Courtesy of The Automatic Earth
"Market Street toward ferry", San Francisco after the earthquake and fire
Ilargi: OK, I’ll admit it off the bat: there’s no sex in this article. That title was just for effect. But then again, to make up for it, there’s plenty of lies.
Yves Smith says, talking about Bank of America’s fateful fits of late, that It’s the extend and pretend endgame.
I’m not too sure about that, other than perhaps it’s the very early stages of the end. But that may be all it is, and we might just as well pick at random any moment in time in the past decade for that honor. Soon as it started, we knew it had to end. You can’t fake it forever.
Much as I’d like to see the end of the extend and pretend game, I’m sort of pretty convinced that it’s the only thing left standing between the world as we knew it and the demise of the financial and political system that went along with it. And there’s a whole bunch of skin in the game that ain’t preparing to give up all that easily.
Yves carries a great quote from an April 3 2010 Steve Waldman piece that puts into words what we all (well, all?!) know but have perhaps never said as eloquently:
Bank capital cannot be measured. Think about that until you really get it. "Large complex financial institutions" report leverage ratios and "tier one" capital and all kinds of aromatic stuff. But those numbers are meaningless. For any large complex financial institution levered at the House-proposed limit of 15x, a reasonable confidence interval surrounding its estimate of bank capital would be greater than 100% of the reported value. In English, we cannot distinguish "well capitalized" from insolvent banks, even in good times, and regardless of their formal statements.
Ilargi: When you read that and let it sip in, isn’t that just the strangest thing? There’s no way to tell what a major financial institution is worth.
In the Bank of America discussion, both Mike ‘Mish’ Shedlock and Barry Ritholtz refer back to what’s been ailing the US financial system for years now: the insistence of both banks and regulators, in close cahoots, that assets should never not be marked to market; until, that is, it is favorable to the banks to do so.
FASB 157, the piece of paper that officially allows for American mark-to-Alzheimer valuation, doesn’t appear to provide for any rules in case that favorable situation simply never comes along. And that’s a predictable problem right there, isn’t it? You can’t lie forever. So what do you think happens? Yup, the FASB 157 rules receive one extension after the other.
And it’s not hard to understand why. Force Bank of America, or any other major bank in the world (all the attention for BofA is a bit weird, since they’re all zombie goners), to tell the outside world what paper they truly hold, and what all that paper is truly worth, and you might as well sign their death warrant.
Matt Taibbi delicately suggests that the $20 billion deal the government(s) are trying to reach with Wall Street on mortgage irregularities (see under fraud) may have something to do with the 2012 presidential elections.
Obama Goes All Out For Dirty Banker Deal
by Matt Taibbi – Rolling StoneIn a remarkable quote given to the Times, Kathryn Wylde, the Fed board member who ostensibly represents the public, said the following about Schneiderman:
It is of concern to the industry that instead of trying to facilitate resolving these issues, you seem to be throwing a wrench into it. Wall Street is our Main Street — love ’em or hate ’em. They are important and we have to make sure we are doing everything we can to support them unless they are doing something indefensible.
This, again, is coming not from a Bank of America attorney, but from the person on the Fed board who is supposedly representing the public!
This quote leads one to wonder just what Wylde would consider “indefensible,” given that stealing is pretty much the worst thing that a bank can do — and these banks just finished the longest and most orgiastic campaign of stealing in the history of money. Is Wylde waiting for Goldman and Citi to blow up a skyscraper? Dump dioxin into an orphanage? It’s really an incredible quote. [..]
Why? My theory is that the Obama administration is trying to secure its 2012 campaign war chest with this settlement deal. If Barry can make this foreclosure thing go away for the banks, you can bet he’ll win the contributions battle against the Republicans next summer. Which is good for him, I guess. But it seems to me that it might be time to wonder if is this the most disappointing president we’ve ever had.
Ilargi: Now, I don’t know whether Obama would be the most disappointing president ever, since that would be contingent on your expectations, which in turn should perhaps have been pretty much set when Larry Summers, Robert Rubin and Tim Geithner joined the team avant la lettre. It’s more like the deal once again confirms the Washington/Wall Street MO, and if that anno August 2011 surprises anyone, they should probably be reading up on their history.
