Now that the FASB accounting change is official giving banks more leeway in pricing hard to value assets, the CDS of the big banks are narrowing after yesterday’s record high wides.

-Citi is in about 40 bps but is just back to where it was on Tuesday.
-BAC is lower by 50 bps
-WFC is lower by 30 bps
-JPM is lower by 15 bps, all back to one week lows.
-MS and GS are each in about 30 bps.

The question for bank stocks as we enter the afternoon is whether they can hold their mark to market euphoria or will they be a sell on the news into the close. Altering the rules may help them from a capital ratio standpoint but it doesn’t change the issues facing the housing market or the consumer.

What will be interesting however is if the banks feel like they need to hold less capital based on where certain assets are now priced, will they be even more inclined to quickly give back our TARP money and get out from underneath the persecution of Congress?

Category: Bailouts, Credit, Markets

Please use the comments to demonstrate your own ignorance, unfamiliarity with empirical data and lack of respect for scientific knowledge. Be sure to create straw men and argue against things I have neither said nor implied. If you could repeat previously discredited memes or steer the conversation into irrelevant, off topic discussions, it would be appreciated. Lastly, kindly forgo all civility in your discourse . . . you are, after all, anonymous.

37 Responses to “CDS/FASB”

  1. Super-Anon says:

    Big reversal or big blowoff coming in the next hour?

  2. grumpyoldvet says:

    Riddle me this Barryman…

    The Free Market types (embodied by Kudlow) say that all government interference is BAAADDDDD. Tho FASB is “independent” and had this rule free marketers imposed their strength and convinced them to loosen the rules. So how is this Free Market Capitalism when taxes, rules changes, interest rate changes etc are used to change market psychology. To my mind it’s all a big game with the elite, big money people, winning and the schlubs, meaning the rest of us, losing. Transparency MY ASS.

  3. this maybe the extent of the push back to highs. if that is the case a break below 835 w/confirm. push came a bit early for me to see continuation through close.

    caveat

    it’s anyones guess now.

  4. tCA says:

    “What will be interesting however is if the banks feel like they need to hold less capital based on where certain assets are now priced, will they be even more inclined to quickly give back our TARP money and get out from underneath the persecution of Congress?”

    …and straight into bankruptcy for the likes of C, BAC, and possibly others???

  5. Super-Anon says:

    So how is this Free Market Capitalism…

    Free markets have been dying a long slow death.

    Nixon really started it by taking us off the gold standard – the mother of all currency market interventions. Never mind his attempts at price fixing commodities.

    Then after the 1987 crash we decide we can’t have markets correct any more. And that’s when interest rate (credit market) manipulation really picked up steam. Of course we had the 1998 super-interventions that once again aborted a badly needed market correction and “cleansing” of the garbage from the financial system.

    The story goes on.

    The point is that many of current problems have emerged along with increasing intervention in the markets, not decreasing intervention.

    With regard to deregulation – I think an argument can be made that perhaps the problem recently hasn’t been deregulation per se, but selective deregulation: The removal of regulations in such a way that it assymetrically benefited Wall Street at the expense of everyone else. We still have tons of regulations and regulators. It’s hard to say we lack regulation.

    Keep the bigger picture in mind:

    Pre-WWI, when we were a country of unregulated free market zealots we were also the greatest economic success story in the world with the highest per-capita GDP.

    People need to be reminded how sucessful we were before the Federal Reserve, before FDR, and before we had a fiat currency.

    Sure there were financial and social injustices that needed to be addressed, and there were brutal ups and downs in the economy.

    But history simply does not support the argument that success comes from heavily regulated and managed markets and that failure comes from loosely regulated and unmanaged markets.

    Where are all the successes of central planning? We’ve tried it after all. Where are they?

  6. DeDude says:

    There will clearly be more banks giving back the TARP money. They will come in two flavors: 1) banks that have all the capital they need and just don’t see it as a good overall deal to hang on to that “free” money, and 2) banks that really need the capital but whose management would rather risk the company than risk their own bonuses.

