Posts filed under “Bailout Nation”
Morgan Stanley in a free fall. Goldman Sachs at multi-year lows. Citigroup looking Ugly. Bank of America off 50% from recent highs.
You may be wondering what is going on with the major firms in the financial sector. While each of these firms have different problems — vampire squids to Countrywide acquisitions — they all have something in common: Their balance sheets are opaque.
This is no accident. Indeed, it was by design that execs in the banking sector, and their outside accountants, hatched a scheme in 2008 to hide their balance sheets from public view. The bankers had been lobbying the Financial Accounting Standards Board to change the rules that governed “Fair Value Measurements” also known as FAS157 (September 2006).
You may recall during 2008 this was referred to as “Mark-to-market” accounting.
Banks loved m2m during a boom period. M2M made the more unusual balance sheet holdings — derivatives, the mortgage-backed securities (MBS), exotic liabilities, and other assets — look fantastic. The fair value measurements of these items — essentially, yesterday’s closing price — allowed the accounts to show enormous profits. Those were the underlying basis for huge bonuses, stock option grants and of course, company share prices.
The reality was quite a bit different. These were not equities or treasuries or corporate bonds — they were thinly traded items whose prices were ramping upwards on a sea of delusional optimism. As soon as the credit bubble ended and housing began to retreat, these assets would free fall like an Acme anvil in a Roadrunner cartoon — and the bankers were the Coyote.
Uh-oh, this was gonna be a problem. So the bankers began to lobby FASB to change the rules governing Fair Value Accounting. Sure, it was hugely helpful on the way up, but now, reporting actual holdings — previously marked at all time highs — was becoming problematic.
To their credit, the accounting board resisted. What Bankers were proposing — marking to their models — was patently absurd. These were the models that told them these purchases were good ideas in the first place. Changing Mark-to-Market to Mark-to-Model was a free pass to practically allowed banks to NEVER have to write down their liabilities. Some people began calling the proposed accounting changes “Mark-to-Make-Believe.”
In the midst of the 2008-09 collapse, however, Congress was in a panic. They mandated that FASB accept Mark-to-Make-Believe accounting in the Emergency Economic Stabilization Act of 2008. It gave the Securities and Exchange Commission the authority to “Suspend Mark-to-Market Accounting.” In March and April of 2009, that is precisely what occurred.
It was yet another example of an industry lobbying Washington, D.C. to get precisely what they want — and then having that legislation blow up in their faces. (I detailed other examples of this in a chapter of Bailout Nation — you can see that chapter here: Strange Connections, Unintended Consequences).
The bottom line is this: Investors do not really have a clear idea of how healthy any of these banks truly are. We do not know the state of their balance sheets. We do not know what their exposures are to mortgages, to Europe, to Greece, etc. They could all be technically insolvent, as far as any investor can tell.
And that is exactly how the bankers wanted it.
But given the trouble in Europe, and the likely problems in housing if the US goes into a recession, Investors have decided they cannot take the risk of a holding an opaque, possibly under-capitalized probably over-leveraged financial firm blindly. They are telling the banks no thanks, we are not interested, we are going to be prudent and we have to assume the worst. Hence, for the second half of 2011, they have been selling off their holdings in these opaque, potentially insolvent too big to succeed entities.
Bankers, enjoy your beds. You made them, now lay in them . . .
> I continue to be of the mind that the Wall Street Bailouts were misguided, and that a massive Swedish style reorg would have been the best thing for the nation and the economy in the long run. Both Uncle Sam and the Fed would have provided the broad based debtor in possession financing required,…Read More
Yesterday morning’s comments (Random Thoughts: Recent Trading/Market Activity) began with this bullet point: “This entire crisis traces itself back in large part to then FOMC chair Alan Greenspan not allowing markets and the economy to flush themselves clean after the dot com collapse. It seems that nearly every Fed/Government policy action has been a response…Read More
Here is a laugher: Dealbook is reporting that former S.E.C. Chairman Harvey Pitt is now criticizing Dodd-Frank. The giant SEC FAIL of the past decade traces, in no small part, to the great work of Mr. Pitt. As a reminder of Pitt’s sterling ethics and his service to the investing community, I give you this…Read More
I was reading this piece from Michael Hiltzik of the L.A. Times, and I was struck by something intriguing. The debate over the deficit is quite revealing about the speaker: What they choose to omit is every bit as important as what they emphasize. Consider these two short paragraphs: “As Henry Aaron of the Brookings…Read More
The “Datapoint of the Day” comes from the NYT column we referenced yesterday: The mind-boggling drop in Justice Department criminal referrals over the past decade. I find this specific factoid astounding: “Data supplied by the Justice Department and compiled by a group at Syracuse University show that over the last decade, regulators have referred substantially…Read More
This morning’s must read MSM piece is over at NYRB: The Wall Street Leviathan. Jeff Madrick simultaneously reviews: • Financial Crisis Inquiry Commission Final Report • Inside Job • Regulating Wall Street: The Dodd-Frank Act and the New Architecture of Global Finance • Reforming US Financial Markets: Reflections Before and Beyond Dodd-Frank This should give…Read More