Market Talk

It’s no secret that banks are parked over a mother lode of bad loans, mainly residential and commercial mortgages, and they prefer to not publicly acknowledge (by marking to market) what those loans are really worth. That tactic has helped banks recuperate and appear healthy, but it’s a stance that’s also costing at least of few jobs, in a roundabout way.

We’re a little late to this story, but our new-found fascination with state WARN notices led us to find one from a California company called Kondaur Capital, which said about a month ago that it plans to lay off 161 workers by April 18. A little searching brought up an article last month by the accomplished Paul Muolo at National Mortgage News.

Seems Kondaur buys nonperforming loans, and finds itself needing to layoff workers because there aren’t enough bad loans available to buy.

Come again? Aren’t banks still sitting on mountains of toxic debt? Can’t find enough to buy? Continue reading…

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.)

The most overlooked government intervention during the bailout phase of the credit crisis was Congressional pressure on the FASB to drop mark-to-market accounting. This one change allowed the nation’s banks, and the so-called too-big-to-fail banks in particular, to just hide whatever losses were on their books owing to the housing meltdown.

It was one of a number of actions your government took to save the banks. Not the banking system, mind you, the banks. The sum total of these actions was a blatant admission on the part of your elected and appointed leaders that connected parties would be saved at all costs. The alone explains why the stock market is putting in multi-year highs while unemployment remains pegs around 10%, while one-in-three working families are categorized as “low income,” while Wall Street bankers are getting their fat bonuses again.

John Hussman explains, again, how we were bamboozled:

If you carefully observe what happened in 2008, the large-scale collapse of the financial markets and the U.S. economy started literally sixty seconds after TARP was passed by Congress on Oct. 3, 2008. At that moment, the world was told not that the smooth operation of the global financial system would be ensured by taking receivership of failing financial institutions; not that the focus of policy would be the protection of depositors, customers, and U.S. fiscal stability; but instead that insolvent private balance sheets would now be defended, subject to the arbitrary decisions of policy makers in which nobody had confidence. Lehman’s failure simply told investors that these decisions could be completely arbitrary, since there was really no operative distinction between Bear Stearns, which was saved, and Lehman, which was not. Moreover, in order to pass TARP, the public had to be convinced that a global meltdown would result if financial institutions weren’t preserved in their existing form. In this way, policy makers created a crisis of confidence.

Skip forward and carefully observe what happened in 2009, and you’ll see that the crisis was suspended once the FASB threw out rules requiring financial companies to report their assets at market value, while at the same time, the Federal Reserve illegally broadened the definition of “government agency” in Section 14(b) of the Federal Reserve Act in order to purchase $1.5 trillion of Fannie Mae and Freddie Mac obligations. These actions replaced the arbitrary discretion of policy makers with confidence that no major institution would be at risk of failing because, in effect, meaningful capital standards would no longer apply.

Thus, our policy makers first created a crisis of confidence, and then resolved it by legalizing a global Ponzi scheme.

Bernie Madoff was a small-time crook compared to what your own elected officials have done. In your name.

Keep in mind, too, as Hussman points out, that the major banks have enough debt among its bondholders to absorb all the losses it could possibly take, without hitting the depositors or customers. So why did the banks need to be bailed out?

Now, do you really think Congressional leaders, all on their own, came up with the idea to suspend mark-to-market? Do you really?

Who’s being naive, Kay?

Forget pondering whether or not Ben Bernanke and his band of merry pranksters is going to unleash QE2 on the land; it’s a done deal at this point. The questions to ponder now is (besides, do I have any Zimbabwean neighbors who can counsel me on how to adjust to hyperinflation and where can I buy a wheelbarrow for carrying my cash) one, how much are they going to blow on this experiment and, two, will it work?

The very sharp John Hussman, who runs the Hussman Funds and is one of the beleaguered bears who gets grief for “missing” the big rally last year but less credit for avoiding the crash before that, looks at the question today in his weekly commentary. To summarize his opinion: not likely. But the interesting part to me is that he gets into this whole misnomer about the “success” of QE1. But what really made the difference, he points out, wasn’t the trillion-plus bond-buying scheme:

One of the arguments for quantitative easing is the notion that the Fed’s purchase of $1.5 trillion of Fannie Mae and Freddie Mac debt somehow “pulled the U.S. economy back from the abyss” of a Depression. But a closer examination of the past 19 months suggests that a much more specific mechanism – suspension of truthful disclosure – was actually the key element. Unfortunately, the benefits of this suspension are also impermanent, because the underlying solvency problems have been left unaddressed.

Continue reading…

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.

Continue reading…

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.

Continue reading…