Market Talk

I have long thought that the scuttling of mark-to-market accounting as codified in FASB 157 is one of the most overlooked causes of the sudden, almost overnight improvement in the state of the banking sector that started near the market lows in 2009.

It was also a prime, prime example of crony capitalism. The banks wanted to get rid of mark-to-market, they needed to get rid of it, because if they had to mark all the lousy, bad loans to anything approaching reality, we’d suddenly find ourselves with a lot of suddenly insolvent banks. So the banks leaned on Congress, Congress leaned on the FASB, the FASB quickly caved and today we’ve got a bunch of zombie banks on our hands complaining that they’re burdened by too much government oversight.

But ultimately, there will be reckoning. It may be a sudden panic and collapse, or it may be more subtle, a slowly crumbling edifice that nobody notices is crumbling until one day it’s gone. At some point, though, somebody has to pay the piper. Who do you think that’ll be?

Our elected and appointed officials, in our name, abolished accounting rules that were inconvenient. Turned Fannie and Freddie into massive Hoover vacuums to suck up every bad mortgage in the nation. Debased the dollar. Spent trillions in government money and guarantees to protect a small band of connected players. We haven’t charge a single responsible person with any crime, criminal or civil.

Know the saying about not being able to spot the mark at a card game? You’re the mark, bub.

Barry Ritholtz breaks this thing down. Please go read the entire post. Here’s a snippet:

Many of the bailouts, mortgage mods and behaviors we have today exist to serve a single purpose: To allow the banks to kick the can down the road as far as they possibly can when it comes top their dual portfolio of bad mortgages and bank owned Real Estate (REOs).

Consider how ironic this is: From the GSEs becoming a dumping ground for every crappy mortgage to the failed policy of HAMP/mortgage mods, to the arbitrage between the the Fed’s ZIRP policy and Treasury’s 10 year bonds, nearly every reaction to the financial crisis has been a willful, concerted effort to kick the can down the road.

Rather than go Swedish, and force a shorter painful pre-packaged bankruptcy process, we have opted to take the long slow route.

The problem is with this strategy is we have more cans than road.

(Now, really, honestly, I planned to write this before Barry did a post about my Cramer post; this isn’t some mutual admiration society (although I do know and like him,) and it’s not like Barry needs the traffic boost from us.)

Now that the recession’s “officially” over, what changes if any can we expect to see?

- I expect that tomorrow the FOMC, the rate-setting committee of the Federal Reserve, will announce that it’s going to start raising interest rates, now that the recession’s over. After all, the Fed cut its overnight fed funds rate to zero in response to the recession. If the recession’s over, it should be self-evident that a zero percent interest rate is manifestly irresponsible. So forget all this talk about QE II, about another bond-buying scheme from the Fed. It’s time to start the exit strategies and rate tightening.

- I expect the Obama administration to phase out all stimulus programs, and to scuttle the programs it proposed just a few weeks ago, now that the recession’s over. Forget about extending the Bush tax cuts. They are not needed. The economy’s expanding.

- The debate over whether or not to extend unemployment benefits will disappear on its own now that the recession’s over, as companies start hiring again and that army of the unemployed dwindles down to nothing.

- The FASB, the Financial Accounting Standards Board, reinstates the rules for mark-to-market accounting that existed before the recession started, now that the recession’s over. After all, the rules were suspended because of the emergency created by the credit crisis. If the crisis is over, it’s time to reinstate the old rules.

- States and local governments will balance their budgets again, as their revenue rises, since now that the recession’s over and the economy’s expanding citizens will see their incomes recover, which will boost the tax rolls.

How many of those things do you expect to happen? I’d put the odds on them, in order, at zero, zero, zero, zero and zero. So long as the Fed is keeping interest rates at zero, a number that in any other context would be considered dangerously irresponsible, so long as hiring remains stagnant, so long as the government is more concerned about stimulus than austerity, so long as state and local governments remain on the edge of the budgetary abyss, whatever tag we give the economy won’t matter. It’s a point John’s made a few times, and it’s worth bearing in mind as you hear people trying to talk up the recovery.

It’s going to a long, protracted, painful phase we’re going through here.