  7. jpm just went green from red all day. one more push.

  8. @Super-Anon:

    The only regulation we don’t have is any regulation of the regulators. The regulators exist to serve the regulated. The people (the taxpayers) are left in the lurch, with both the regulators and the regulated digging around in our pockets for loose change.

  9. ndmaster says:

    @guidepostings- um, it was red for all of 2 hours, maybe.

    this push will likely be the last. unless we get an incredibly good unemployment number tomorrow, the market is so overbought, we will at least see a pullback, if not the beginning of another down move.

  10. HCF says:

    Doesn’t look like the S&P can break 840 for a prolonged period…

    HCF

  11. AmenRa says:

    Prev high on my daily 3LB is 832.86 for the SPX. If that holds then the rally continues (it also moves the rev price up to 778.12). But I’ll be using 832.56 as the price that tells me whether sentiment is up or down.

    But I digress. All of this means nothing when the FASB will allow the banks to continue mark-to-fantasymodel for their Level 3 assets.

  12. Super-Anon says:

    The only regulation we don’t have is any regulation of the regulators. The regulators exist to serve the regulated.

    That’s the problem with regulation: There’s no guarantee the regulators will do the job.

    Especially when it comes to regulating finance – there’s a huge incentive to do your job poorly.

    It’s like guarding a bank vault: The payoff for failing to do your job is huge if it’s not your bank and the guy who robs it agrees to split the loot with you or promote you to some prominent political position.

    In practice this doesn’t happen much because the bank owner is looking out for his own interests (the bank’s income) and he guards the vault from a higher level by monitoring the guards.

    Financial regulators don’t really have this incentive.

    I think regulators like Greenspan allowed Wall Street to “rob the vault” because it greatly elevated his stature and there were no legal or immediate social consequences for doing so.

    For Greenspan throwing open the vault doors lead to the best personal outcome.

  13. SWMOD52 says:

    Super Anon

    “With regard to deregulation – I think an argument can be made that perhaps the problem recently hasn’t been deregulation per se, but selective deregulation”

    Well put. What they allowed to happend in housing was a sin. They took an asset with a beta of .1 and gave it a beta of 10. You can’t rig the system to encourage home ownership and then do what they did. Parts of the country may not get back to even for a generation. We have tons of safeguards to prevent people from getting in to say the futures market but encourage anybody to play the real estate game which as it turned out was just as risky.

  14. dead hobo says:

    I think the new mark to market rule will be a non issue at this time. It will have little effect on the financial statements. For example, when FASB announced the anticipated rules last week, valuation change amounts would have been whispered about and stock valuations would have reacted strongly if they were going to be significant. Perhaps later, when markets for these assets become better known, the valuations will become more fluid. It will probably be a slightly delayed ‘sell the news’ event.

  15. MRegan says:

    What would you all do if you saw the S&P @620+ or – in the next three months?

  16. Pat G. says:

    “but it doesn’t change the issues facing the housing market or the consumer.”

    Absolutely. Who cares if they change accounting rules and the G20 throws in another $1T? Like most economies for the last 20+ years, they’ve been smoke and mirrors (perceptions). Nothing more than a magic show.

  17. dead hobo says:

    MRegan Said:
    April 2nd, 2009 at 3:36 pm

    What would you all do if you saw the S&P @620+ or – in the next three months?

    reply
    ——————-

    BUY BUY BUY!!!

  18. Moss says:

    If they are allowed to give back TARP then they MUST also NOT issue bonds with FDIC guarantee nor have assets backed by the Fed. The TARP give back should not mean Congress is off their back. TARP returned, no assets sold to PPIP, no FDIC backed bonds and no Fed backed assets. These bankers are a joke. The TARP is only direct investment, if that is all they got as far as support then fine give it back and then they are good to go. The rule should be any taxpayer/government support.

