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> The problem with most bank insolvencies can be solved with a lifting
> of the mark to market accounting rules. The SEC "clarified" the
> rules which gave banks some latitude, but the auditor liability is
> still there so I doubt the "clarification" will do much for that
> problem.
> The credit freeze is due to banks not trusting other banks because
> the lending bank can not tell what kind of financial shape the
> borrowing bank is in. That's a transparency issue, a problem with
> asset valuation, understated liabilities, financial instruments that
> are too complex to price, and a lack of visible leadership willing
> to forthrightly disclose the true health of their organizations.
> Until those problems are resolved or the Fed guarantees all
> interbank lending, the freeze is going to thaw slowly. It seems to
> be moving a bit now, but not much.
These two concepts are contradictory. Transparency is reduced when
assets are carried at historical cost and not marked to market. If
the feds allow banks to carry assets on their financial statements at
outdated values, investors and lenders will either attempt to factor
in their own idea of asset value (which, out of caution, would have to
be conservative) or they would choose not to invest/lend altogether
out of fear of what garbage is hiding in the balance sheet. It is
ludicrous for regulators to think they are restoring confidence in the
system by concealing present asset values.
Here's an example. I buy a house for $1 million and finance it with a
$900,000 loan. Let's say its value goes up to $1.2 million, so I
report that value on my credit application to the bank and borrow an
additional $180,000. A year later, the value of my house declines to
$600,000. Mark-to-market accounting says I must report a deficit of
($600,000 - $900,000 - $180,000) $480,000. Suspending mark-to-market
accounting says I continue to report $120,000 of equity. Which paints
the true picture? Oh, and following the suspension of mark-to-market
accounting, with my $120,000 of "equity," I convince you, an investor,
to put up $60,000 for an equity interest in my house.
An interesting benefit of Goldman Sachs and Morgan Stanley's recent
switch to bank holding companies was that certain assets no longer get
marked to market. They avoid reporting the decline in value of
billions of dollars of certain assets.
From: superfragalist <no_reply@xxxxxxxxxxxxxxx>
To: equismetastock@xxxxxxxxxxxxxxx
Date: Sunday, October 19, 2008, 4:46:42 PM
Subject: [EquisMetaStock Group] Monetary History of the US
Hi Cameron,
It's good to hear from you. I hope you are doing well and that Canada
has managed to avoid this mess.
The problem with most bank insolvencies can be solved with a lifting
of the mark to market accounting rules. The SEC "clarified" the rules
which gave banks some latitude, but the auditor liability is still
there so I doubt the "clarification" will do much for that problem.
The second issue regarding liquidity has been solved a long while
back. The credit freeze is due to banks not trusting other banks
because the lending bank can not tell what kind of financial shape the
borrowing bank is in. That's a transparency issue, a problem with
asset valuation, understated liabilities, financial instruments that
are too complex to price, and a lack of visible leadership willing to
forthrightly disclose the true health of their organizations. Until
those problems are resolved or the Fed guarantees all interbank
lending, the freeze is going to thaw slowly. It seems to be moving a
bit now, but not much.
In the 1980's we had a collapse of the Savings and Loans, which were
the primary real estate lenders back then. Inflation, and the same
lack of down payments and lose loan approval, especially to developers
caused the same problems. The banks didn't get hit too badly. The
problem thin was there were a lot of depositors who had bought very
high paying CDs from those Savings and Loans. Those CD's had no FDIC
insurance because Savings and Loans were insured by state funds, which
of course didn't have the money to pay back the CD deposits that had
been loaned to developers and that became the bad debt of that era.
Because of the problems here, the US is going to move closer to
socialism and farther away from the capitalism, which built the
country over the last 200 years and which makes it an economic engine
others rely on. Now that the US has given away its manufacturing it
won't be able to rely on nationalism.
In addition, the new political regime is going to propose trillions in
new social programs, which will cause the drying up of investment and
expansion capital over the long run.
My best guess is the recession is going to be longer and deeper than
people think, and/or any recovery is going to shallow and shaky. There
will be changes in global politics, which may not be good for a lot of
other countries. There is no such thing as a free lunch, so it's time
for everyone to pay up for the cost of cheap and plentiful money.
The world will go on, either way. Here's my take on the forth coming
election.
No matter who wins, it will be depressing for a lot of people.
If McCain wins, I'll still have enough money left to hire a therapist
of my choosing to help me get over my depression.
If Obama wins, I won't have any money left to hire a therapist for my
depression, but one will be provided to me free of charge.
Super
--- In equismetastock@xxxxxxxxxxxxxxx, Cameron Reid <cwr_74@xxx> wrote:
>
> Good morning Super,
>
> I read and enjoyed the WSJ article you recommended. My summary is
that their can be two generic problems within banks: A lack of
liquidity and a lack of equity ( insolvency ). At this present time,
I believe there is a crisis of insolvency which has cause almost all
inter-bank lending to cease and thus removed the FED's ability to
manipulate the credit cycle and by extension, the real economy.
>
> Now we have to issues to deal with: 1) the FED has lost a good
portion of its ability to regulate economic demand and 2) Many of the
major financial institutions are insolvent.
>
> As far as I know, the last time the banking system in America was
insolvent was in the early 1980s. At this time many of the Latin
America and other 3rd world loans were in default. A formal
recognition of this fact would have caused write downs that would have
bankrupted most of Europe's, America's and Canada's banks. The
solution at that time was to allow the Banks to collectively hold
these loans on their books at par value until they had built up enough
equity to weather the write downs. This happened for the first time
in 1986, when Citi Bank announced that they were writing down a
portion of their loans; other banks followed Citi's lead.
