Italian Banks Pushing For Mark-To-Market To Benefit From Surging Price Of... Gold

I've been proposing this for a while.  It'll never happen, not if Bernanke tand he rest of the central banking cartel can help it.


http://www.zerohedge.com/article/italian-banks-pushing-mark-market-benefit-surging-price-gold

As Bankers Kill Off Mark-To-Market For Good, Former FDIC Chairman Gloats

http://www.zerohedge.com/article/bankers-kill-mark-market-good-former-fdic-chairman-gloats

My take away message?  Accounting fraud is now not only legalized, but institutionalized.  Banks cooking their books is now OK.  The wonderful world of high finance...

Mark-to-Make-Believe Perfumes Rotten Loans

http://www.bloomberg.com/news/2010-11-18/mark-to-make-believe-perfumes-rotten-loans-commentary-by-jonathan-weil.html

Fed may go bankrupt

http://kingworldnews.com/kingworldnews/KWN_DailyWeb/Entries/2010/11/5_Jim_Rickards_-_Fed_May_Go_Bankrupt.html

Right now the Fed’s balance sheet shows about $57 billion in total capital. Current assets are about $2.3 trillion. The current money-printing plan will take total assets above $3 trillion. At that level, it only takes a 2% decline in asset values to wipe out the Fed’s capital. Put differently, it only takes a 2% drop in the average value of assets on the Fed’s balance sheet for the Fed to go bankrupt. And this is in an environment where various markets frequently go up and down 3% in a single day.

The Fed is saying don’t worry about mark to market losses because we will hold the bonds. The Fed is saying don’t worry about inflation because we will sell the bonds. Both of those statements cannot be true at the same time. You can hold bonds and you can sell bonds but you can’t do both at once. You will want to sell when rates are going up but that’s when losses will be the greatest. So the time when you most want to sell is the time when you will most want to hold.

So, here’s the bottom line on money printing, or QE if you prefer. If nothing happens, the whole thing was a waste of time. If inflation takes off, the Fed will have to choose between holding bonds and letting inflation get worse or selling bonds and going bankrupt in the process. Since no entity goes down without a fight, the Fed will naturally hold the bonds and let inflation take off. Do not ask about the exit strategy from QE; there is no exit.

The true cost of closing failed banks

The FDIC's true cost of closing failed banks into receivership is much higher than initially calculated, thanks to the FASB's "pretend and extend" false accounting methods. This "cooking of the books" throws out GAAP "mark to market" accounting, and overstates the value of toxic assets, in an attempt to feign bank solvency. In the final analysis, this will just be another larger burden on the US taxpayer.

Jim’s Mailbox

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Information released by the FDIC in connection with each new bank closing has been giving us a peek into the real condition of U.S. banks one year after the Financial Accounting Standards Board (“FASB”) suspended fair value accounting requirements. Across the board, we are seeing that banks have radically over-valued their least liquid assets on the basis of a fantasy called “hold to maturity.”

Banks’ fantasy valuations are put to the test when it becomes incumbent upon the FDIC to close the bank and protect depositors’ assets. At that stage, the FDIC has to find a willing buyer for the assets and fair market value is established. As a result, it is now costing the FDIC unprecedented amounts to close banks.

The problem actually goes one step further. As we know, the government’s current economic policy is one of Manipulation of Perspective Economics (“MOPE”) and Pretend and Extend. MOPE does not permit too much bad news to be released at any one time, and Pretend and Extend puts problems off to the future on a presumption that conditions will be quickly improving.

It would be too much bad news all at once to let it be known what banks’ fantasy-valued assets are actually worth. Therefore, instead of selling off banks’ assets “as is” and taking its lumps all at once, the FDIC is now routinely entering into loss-share agreements as to virtually all the assets sold. That allows the FDIC to not have to book the full extent of its losses at the time each bank is closed, but is also leading to the FDIC taking on the risk of huge future losses.

The FDIC is already broke, so any future losses it takes on are liabilities of the U.S. public. The combined policies of MOPE and Pretend and Extend are once again making it inevitable that quantitative easing must continue indefinitely.

GE's balance sheet

Look at General Electric's debt--$518 billion. That should scare any bean counter. They've lost their AAA credit rating, yet the government gives them cheap loans, keeping their borrowing cost at 3.3%. Even at that low borrowing rate, they have trouble covering their expenses. For reference, GM's debt was $82 billion at one point. I'm not even sure how GE Capital accounts for their bad loans and toxic assets, since the government allowed for mark-to-fantasy accounting instead of GAAP mark-to-market accounting standards.

http://www.reuters.com/finance/stocks/incomeStatement?stmtType=BAL&perType=INT&symbol=GE.N

No wonder they are selling assets like NBC Universal. Gotta keep the lights on.

What to do about Toxic Assets

I've never professed to be an economist, and I know little about politics and economic policy. I do try to apply common sense, sprinkled in with morsels of demand/supply dynamics and market timing. I've never proffered up solutions to our global financial crisis due to its depth and severity, but it's gotten to the point where I feel the need to throw my hat into the wring. So here goes:

Credit default swaps (cds), which basically insured the collaterized mortgage obligations (cmo), were transacted between private parties (banks, sovereign funds, pension funds, hedge funds, private equity funds, AIG), outside of exchanges. The quants used algorithms (specifically, Gaussian copula) to price these mortgage-backed securities and swaps, and the software models blew up when real estate values plummeted and defaults skyrocketed. We've covered this topic ad nauseum.

For equities, we have the NYSE, NASDAQ, and other stock exchanges around the world. For fixed-income (bonds), derivatives (options, futures), and commodities, we have the CBOE and COMEX exchanges, for instance.

How about the buyers of these swaps open up their kimonos, and expose these assets? If they don't like the mark to market pricing, put them all onto an exchange, where all parties can see the composition of assets, and then let the markets decide how much they are really worth. If that means they are only worth 20 cents on the dollar, so be it--let them take a bath on them. That's better than burying it in their portfolio, pretending they aren't there. And once exposed, perhaps they are worth more than current panic levels....maybe they would get 60 cents on the dollar. Mark to market accounting prices these assets at liquidation levels, so they would be lucky to get 10 cents on the dollar. The underlying environment is that over 90% of mortgages are not delinquent--yet mark to market valuation prices in a 30% default rate.

Banks have what consumers are experiencing: 401K syndrome. Individuals aren't even opening up their mail because they are scared to see how much their 401K statements have declined.

During the Savings and Loan (FSLIC) crisis, the RTC was formed to consolidate these bad loans, write them down, price them, and sell them off. Granted, today's financial crisis is orders of magnitude greater, but the concept should be the same. Put a Bill Seidman in charge of disposing the assets.

To just sit on the these toxic assets--hoping home balance sheets will magically improve, and defaults will magically decrease--is lunacy if unemployment keeps rising.

In other words, because these transactions were synthetic, outside the auspices of an exchange and subject to mispricing, wouldn't it make sense to put them all into an exchange, and have markets price them in a transparent environment?

For instance, on a micro level, when a borrower defaults, no one knows how much that house is worth anymore. Other homes in the neighborhood are affected, and the more foreclosures, the more distorted the pricing. But put them up into an auction in a foreclosure sale, and the market determines the value of that house--and other homes in the neighborhood.

It seems logical, but I'm not sure the government will figure it out. They're just going to throw more good money at bad money, bailing out special interest groups, and distorting market pricing even more, prolonging any chance of a bottoming out process.


Having said that, the government doing the exact wrong thing makes it easier for investors. Just keep playing the reflation thesis.