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It looks like the Senate is attempting to allow the banks to sweep their problems under a rug.  A MarketWatch.com article this evening says “an accounting regulation that some bankers and lawmakers complain is a key contributor to the financial crisis might need to be temporarily changed or restricted. The rule, known as mark-to-market, requires corporations to adjust the value of their assets four times a year to reflect the fair market price.”

In other words, this accounting rule (known as FAS 157) requires banks to state the actual value of the assets they are claiming.  Before this rule took effect, most banks used a “mark to model” method (many refer to this model as “Mark to Myth), which pretty much allowed them to make up a value and claim it as an asset.  You can read about FAS 157 on the FASB site here.

Many are blaming the financial meltdown on FAS 157, because it became part of Generally Accepted Accounting Practices (GAAP) in November, 2007, which happened to be the same time we started seeing the huge write-downs.  But FAS 157 isn’t the problem – the crappy mortgage derivatives the banks are claiming as assets are the problem.

Before FAS 157, the banks could pretty much claim any value they wanted for the mortgages and derivatives they owned.  Investors didn’t have a clue regarding the real value.  Mark to Market changed that.  Now the banks had to own up to the shenanigans.  No longer could they claim a $500,000 mortgage was worth $500,000 if the borrower was late or in default.  They had to value that mortgage at what it was really worth on the open market.

The problem is that no one knows what anything is really worth until someone buys it and establishes a price.  And there was (and still isn’t for the most part) anyone who wanted to buy a bad mortgage for anywhere near face value.  So the banks didn’t like FAS 157, because they had to write down the value of their crappy assets to reflect the real world.

And when they wrote down these assets, it increased their leverage ratios.  So when the government required them to have $1 in assets for every $12 they had loaned out (the standard until Bush changed it in 2004) suddenly they were under-capitalized.

They were caught between a rock and a hard place.  They either needed to raise more capital, or call in their loans.  They really had no choice – they couldn’t call in their loans because the loans were made to other banks (who counted them as assets and had borrowed against them) so most banks couldn’t maintain their required capital ratio of 33-1 (which is what the Bush administration changed it to – read about that part of this mess here.) so they had to raise capital.

That’s fine and dandy, but who would give an inadequately capitalized bank more money?  Pretty much no one.  Which is also as it should be.

So here’s what should have happened.  The banks who made the crappy loans, the banks who bought those crappy loans from the original bank, the rating agencies who rated the crappy mortgages and derivatives as investment grade, the insurers (mainly MBIA and AMBAC) who insured the crappy mortgages and derivatives against default, and those who purchased stock or bonds from any of these companies should all lose money.  Most would go broke and disappear.  But someone would buy those crappy assets at the bankruptcy sale (thus establishing a true market value for them) and use that true market value as an asset.

And it would truly be an asset at that point, the write-down having taken place when the original company went bankrupt.  But our idiot government could let that happen.  So we starting re-capitalizing banks (and others like GMAC and GE) with tax dollars.  Which obviously hasn’t worked very well because they still want more money.

These write-downs will happen someday – the crappy mortgages are still crappy and won’t be paid back – so all we’re doing with the trillions in bailouts is delaying the inevitable.  And causing those who saved their money and didn’t over-leverage to go broke in the process.

Changing or eliminating the mark to market accounting requirement doesn’t actually change a damn thing – it simply allows the financial institutions to sweep their problems under a rug.  The problems are still there, but everyone is allowed to pretend that they’ve gone away by claiming they’re still worth just as much as they were two years ago.

Idiots.

gk

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I had posted an article late Friday night/Saturday regarding the “expert” opinions staying to stay fully invested in the stock market.  I’m not sure what happened to it, but it gives a not found error now.

Suffice it to say that all the major sites (CNN, FoxNews, NY Times, Marketwatch, etc) said pretty much the same thing.  “Don’t sell – now is a great time to buy!” (or words to that effect.)

They may be right, but they’ve been saying the same things since the market started falling last year.  If you listened to them and followed their advice, you’re down about 20% as of today. 

Speaking of today, CNN has another article advising everyone to stay in the market posted today.  Here’s a quote: “We took the opportunity to buy a few things in the financial sector last week,” said Ted Parrish, co-manager of the Henssler Equity fund. “Even with all the negativity, there are some values. The writedowns may continue but we think the worst of them may be over.”

How’s that working for you Ted?   And I’ve been reading the “the worst of the writedowns may be over” since last fall.  They haven’t stopped yet.  The time to buy (unless you’re made of money and don’t mind more losses) is when the writedowns stop.  Let’s see a quarter from Lehman or Bank of America with no more writedowns, let’s see a quarter from Goldman Sachs with no writedowns – I’ll buy back in then. 

