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While I appreciate your argument, a couple of issues are missing.
First banks have to go through rigorous audits each year. The value of
securities are scrutinized, especially the illiquid ones. So the banks
don't get to hide or inflate the value of securities. If they don't
have a rational method of valuing them, then the auditors don't sign
off on the audit. With the demise of accounting firms like Arthur
Andersen, auditors are very careful in valuing assets.
The second issue is that mark to market accounting forces banks to
value securities primarily at zero if there are no buyers. When major
assets have to be valued at zero it causes the banks to be in
violation of their capital requirements and forced into failure.
If the securities were valued at their probable market prices when the
market returns, as it always has, then most portfolio's of mortgages
would be written down only 10% to 15%, since most loan portfolio's
contain less than 9% under performing or delinquent loans.
It makes no sense to value these loan portfolio's at zero just because
the market is temporarily illiquid. The SEC has agreed with that
position and encouraged banks not to do that, but the SEC can not
waive auditor liability preventing the vulture tort lawyers from using
valuation as the basis for class action suits, which are coming in
droves very shortly.
Banks are not lending to each other because they don't know who is
going to be forced into default next. If mark to market accounting
rules were lifted for awhile, then the banks wouldn't be forced into
insolvency over phantom losses. When losses are realized, or can be
calculated based on the value of securities in a liquid market, then
they should be posted and the capital account adjusted. When the
losses are phantom losses, it makes little sense to force a bank into
insolvency.
Basically, I'm glad I'm retired. I wouldn't want to deal with the
illiquidity issues, the government regulators and the SEC.
Speaking of mark to market accounting, if you were the CEO of a bank
and were arguing that your illiquid securities were valued at nearly
zero because there were no buyers, the auditors would agree and the
IRS would likely accept the argument.
On the other hand if you were classifying yourself as a professional
trader using market to market accounting and you filed a return
writing off the entire value of a portfolio due to the illiquidity of
the securities, the IRS would have you in tax court in a millisecond.
Good luck with getting a zero valuation in tax court.
Super
--- In equismetastock@xxxxxxxxxxxxxxx, Code 2 <Code2@xxx> wrote:
>
> > 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@> 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@: no_reply@: 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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> --
> In an office building washroom: Toilet out of order. Please use
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>
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