempting to avoid inappropriate hindsight, the Examiner concludes that New Century engaged in a number of significant improper and imprudent practices related to its loan originations, operations, accounting and financial reporting processes. KPMG contributed to certain of these accounting and financial reporting deficiencies by enabling them to persist and, in some instances, precipitating the Company's departures from applicable accounting standards."

"KPMG contributed to these failings in critical ways. Among other inadequacies, KPMG failed to question or test certain important assumptions in a rigorous manner. The KPMG management team acquiesced in New Century's departures from prescribed accounting methodologies and often resisted or ignored valid recommendations from specialists within KPMG. At times, the engagement team acted more as advocates for New Century, even when its practices were questioned by KPMG specialists who had greater knowledge of relevant accounting guidelines and industry practice. When one KPMG specialist persisted in objecting to a particular accounting practice on the eve of the Company's 2005 Form 10-K filing -- an objection that was well-founded and later led to a change in the Company's practice -- the lead KPMG engagement partner told him in an email: 'I am very disappointed we are still discussing this. As far as I am concerned we are done. The client thinks we are done. All we are going to do is piss everybody off.'"

Somehow that last paragraph seems like it could fit the whole Climategate fiasco with just a minor tweaking. According to Fox News, "De Boer's resignation comes in the wake of the continuing Climate-gate scandal -- a story that began with the leak of stolen e-mails from top climate scientists and led to revelations of sloppy science, efforts to suppress dissenting opinions and ultimately flaws in the U.N.'s top climate policy document. "

The article concludes with, "De Boer said he will be a consultant on climate and sustainability issues for KPMG, a global accounting firm, and will be associated with several universities."

Fitting.

By the way -- those 80/20 loans that were made in 2007 and 2008 (and there were quite a few of them) -- are now resetting. Look for foreclosures to jump again toward mid-2010.