EXTEND & PRETEND IS WALL STREET’S FRIEND
by ilene - March 31st, 2011 11:53 am
Courtesy of Jim Quinn, The Burning Platform
“We now have an economy in which five banks control over 50 percent of the entire banking industry, four or five corporations own most of the mainstream media, and the top one percent of families hold a greater share of the nation’s wealth than any time since 1930. This sort of concentration of wealth and power is a classic setup for the failure of a democratic republic and the stifling of organic economic growth.” - Jesse –http://jessescrossroadscafe.blogspot.com/
Source: Barry Ritholtz
“All of the old-timers knew that subprime mortgages were what we called neutron loans — they killed the people and left the houses.” - Louis S. Barnes, 58, a partner at Boulder West, a mortgage banking firm in Lafayette, Colo
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THOSE WHO IGNORE HISTORY….
by ilene - September 2nd, 2010 12:46 am
THOSE WHO IGNORE HISTORY….
Courtesy of The Pragmatic Capitalist
My position over the last 2 years has been as follows: this is a Main Street debt crisis. I have been highly critical of the government’s incessant interventionist policies over the last few years largely because they ignore the actual problems at hand. First it was Mr. Bernanke saving the banks because he believed the credit crisis started with the banking sector. The great monetarist gaffe ensued. Tim Geithner piled on with the PPIP. FASB jumped on board the bank rescue plan by altering the accounting rules. And then the icing on the cake was the Recovery Act, which, in my opinion, just shoveled money into the hole that had become the output gap, without actually trying to target the real cause of the crisis – those burdened by the debt. In essence, the various bailouts primarily targeted everyone except the people who really needed it.
A year ago I posted a story citing the many reasons why we were sinking into the deflationary Japanese trap. The primary flaw with the US response to the crisis was that we never actually confronted the problem at hand. I have often cited Japanese economists such as Richard Koo who appear to have a good grasp on the problems in Japan and now in the USA. In this case, I cited Keiichiro Kobayashi who is now looking most prescient:
We continue to ignore our past and the warnings from those who have dealt with similar financial crises. Keiichiro Kobayashi, Senior Fellow at the Research Institute of Economy, Trade and Industry is the latest economist with an in-depth understanding of Japan, who says the U.S. and U.K. are making all the same mistakes:
“Bad
debt is the root of the crisis. Fiscal stimulus may help economies for a couple of years but once the “painkilling” effect wears off, US and European economies will plunge back into crisis. The crisis won’t be over until the nonperforming assets are off the balance sheets of US and European banks.”
Read that last paragraph again. These are scarily accurate comments. While the USA claims to have many economists who understand the Japan disease and/or the Great Depression the policy actions we’ve undertaken do not appear to be in line with any understanding of this history.
What we’ve done over the last few years is repeat the mistakes…
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Death-Spiral Intercept
by Chart School - April 15th, 2010 3:53 pm
Death-Spiral Intercept
Courtesy of Karl Denninger at The Market Ticker
In essence, White was saying: "it’s the debt, stupid." When aggregate debt levels build up across business cycles, economists focused on managingwithin business cycles miss the key ingredient that leads to systemic crisis. It should be expected that politicians or private sector participants worried about the day-to-day exhibit short-termism. But White says it is particularly troubling that economists and their models exhibit the same tendency because it means there is no long-term oriented systemic counterweight guiding the economy.
This short-termism that White refers to is what I call the asset-based economic model. And, quite frankly, it works – especially when interest rates are declining as they have over the past quarter century. The problem, however, is that you reach a critical state when the accumulation of debt and the misallocation of resources is so large that the same old policies just don’t work anymore. And that’s when the next crisis occurs.
It seems that Mr. [Edward] Harrison has it figured out. He goes on to spend a lot of digital ink on the periphery of the bottom line, which is that we continue to think of debt in terms of service costs (indeed, you’ll hear Bernanke talk about it, but never about the actual gross financial system debt outstanding.)
When you boil all this down, however, you get to the following chart (trendline added by moi):
You can see what’s going on here – each "crisis" leads to lower lows and lower highs.
This presents two problems:
-
Lower lows have run into the zero boundary. That wasn’t sufficient this time, which of course is why we got "Quantitative Easing" and other similar abortions intended to distort market rates – like guarantees on bank debt, for example. Ultimately this devolves into The Fed or The Government (as if there’s a real difference) guaranteeing everything to prevent spreads from blowing out.