Still, Taibbi’s piece ties in nicely with the whole Bank of America tragic tale: given what we may reasonably and minimally presume to be the bank’s involvement in mortgage mayhem of all sorts and kinds, not in the least, but also certainly not exclusively, because of its purchase of Countrywide, $20 billion should be Bank of America’s lawyers’ tally, not its penalty for breaking about every law in the book, and by all means not the combined fine for the major lenders put together.
It’s nice to read about the negotiations on the deal and see the banks demanding some sort of absolute immunity to all further legal action, or else they won’t sign. Who on earth are they to have any demands at all? They’re being accused of what Taibbi calls "pretty much the worst thing that a bank can do", and then they threaten to not comply with a deal that lets them off far too easily?
All the lying and scheming isn’t limited to Washington either, or the US for that matter. Europe has its own version of FASB 157 mark-to-Alzheimer regulation, suggested to it by no less than the International Accounting Standards Board, IASB. It’s called IFRS9, and here’s a telling little tale from Accountancy Age:
Can IFRS 9 prevent Greek tragedy?
CFA senior policy analyst Vincent Papa said investors want to see losses when they occur, and the proposed mixed model of impairment accounting "gives preparers too much freedom to present accounts as they see fit – a pure fair value model will take away this freedom".
Papa warned current proposals would present a "false plateau" and undermine investor confidence in the numbers, concluding: "The only way to solve this crisis is to tell it as it is."
Unsurprisingly, the IASB does not agree. Where IAS 39 used fair value measurement, IFRS 9 is based on expected cash flows, meaning if the holder of an asset is confident it will continue to bring in cash over its lifetime, it might not have to be written down to the extreme lows dictated by market prices.
Ilargi: It’s like going up to a murder suspect and ask: "Did you kill the victim?", and when he replies, with blood all over his shirt, hands and teeth: "I don’t reckon I did", vacate the premises while uttering abundant apologies. Not exactly Sherlock Holmes methods, and little to do with truth finding.
And then today Europe did itself one better in this lying league, as Zero Hedge reports:
Kiss the free market goodbye. Spain’s and France’s regulator have both just announced that the short selling ban, which was supposed to expire tomorrow, has now been extended until the end of September 30, and November 11, respectively. Add to this Belgium and Greece whose regulators announced they will lift its own short selling ban "when conditions allow", or some time in October, in and we can pretty much be confident that the European market rout seen earlier is due to someone leaking the news that price discovery in Europe is now officially over.
Ilargi: Now, let’s get this straight. Is banning short selling equivalent to telling outright lies? No it’s not. But it IS equivalent to not telling the truth. And that is, whatever you may think about this, a strange thing to be confirmed in official policy when it comes to what publicly traded companies are worth.
Remember free markets, how they are supposed to be efficient and rational and all, based on full information for all participants? Well, all of these things, FASB 157, IFRS9, and any and all short-selling bans, they serve one purpose and one only: to obscure the facts from the public, so they can never make any decisions based on full disclosure.
Financial institutions are not only permitted to withhold information from their shareholders, they’re actively assisted -and one might add encouraged- in doing so.
And that’s not going to change. The bordering-on-criminal-negligence deal on mortgage fraud the US government is preparing for its banks is only the last example we need to bring that home. Just another detail that confirms the overall pattern.
The big flipside of it all, as I said before, is that you can’t fake it forever. And once you realize that you will never get full information on the value of bank assets, you’re going to sell their stocks and never go back. Unless, and here we are in our Wile E. Coyote moment, you’re the sort of investor that bets on governments forking over ever more taxpayer funds in order to make you hold on to those stocks.
We can all try and determine what Bank of America’s financial situation is really like, and Henry Blodget does a reasonable job of it in The Truth About Bank of America. The point is, though, that it’s all just a guessing game for even the most in the know experts, since the government has freed all banks from their legal commitments concerning both fair value and the truthful disclosure of information related to it. Yes, it may be somewhat interesting to know whether Bank of America has $50 billion or $200 billion in undisclosed liabilities. But the political system has guaranteed that you’ll never find out the real number. Until, perhaps, the bank goes poof.
