Bouncity-Bounce Time

Where did that come from?  Maybe here:

“I am most encouraged with the strength of our business so far in 2009,” Pandit wrote in an internal memorandum obtained today by Bloomberg. “In fact, we are profitable through the first two months of 2009 and are having our best quarter-to-date performance since the third quarter of 2007.” The bank had $19 billion of revenue in January and February before disclosed writedowns, he added.

This may well be true, but the underlying problem is what are the losses?

This singular question has been how one values these firms.  Is Citibank worth $1/share?  Zero? $20?  Its impossible to know, and the reason is all the off-balance sheet garbage and derivative exposure, none of which is being accurately valued by these institutions in a manner that investors can get their arms around.

Citibank, Bank of America , HSBC Bank USA , Wells Fargo Bank and J.P. Morgan Chase reported that their "current" net loss risks from derivatives — insurance-like bets tied to a loan or other underlying asset — surged to $587 billion as of Dec. 31 . Buried in end-of-the-year regulatory reports that McClatchy has reviewed, the figures reflect a jump of 49 percent in just 90 days.

$587 billion?!  A jump of nearly half in 90 days?

This is the sort of thing that drives stock prices into the dirt, causes the CDS players to ramp spreads and ultimately can cause market dislocations.

It also makes it impossible for investors both large and small to value these firms and settle on a personal evaluation of these firms’ prospects – and thus make decisions on whether to buy, sell, hold or short.

It is a fact that with The Fed throwing liquidity at the system in buckets the cost of funds is very near zero.  Now add to that the jacking up of rates across the curve for borrowing of all sorts (look at your credit card rate lately?) and you can see that if a bank does not have a ton of embedded and hidden losses the current environment is a potential gold mine.  Indeed, there’s an argument to be made that the current rate environment is exploitive and intentionally destructive to both savers and consumers so that the banks can try to "earn their way out of their losses" – on your back!

But the ramp job overnight and this morning in the futures is more than just a reaction to Pandit’s memo being leaked (intentionally?) last night.  It, and the schizoid behavior of the markets over the last several months, with a violent downward bias, is symptomatic of the utter dereliction of duty that our regulators in government have demonstrated time and time again.

The SEC, The Fed and other regulators exist not only to protect shareholders from fraud and taxpayers from abuse of various forms but are also supposed to stand, along with FASB, for presentation of financial data in a manner that is consistent from firm to firm and can be comprehended and evaluated.

They have utterly failed, and as a consequence we have seen market prices collapse as investors and traders have (rightfully so) concluded that anything which cannot be transparently valued is being concealed for a reason and thus has a net present value of zero.

The lesson in here for regulators and other government officials is that if they want the market to stabilize they must stop the games – that is, drive out The Bezzle – so that people can discern the value of these instruments.

Failing that the whipsaws will continue and each time that occurs liquidity is destroyed by investors discovering to their chagrin that bets they believed were correct in fact were wrong – not due to their lack of analysis, but rather due to the intentional concealment of loss exposure by the firms in which they were invested.