-
Far more sinister, however, is what happens to the top line. The top line – that is, the maximum rate between crises, declines because it becomes impossible to normalize rates - nobody can afford to pay "normal" rates with the amount of leverage they have.
This is where the ultimate failure in policy arrives, and it…
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Did The Fed Just (Surreptitiously) Bail Out Europe?
by ilene - April 12th, 2010 10:42 pm
Did The Fed Just (Surreptitiously) Bail Out Europe?
Courtesy of Karl Denninger at The Market Ticker
No, not just Greece – all of Europe. Without Congressional authorization or notice, of course.
Hattip to a nice emailer….
Or if you prefer it on a one-year time scale…
That nice little vertical line is a gain of $421.8 billion dollars of outstanding loans and leases in one week’s time.
WHERE THE HELL DID THAT MONEY GO AND WHAT COLLATERAL WAS TAKEN AGAINST A FOUR HUNDRED BILLION DOLLAR INCREASE IN OUTSTANDING LOANS?
You won’t find anything like that in the records – because it’s never happened before. That’s beyond unprecedented, it’s ridiculous, and assuming it’s also accurate, someone has some ‘splaining to do on what clearly appears to be some sort of back-door game being run.
Update: It has been suggested that this may be related to the FASB changes and securitized loans coming back on the balance sheet. If so, where’s the alleged memorandum items on the other side and the footnote on FRED? The latter is missing, but the necessary data on FRED to confirm that is not yet updated.
Nonetheless, if this is the case, it’s still bad (just not catastrophic) as this will directly hit capital ratios. Or, put another way, where’s the additional capital that "should" be there to support what is now on balance sheet and was previously off (never mind that it was crooked as hell to have it off in the first place!)
****
Karl’s follow-up post:
What The Hell? (Outstanding Credit)
Go read this Ticker first (it’s right below this one on the top page)
Some more digging around FRED has found additional disturbing data. Specifically:
WHAT?
An $84.2 billion increase in one month, or annualized, a significantly more than 100% run rate?
Something’s not right here folks. I can’t find the rest of the one-week ramp yet, as the data is not current enough for me to do so, but that’s an insane increase.
C&I loans picked up a bit (614 .vs. 591.8) which is a significant move as well, but then again it also dropped a lot between 3-17 and 3-24 (605 to 591.8), so in context it’s not nearly as material.
Where did the more than $400 billion go that was "borrowed"?
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Most Wall Street Banks Using Lehman Style Accounting Trickery Enabled by the Fed to Hide Their Risk
by ilene - April 9th, 2010 12:27 pm
Most Wall Street Banks Using Lehman Style Accounting Trickery Enabled by the Fed to Hide Their Risk
Courtesy of JESSE’S CAFÉ AMÉRICAIN
This analysis from the Wall Street Journal indicates that most of the big US Banks are engaging in the same kind of repo accounting at the end of the quarter that Lehman Brothers was doing to hide their financial instability until deteriorating credit conditions and liquidity problems made them precipitously collapse, as all ponzi schemes and financial frauds do when the truth becomes known.
The basic exercise is to hold big leverage and dodgy debt, but swap it off your books with the Fed at the end of each quarter for a short period of time when you have to report your holdings.
This could easily be corrected by requiring banks to report four week averages of their holdings for example, rather than a snapshot when they can hide their true risk profiles so easily, compliments of that protector of consumers and investors, the Fed.
This is nothing new to us. Many of us have noted this sort of accounting trickery and market manipulation at key events especially at end of quarter.
It is facilitated by the Federal Reserve, and FASB, and the agencies.
"Their Fraud doth rarely falter, and is subsidized, instead,
for none dare call it bank fraud, if it’s sanctioned by the Fed."
(apologies to Ovid)
The US is Lehman Brothers on a scale writ large. And when it is exposed by some series of events, the implosion could be more sudden than any can imagine. But in the meantime the US is still the ‘superpower’ of the world’s financial system, through its currency, its banks, and its ratings agencies.