Right now you’re urging investors to “catch a falling knife” and that’s never a good idea.

gk

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I read an article on Business Week saying that the dollar may be at a bottom.  Huh? 

I read the entire article, but I don’t see anything that suggests we’re going to quit borrowing $1.45 billion per day – and that’s at the national level alone.  Coupled with the American consumers’ ability to live beyond their means, and we continue to spend more than we produce.  Individually, and at the city, county, state, and national levels.

 Why’s that bad?  Because someone is forking over money when you charge something on your Visa card, someone is paying when you take out a second mortgage, someone is paying when you do a no money down deal on a new car….  Where is the money coming from?

Overseas.  We (Americans) are flooding the world markets with debt instruments.  It doesn’t matter if it’s  bonds sold by the US Government, or bonds sold by Citigroup, or bonds sold by AMBAC, someone has to have the money to lend – and that someone is overseas investors.

As long as “helicopter Ben” keeps printing money, and as long as Americans overall refuse to live within their means, the dollar will continue a downward spiral.  There will be days and weeks (like the last couple of weeks) in which the dollar rises, but nothing has changed regarding the long term fundamentals.

These articles where pundits are calling a bottom in the dollar remind me of the financials since last fall.  How many times have we heard that “this is a kitchen sink” quarter?  “All the bad news is out there now” and “this is the end of the writedowns” has been said countless times by the financial press.

Here’s the bottom line:  The financials ain’t done writing off losses, and the dollar ain’t done falling. 

gk

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Just had to pass this on.  Excellent write up of the financial issues facing Wall Street and (though I disagree with some of it) Allan Sloan does a good job of breaking down a complex subject.  Highly readable and highly recommended.

gk

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Paul Krugman has a decent opinion piece in the NY Times today.  If you’ve read any of his stuff before, you know that he thinks government has all the answers – and that government can fix whatever is wrong with (pick your topic!).

Todays’ article basically blames everything economic on “A Crisis of Faith”.  He says that investors have lost faith in the security of the underlying investments, and their lack of faith is causing the Port Authority’s borrowing cost to go up.  Technically that’s true, but he doesn’t go deep enough into “why” investors don’t have faith.

It’s not that they distrust the Port Authority ability to raise taxes to pay them back – it’s that the insurers are technically bankrupt – IF the Port Authority doesn’t pay the money back, there’s no second layer of protection.  It’s the same as if you were thinking about putting your money into a bank that has a great reputation but isn’t FDIC insured.  If you can get the same return on your investment from an FDIC insured bank – why would you bother with the non-insured bank?

When Ambac and MBIA are technically bankrupt, why bother with anything they insure?  There are safer places to put your money.  Not necessarily big FDIC insured banks – sure you’ll get your money back if the bank fails, but it may take quite a while.  Local banks that didn’t resell the mortgages they wrote should be fine – they were conservative in writing the loans, so they won’t be hit as hard when a lot of people default over the next couple of years – but I think gold and/or silver will have better returns than most other common investment over the next 1 to 2 years.  This financial crisis is just getting started.

gk

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I wonder how Doug Kass is feeling about this advice he gave on Jan 14th?

http://www.thestreet.com/s/kass-katch-buy-the-financials-yes-buy/newsanalysis/investing/10398482.html

Yup, you read that right – he said to “Buy the Financials. Yes, Buy”.  Since Mr. Kass published his story on the 14th, the Financial Sector Index (XLF) is down more than 8% – and it was down 10% at one time Friday.  I may be wrong (I often am!) but I don’t think buying on the 14th would have been a good idea….

I think it’s waaay to soon to be looking at this sector.  Personally, I think we’ll see a couple of big bank failures before the financial house of cards has collapsed fully.  No, I don’t know who it will be, but I do know that you don’t make money in the long run by borrowing money (especially at today’s higher rates) to pay down debt.  Eventually you run out of willing lenders (can you say credit crunch?) and you have to face the music.

Banks and other lenders have been putting off the inevitable for quite awhile, and they may be able to postpone it a bit longer, but borrowing from Peter to pay Paul still works the same way it did 100 years ago.  It doesn’t.  Infusions of capital from the Middle East, reductions in the Fed Funds Rate, and issuing corporate bonds simply makes the eventual crash worse.

In my humble opinion, we’re heading into a very rough period for almost all asset classes, but “soft” things like made up financial assets and corporate profits (measured in the dollar) will fare much worse than “hard” assets, such as commodities.  Another 20% to 30% decline from here is not out of the question, so sell some stocks and put the proceeds into simple money market funds or commodities.  In other words, it’s time to keep your powder dry (conserve your capital) so you can afford to pick up some bargains when this train wreck is over.

gk

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