- Several big name hedge-fund managers are placing bullish bets on Citi (C) and Bank of America (BAC). “Paulson, Soros, Falcone, Tepper, Ackman, Ainslie, Loeb — you name it, they own one or the other…or both,” Joshua Brown writes at The Reformed Broker. “And they own them in size.” But why the sudden interest?

- Goldman Sachs (GS) may be on the verge of resolving SEC’s fraud charge by agreeing to a settlement worth hundreds of millions of dollars, according to FT. But FusionIQ CEO Barry Ritholtz is still perplexed why GS chose to fight this charge in the first place. “Even if GS were to prevail in court, they have already lost. The reputational damage is already measured in billions of dollars, and will last years if not decades.”

- Furious decline in newspaper ad sales eased in 1Q, but struggling industry still isn’t showing signs of rebounding. “The less-awful sales in the first months of this year gave publishers the gift of a bit more time to fundamentally reposition their businesses,” Newsosaur blogger Alan Mutter says. “But there is nothing in the first-quarter numbers to suggest that the storm for newspapers has blown over.”

- S&P 500 has averaged a 0.12% gain on the Friday before Memorial Day since 1971, with positive returns coming 59% of the time, Bespoke Investment Group reports. But the performance hasn’t been so hot recently, with the index averaging a 0.28% decline throughout the last 10 years, firm notes. And the measure has dropped more than 1% on three instances in last decade.

- Warren Buffett’s testimony next week before FCIC is subpoena-driven, writes Fortune senior editor-at-large Carol Loomis, a pal of the Berkshire Hathaway (BRKA BRKB) chairman.

- FASB publishes proposal that would overhaul how companies value many assets and liabilities they hold. “Tremble US financial institutions, for FASB is about to fair value your assets,” FT’s Alphaville says.

- There are still calls for more (yes, more) government spending. “The long-term deficit needs attention, but right now it’s critical for government to spend,” says former labor secretary Robert Reich. “Otherwise we have no hope of getting free of the gravitational pull of this recession.”

- If enough tech giants go after a market, will it eventually catch on? Just a week after Google unveiled details of Google TV, Engadget reports Apple (AAPL) will take another crack at its three-year-old Apple TV product. But as MarketWatch’s John Dvorak pointed out in a column last week, it may be a hard slog, even for the biggest of behemoths.

- “The Great Recession is over, and the Great Transition is here,” James Picerno writes. In theory, distinguishing between the two is a piece of cake. In practice, reading the tea leaves is going to get complicated at times.”

- The Apple faithful struggle figuring out the best way to carry around the iPad. Aw, poor fanboys, such a conundrum – what are they gonna do??

No, no, no, it's worth what we say it's worth now.

The next time you hear somebody drone on about how healthy the banks are and how the worst is over, just remember the lede of this Reuters story:

Half of the losses suffered by banks could still be hidden in their balance sheets, more so in Europe than in the United States, the International Monetary Fund’s chief, Dominique Strauss-Kahn, was quoted as saying on Tuesday.

I’ve long thought that the most underappreciated bank bailout was the move by the Financial Accounting Standards Board, or FASB, to alter mark-to-market accounting rules back in March, the effect of which was to weaken the standard. This took the pressure off the banks to recognize losses on the assets on their balance sheets, and has miraculously coincided with an historic stock-mark rally, led largely by bank stocks.

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Judging by the way US stocks have rallied since Monday’s selloff (DJIA’s up more than 6%), Wall Street was well-braced for an ugly March jobs report this morning.

The headline numbers came in as expected, bringing a perverse sense of relief on the Street; the nation shed 663,000 jobs in March, pushing total jobs losses for this recession above five million, and the unemployment rate jumped to 8.5%, a 25-year high. Stock futures rose after the numbers came out; they’ve since receded. S&P futures up 0.30; DJ futures down 2. Ten-year lower, yield at 2.79%.

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This stuff used to be so hard; thanks FASB!

Newswires’ Matthias Rieker writes:

Bank stock investors might be getting in ahead of bank earnings reports in hopes for a big boost from the proposed changes mark-to-market accounting, which are expected to be voted on this morning by FASB.

So far, bankers have said little about the potential impact, but are careful not to imply any change might lift earnings as much as 20%, as some observers have suggested.

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