  19. Mannwich says:

    More obfuscation in the works. Just what we need. Picked up some FAZ, QID, and SRS today. Shows you what I think of this nonsense.

  20. AmenRa says:

    @MRegan

    Close out my puts for a nice profit :)

  21. AmenRa says:

    @Moss

    I agree. If you give back TARP you don’t get to participate in the PPIP. Then the Level 3 assets would stay on their books. They better hope that people believe their mark-to-fantasy values at that point.

  22. bernandoo says:

    anybody looking to play RIMM before earnings announcement today?

  23. MRegan says:

    AmenRa et al-

    Thanks. What is fueling this run? What will earning reveal?

  24. Super-Anon says:

    Super Anon

    “With regard to deregulation – I think an argument can be made that perhaps the problem recently hasn’t been deregulation per se, but selective deregulation”

    Well put. What they allowed to happend in housing was a sin. They took an asset with a beta of .1 and gave it a beta of 10. You can’t rig the system to encourage home ownership and then do what they did. Parts of the country may not get back to even for a generation. We have tons of safeguards to prevent people from getting in to say the futures market but encourage anybody to play the real estate game which as it turned out was just as risky.

    Yep. Here’s another way to look at it:

    Consider a football game or boxing match.

    You need rules, but the key is not having as many rules as possible, but having rules that don’t benefit one team or contestant over the other.

    I think that’s what we have lost sight of:

    The problem isn’t insufficent regulation. The problem is the alteration of the rules in such away that the game is no longer fair.

    In that regard little or no regulation may be far better than regulation that is cherry-picked by special interest groups.

    I say that’s the real problem with regulation today: Unbalanced regulation, not too little regulation.

  25. JohnnyVee says:

    “it doesn’t change the issues facing the housing market or the consumer” That right…just putting lipstick on a pig.

  26. JohnnyVee says:

    Also, it doesn’t address what is coming at the banks in the next 3-18 months–Credit, Auto, & Commercial loan defaults.

  27. HCF says:

    B.S. rally? Looks like the volume numbers on today’s S&P 500 move is lighter than yesterday, which was lighter than the day before… Too much happy talk on CNBC…

    HCF

  28. dead hobo says:

    I learned a lot of neat sayings over the years. One that just came to mind is ….

    “Every Solution Introduces New Problems”

    This is as true as true can be. It applies to everything. Every time someone tries to fix something, they create the opportunity for new problems to enter the picture. They may be delayed a bit so the cause and effect aren’t obvious. But they’re going to appear. A physicist might call it entropy. A cynic might call it the “Law Of Unintended Consequences”.

    It doesn’t matter who does what or when it happens. It will create a problem for someone. This will require someone to figure out a new solution which will add new problems into the system. The old problems may disappear, however, as a consequence of the new solution and the new problems.

    Now, apply this to TARP, TALF, or anything in the mix at this time. Life will be interesting.

  29. Robespierre says:

    Banks will give back the TARP money because the FED/Treasury/FDIC has given them a back door to re-capitalize with tax payer’s money without ANY congress oversight. The FDIC now says that they can go be part of the companies that bid for toxic assets. So what is a partially own bidder to do but to overpay and then dump into the tax payers?

  30. bubba says:

    saw Cramer calling an end to the bear market this morning on CNBS. Does anyone recall (or better yet have a link) him making a bottom call when we came of the Oct or Nov lows in 2008?

  31. leftback says:

    One Man’s Bottom is Another Man’s Ass….good luck, tomorrow, dudes.

  32. JustinTheSkeptic says:

    bubba, I do! He no doubt, feels that since we have been in this bear, this long his prognostication might come true. But what do they say about the flip of a penny? I believe it is that the chances of the next flip are always the same. If we are out of the bear, then we are in to a flat-line. With perhaps a CNBC false rally, every now and then. They are reporting as if to apeal to mass phycology, not mass reality. I truly do believe that there is an implicit mandate for all the news channels to “talk the market up.” That is how bad things are. AND THEY KNOW IT.