>
> What, in part, enabled this strategy to work was the continue
profitability of each banks domestic franchise. All of the European,
American and Canadian banks enjoyed robust levels of growth and
profitability in their home markets and a steep yield curve.
>
> Today, the profitability of each bank's domestic franchise, in most
cases, is materially compromised in America and Europe; Canadian banks
are remarkably profitable at home.
>
> In my view, if the US and Europeans continue on their current path,
the solution will be painful. When equity is injected, banks regain
the ability to sustain write downs and remain technically solvent.
But, the opposite side of a Bank's write down is either a consumer of
commercial default. These continued defaults discourage consumers and
businesses from taking any risks or additional debt; thereby removing
the prospect of any economic growth outside of increased government
spending. This process can be successful if enough equity is injected
and all of the bad loans are written off and the assets behind them
liquidated, but the cost is incredible.
>
> The other option is to manufacture equity. This can be done through
inflation. If the US and Europe were to devalue their currencies by
25% of so, then wages would rise between 20% and 33% on both
continents. With hire incomes, families could begin to afford the
mortgages on their homes again and businesses would see their balance
sheets improve. Additionally, with fewer loans going into default,
there would be less need to inject equity into the balance sheets of
banks and because of this counter party risk would diminish.
>
> Each scenario will have its own winners and losers. In the first
scenario, the wealthy make out better as their prudent investments
will retain their value through time. In the second scenario, we are
bailing out many of the imprudent speculators; those who are the most
indebted and who can avoid being liquidated will come out the best.
>
> I don't know what will happen. But with the prospect of 1 in 5 US
home ( and probably a similar number in Spain, the UK, Ireland and
some parts of Italy ) worth less than their mortgage the political
pressure to 'save the voter' will be substantial.
>
> There is certainly the sense of panic in the air. Looking down from
Canada, the US electorate is desperate for change. But, it also
appears to have lost much of its frontier self reliance in what
appears to be a jump to the left. A larger government is certainly
the most prospective outcome at this time.
>
> In my opinion, much of the economic freedom I enjoy today in Canada
is the result of Canadians being forced to remain competitive with the
massive US economy to the South. I suspect that this constructive
pressure is about to diminish considerably.
>
>
>
> Cheers,
>
> Cameron
>
>
>
> To: equismetastock@xxx: no_reply@xxx: Sat, 18 Oct 2008 19:29:15
+0000Subject: [EquisMetaStock Group] Monetary History of the US
>
>
>
>
> If you like to read clear and concise economic theory and what's
wrongwith what is happening now, the Wall Street Journal had an
interviewwith in the Saturday Oct 18 edition with Anna Schwartz, co
authorwith Milton Friedman of A Monetary History of the United States.
Here's the link.
http://online.wsj.com/article/SB122428279231046053.htmlThe Journal
allows non-subscribers to read opinions for a few daysbefore they take
them down. This is an exceptional look at economic theory from someone
who wasalive during the depression and through all of the recessions.
Sheunderstand economic policy as well as any Fed executive. As
traders, we all need to prepare for a return to the oppressive
taxpolicies of the 1930's through the 1980's. Implied tax rates hit
70plus percent in those days. If you want a read an article
thatillustrates how someone with a small amount of historical
knowledgeand misapplied statistics can make a case for higher taxation
as a wayto grow, here's a link to an article written by such a
person.http://www.oregonlive.com/opinion/index.ssf/2008/10/bailout_instead_double_the_top.htmlI
also found it interesting how many comments were supportive. Wow,does
this speak to the level of education, or lack of it, in oursociety.
There is a huge difference between implied rates andeffective rates.
In those days there were a zillion ways to taxshelter income. Back
then the IRS even allowed income averaging. Thosedeductions are gone.
No mention of that. No mention of the effectivetax rate back then and
why rates were brought down.In addition, America was not a global
economy then, the economy wasnationalized. We bought what we consumed
so we had a huge post warexpansion because of the population growth.
Of course the standard ofliving was much lower then than it is today.
In addition, credit washard to come by. No one was leveraged up to
their teeth in credit carddebt. Opps. Was that all conveniently left
out, forgotten, or maybethe author just didn't know about those
economic factors--that'scalled ignorance. This is what happens when
GDP is looked at as anisolated number. Back then the government
accounted for less than 10%of the GDP. As we've moved toward
socialism, the government nowaccounts for 28% of the GDP. And it's
going to grow in the next 8years to something over 35%. I also noticed
that the economic history writer left out the fact thatwhen Europe
raised taxes, particularly the UK, to those levels upto90% business
investment dropped and the wealthy left. (If that'sincorrect, the UK
members my age should correct my argument.) Anyway the point is when
all these new tax policies hit, it's going tochange trading strategy.
TA isn't going to help with that. When atrader is keeping $0.40 on the
dollar from successful trading ratherthan $0.67 on the dollar, it
changes the risk/reward ratios. Remember the government is our partner
only when we win. If we have anet loss, the government only allows us
to deduct up to $3000 a yearin losses. That's a great partnership. If
you win I get 35% (moving upto 50% or more shortly) and if you lose,
my share of your losses islimited to $3000. Sweat! A large part of the
population is yelling for change. They might wantto be careful what
they wish for!Enjoy those articles. Your trading life is going to
change in theyears to come. Well, only the ones of you who survive. Super
>
>
>
>
>
> _________________________________________________________________
> Stay organized with simple drag and drop from Windows Live Hotmail.
> http://windowslive.com/Explore/hotmail?ocid=TXT_TAGLM_WL_hotmail_102008
>
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