Suspension of Banks' Mark to Market Accounting is Fraud
Mark to Market Update
Suspension of Mark to Market did not have the effect of increasing libor rates. In fact, we have had a period of stability since M2M was suspended. The stock market has taken off and banks are hiding their insolvency.
This doesn't make transparency less important, it just means that we have been given a respite by the international central bank cartel, focused in the Bank of International Settlements. I fully view this bank's timing skeptically. It allowed a bubble then burst it, when it had the framework in place to stop the bubble dead in its tracks much earlier. This delay in using the Mark to Market application allowed a bubble, then a crash when it was implemented post bubble, and now has forced the BIS and FASB to back off and allow a suspension.
Just because banks are able to hold onto assets and did not have to sell to investors, as Tarp became a bailout instead of a bad debt purchasing mechanism, as Paulson originally said it would, does not mean that banks are out of the woods. If it turns out that banks have so many bad loans, and so many people walking away, that they are unable to stop the decline of house prices, then they could be in trouble. Yet we still have many areas where house prices do not reflect the fundamentals of wages and rents and should decline more in a competitive global economy.
In Paul Volcker's day, banks were insolvent in the recession, with many bad loans on the books to Latin America, yet they finally came out of it as the economy improved. Volcker's plan to suspend mark to market worked then.
But will the suspension of mark to market work now? Clearly there has been some time bought since March 2009. But the economy as of 2011 may not be able to continue growing. That would cause the banks to fail in their bid to throw off insolvency as they were able to do in the early 1980s.
Suspension of Mark to Market in a deflationary environment may well turn out to be fraud, because it necessitates massive quantitative easing, rather than bank failures, and causes commodity prices to skyrocket in a world where house prices have to decline for the US to be competitive and pay lower wages! While I do not support the failure of the entire financial system all at once, I do support the winding down of TBTF banks one at a time. This should have been done in 2010, 2011, and now 2012 but it is not being done.
The probability of massive economic bubbles increases as the power of these banks and inability of government to wind them down increases. The fraud is in the fact that this mark to market should have been the norm, rather than establishing it one time and taking it away another time.
Establishing mark to market made the stock market crash in 2008. Taking it away made the stock market sail beyond what is prudent through 2012. The fraud is that there is no set accounting measure, only what pleases the central banks at the time.
Update: FASB Wants Credibility Back. Banks Will Have To Show Loan Values.
Banks will no longer be able to hide their loan values in footnotes. This new rule will force banks to show their loan values up front where all investors can see them. Evidently Citi (not to be confused with Citibank) had loans that were only worth a fraction of what mark to model allowed them to be worth. Lesson is: banks are far more insolvent than you think, which is why they are adding big bucks to their excess reserves, money that just sits without being loaned out. Here is the Bloomberg link to why FASB wants to do right by the investor, finally!
The banks will still get to manipulate loan values, but it will be easy to compare them with the real state of the loans that will have to go on the balance sheets. Bloomberg says that most media ignored this story. They want happy banks. But folks, there is nothing happy in bankville.
Great Depression to Great Recession
Suspension of Mark to Market is Fraud
Every pumper of stocks is saying that suspension of mark to market is good for banks, good for the stock market, Suspension of mark to market is where the banks estimate the value of assets that the banks are refusing to sell that are labeled as "toxic" assets instead of letting the free market determine the value of the assets.
Bill Seidman and others have gone onto CNBC saying that these banks cannot mark to market the assets because the market is frozen. He said that the banks don't want to sell and the investors don't want to buy. However that spin is not quite true.
The truth is, there is a price at which investors would buy the toxic assets, yet that price would kill the banks. They don't want to sell at that price!!
It is unfortunate that this fraud is going to be buttressed by that friend of international bankers, Tim Geithner. The treasury of the United States is going to lend money in order for investors to buy the assets that the banks refuse to sell at market value. But this is fraud because the price at which investors will buy these assets is not a real fair market price.
These investors, with loans and guarantees from the United States government, will purchase these assets at inflated unrealistic prices that are far above market value. They believe they will kindle a market for these assets, however, I would say that unless this becomes a destructive bubble, which will end up in the mother of all crashes, the private sector will not buy without the guarantees or government loans. And you certainly cannot sell your house for an inflated price based on government guarantees.You cannot make up a value for that house that does not reflect the free market value. Just because you are getting rent (which seems to be declining on average) does not mean you can avoid the free market in valuing your house.
We need to watch these events carefully, because if bubble economics and smoke and mirrors becomes the "solution", then our economy is worthless in any intrinsic sense.
Mark to Market
The housing market could freeze up just like the toxic asset market has frozen. If many buyers refuse to pay artificially high housing prices because sellers refuse to lower the house prices, you would think that the sellers are dumb.
But if the banks don't want to sell overpriced toxic assets then they are seen as being shrewd businessmen. Then they whine to the taxpayer to cover their losses!
What people do not realize is that every transaction, including the selling of stock, is based upon a marginal transaction, not based upon on those who hold long term. Who is to say that this bear rally is not a giant manipulation?
And people say with regard to the bank assets that they are performing above the selling price, that they are more valuable in terms of income than that which is reflected in the selling price. But that does not change the fact that at the margin, these assets trade lower. This lower trade is a warning of lower future earnings and greater defaults. If this were not the case, investors would buy the assets at a higher price! We are looking at real voodoo economics with regard to the pricing of bank assets.
And at the margin, house prices are declining. If that is interfered with in any way, the market for housing could freeze up. As it is we are somewhat frozen now.
As far as the banks are concerned, they are going to be a bottomless pit of taxpayer liability as the Alt A and Option Arms reset in massive numbers in 2010 and 2011. However, China has said that they are worried about American bond investments. If we spend into oblivion they may not be there to buy our bonds! Add this reality to the gimmick of mark to model and we have a very unsettling future for the world economy.
Mark to Market Suspension and Other Banking Scams
- On Mark-to-Market and Its Supposed Suspension The Heat Death Hour
One of the most misunderstood episodes of the financial crisis concerned the events surrounding fair value accounting, specifically in reference to what securities should be marked to market.
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Suspension of Mark to Market Perils.
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