WSJ
Big Banks Mask Risk Levels
By KATE KELLY, TOM MCGINTY and DAN FITZPATRICK
April 9, 2010Quarter-End Loan Figures Sit 42% Below Peak, Then Rise as New Period Progresses; SEC Review
Major banks have masked their risk levels in the past five quarters by temporarily lowering their debt just before reporting it to the public, according to data from the Federal Reserve Bank of New York.A group of 18 banks—which includes Goldman Sachs
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Big Banks: “You Will Cancel FASB 166 So We Can Continue Pretending All Is Good… Or We Will Kill Lending Even More”
by ilene - October 16th, 2009 5:11 pm
Big Banks: "You Will Cancel FASB 166 So We Can Continue Pretending All Is Good… Or We Will Kill Lending Even More"
Courtesy of Zero Hedge
At first it was just the smaller banks, but now the big boys have joined the collective cry against FASB 166 and 167, according to which beginning January 1, banks will likely see up to $900 billion in off-balance sheet assets being onboarded to bank balance sheets. This would likely mean banks need to dramatically increase their Tangible and Tier 1 Capital to offset the capital needed to account for possible asset deterioration. And that, of course, is unacceptable to banks who know too well the deep shit they still find themselves in.
The irony is that banks, which have already virtually halted lending to those in need of credit, are threatening they will cut any available credit even futher. How anyone could admit to being stupid enough to believe this latest episode of Mutual Assured Destruction courtesy of the US banking system is a mystery. And yet this is precisely the type of "gun against the head" negotiating that Max Keiser was fulminating against, and that the banks are once again perpetrating:
“With any increase in required capital, a banking institution is likely to reduce the amount of lending using such securitization vehicles, as well as other lending,” the American Bankers Association wrote in a letter to regulators. The association, the nation’s biggest banking lobby, suggested that any transition period should be three years at least, with no change in regulatory capital impact in the first year.
Taking a cue from the ABA, the big 3 record earners have decided to join in: last thing one would want is JPMorgan not earning yet another record amount in Q4. First Citi chimes in:
Banks should be given three years to raise capital for offsetting assets and liabilities that must be brought onto their balance sheets, Citigroup Chief Financial Officer John Gerspach said yesterday in a letter to regulators. Requiring banks to “assume the risk-based capital effects immediately, or even over one year, is an undeniably severe penalty,” he wrote.
Then you have record earner JPMorgan:
The capital requirements “will have a significant and negative impact on the amount of consumer-conduit funding that will be made available by U.S. banks,” said
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WHY ISN’T THIS ON THE COVER OF EVERY NEWSPAPER?
by ilene - July 25th, 2009 10:12 pm
WHY ISN’T THIS ON THE COVER OF EVERY NEWSPAPER?
Courtesy of The Pragmatic Capitalist
Okay, I can see how this story might not be a headliner, but we’ve heard practically nothing in the mainstream media about the upcoming battle between FASB and the financial industry with regards to accounting changes. According to Bloomberg FASB is expected to expand the use of fair value accounting after the drastic changes that took place in Q1 – the same changes that have helped so many of the banks in the near-term. FASB knows they made a mistake and got pressured by politicians and the Treasury to change the rules in the middle of the game. Well, now they’re considering changing them back (kind of). The rule change would have sweeping effects on the banks and as regular readers know, I believe would have an enormously positive impact on the long-term well being of the country. Bloomberg reports:
The scope of the FASB’s initiative, which has received almost no attention in the press, is massive. All financial assets would have to be recorded at fair value on the balance sheet each quarter, under the board’s tentative plan.
This would mean an end to asset classifications such as held for investment, held to maturity and held for sale, along with their differing balance-sheet treatments. Most loans, for example, probably would be presented on the balance sheet at cost, with a line item below showing accumulated change in fair value, and then a net fair-value figure below that. For lenders, rule changes could mean faster recognition of loan losses, resulting in lower earnings and book values.
The board said financial instruments on the liabilities side of the balance sheet also would have to be recorded at fair-market values, though there could be exceptions for a company’s own debt or a bank’s customer deposits…
Differing Treatment
While balance sheets might be simplified, income statements would acquire new complexities. Some gains and losses would count in net income. These would include changes in the values of all equity securities and almost all derivatives. Interest payments, dividends and credit losses would go in net, too, as would realized gains and losses. So would fluctuations in all debt instruments with derivatives embedded in their structures…
Imagining the Impact
Think how the saga at CIT Group Inc. might have unfolded if loans already
…
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FASB Grows A Pair? Watch Those Stocks!
by ilene - July 23rd, 2009 11:23 am
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FASB Grows A Pair? Watch Those Stocks!
Courtesy of Karl Denninger at The Market Ticker
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Philip R. Davis is a founder Phil's Stock World, a stock and options trading site that teaches the art of options trading to newcomers and devises advanced strategies for expert traders...
Ilene is editor and affiliate program
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