  33. DeDude says:

    Robespierre;

    The sad thing is that this backdoor had to be created because in this idiocracy of ours it was impossible to communicate to people that this problem will land on the taxpayers one way or another. Whether you destroy pensions, economic growth, create hyperinflation or any of the other wonderful side-effects of “solutions” that screaming idiots put forth – most of the suffering will land on ordinary people. The losses WILL be socialized, however our masters would never allow that the assets also become socialized. As long as the majority in this idiocracy can be scared by buggymen word such as socializing, government and restrictions; just bend over – because it is not a question of whether you are going to get taken, just when and how.

  34. Clay says:

    If my memory serves me, I read something recently which stated that this new or temporary rule regarding mark-to-market writedowns of assets will still require such writedowns to be recorded, just not as current losses on the income statement but probably as deferred charges on the asset side of the balance sheet. At some point these entities will have to recognize these writedowns unless the value of the foreclosed properties behind the mortgage-backed secutities rises enough in the future to recoup such writedowns before the writedowns are required to be recognized by FASB rules in the future.
    After all, once real property becomes foreclosed property, then the value of the related mortgage will be dependent upon whatever the mortgagor can sell the property for.

    Another issue which will probably arise at some time in the future will be related to offshore entities set up and administered by the banks and others, which are holding some type(s) of mortgage backed securities. The banks begged the FASB last summer to defer a rule to be implemented late in 2008 requiring entities to recognize offshore entities in their financial statements and thus would be required to take huge write-downs due to the mark-to-market rules. (I think the FASB chairman said he was a bit shocked at information presented by the banks.) These additonal disclosures and write-downs would have reduced the banks’ equity so much that they would have been required to raise large sums of capital to meet the banking reg minimums. These are a bunch of black boxes waiting to be opened, and my guess is there are only an elite few who have been made privy to this information, i.e., upper Corp. mgt. and BOD’s, the FASB and possibly the Fed Reserve, FDIC, Treasury, some Bush & Obama admins, etc.

    Also, I think the Office of Thift Supervision forecasts loan losses to increase steadily through the end of this year. Their data also showed that redefault rates on loans was increasing over time. So even with temporary suspension of mark-to-market write-downs, loan losses should continue to rise. Have the banks accounted for some of these yet? I guess we shall see.

  35. Wells Fargo is now getting back into wholesale mortgage lending, i.e., with running money through mortgage brokers, one of the many practices leading to the housing crash. (http://www.bloomberg.com/apps/news?pid=newsarchive&sid=ayexylFUItmw)

    This is all so stupid I think my head might explode. Yes, if you juice things enough you can reflate housing. But only at the expense of having it all crash down again once the reflation-induced illusion of demand is stripped bare.

    How could it possibly be that we wish to return to the housing market of 2005 that got us in this jam to start with?

    Easiest prediction I’ve ever made: This too will end badly.

  36. usphoenix says:

    Lots of interesting crap yet to be purged. All the off-shore mess, etc etc etc. Trying to juice real estate again.

    If there were some sanity IMHO it would focus on jobs and pay. Who’s going to feed the kitty?

    As SB has said, we are yet to extinguish the credit bubble.

    Consider the logic. If I were considering buying into bank assets, would I consider the rule change a confidence builder? I don’t think so. Run! It’s alive. So the taxpayer is the last payer standing around.

    Well bank stock prices can be rationalized higher. Or can they? My head hurts.

  37. philipat says:

    I thought everyone agreed that more and more effective regulation is needed. And then we get this before any positive change has taken place. Mark to solvency begins. It seems patently clear that trusting bankers to apply fair marks is a grave mistake. Mark to market was the one remaining bit of reality in a sea of greed and corruption. God help us.