Which means that’s it’s not about Bank of America. It may be the worst of the bad apples, but so what? The entire basket full of them is rotten to the core. It’s about political systems that break their own laws in order to facilitate the continued provision of misinformation concerning publicly traded institutions.
And as much as you may or may not trust or mistrust the financial markets, they are the only option left for finding the truth about these institutions.
[Additional Reading – click on titles for full articles]
Greece forced to tap emergency fund
by Louise Armitstead – Telegraph
Greece has been forced to activate an obscure emergency fund for its banks because they are running short of collateral that is acceptable to the European Central Bank (ECB).
In a move described as the "last stand for Greek banks", the embattled country’s central bank activated Emergency Liquidity Assistance (ELA) for the first time on Wednesday night. Raoul Ruparel of Open Europe told The Telegraph: "The activation of the so-called ELA looks to be the last stand for Greek banks and suggests they are running alarmingly short of quality collateral usually used to obtain funding."
Market Chaos ‘Potentially Dangerous for Humanity’
by Christoph Pauly – Spiegel
Financial markets are inefficient and growing to the point of overwhelming the economy, according to Paul Woolley, an expert on market dysfunctionality. In an interview with SPIEGEL he explains why it’s up to investors to stop dangerous trends and hold financial institutions accountable.
SPIEGEL: Mr. Woolley, you were fund manager for many years, but went on to found a research institute at the London School of Economics to study why financial markets repeatedly go haywire. Now speculators are once again betting against the euro, and share prices for big companies are falling by 20 percent in a day only to shoot back up again. What is going on?
Woolley: The developments in recent weeks have made it quite clear that the markets don’t function properly. Things are spinning out of control and are potentially dangerous for society. Only a fraternity of academic high priests connected to the finance markets is still speaking of efficient markets. Still each market participant is pursuing their own selfish interests. The market isn’t reaching equilibrium — it’s falling into chaos.SPIEGEL: You’ve compared the finance markets to a cancer. What do you mean by that?
Woolley: The finance sector can — and is — growing until it overwhelms the economy. In good years the US finance industry cashes in on more than 40 percent of all corporate profits. In bad years they are saved by the taxpayers. The agents are doing a devilishly good job of developing innovative, complicated new products that people can’t understand. It gives them the opportunity to earn excess returns and attract the best talent. While they are acting rationally, the result is a catastrophe.
Market crash ‘could hit within weeks’, warn bankers
by Harry Wilson and Philip Aldrick – Telegraph
A more severe crash than the one triggered by the collapse of Lehman Brothers could be on the way, according to alarm signals in the credit markets.
Insurance on the debt of several major European banks has now hit historic levels, higher even than those recorded during financial crisis caused by the US financial group’s implosion nearly three years ago.
Credit default swaps on the bonds of Royal Bank of Scotland, BNP Paribas, Deutsche Bank and Intesa Sanpaolo, among others, flashed warning signals on Wednesday. Credit default swaps (CDS) on RBS were trading at 343.54 basis points, meaning the annual cost to insure £10m of the state-backed lender’s bonds against default is now £343,540.
The cost of insuring RBS bonds is now higher than before the taxpayer was forced to step in and rescue the bank in October 2008, and shows the recent dramatic downturn in sentiment among credit investors towards banks.
"The problem is a shortage of liquidity – that is what is causing the problems with the banks. It feels exactly as it felt in 2008," said one senior London-based bank executive. "I think we are heading for a market shock in September or October that will match anything we have ever seen before," said a senior credit banker at a major European bank.
Today, Bank of America management finally acknowledged what the market has long suspected—the company needs money.
This morning, Bank of America sold 50,000 shares of preferred stock and 700 million options to Warren Buffett for $5 billion.
This was very expensive money. Six months ago, Bank of America could have raised this capital at a vastly lower cost to its shareholders. But that’s the penalty for failing to be conservative and waiting to raise money until you absolutely have to.
Relieved that management is finally facing reality, Bank of America shareholders have bid the stock back up to $8 a share. This is still less than half of the company’s book value, though, which suggests the market thinks there’s still plenty of reality that management has yet to face up to.
As you may recall, I wrote an article earlier this week about why Bank of America’s stock has tanked ~40% in a month.
The article explained that the market does not believe that Bank of America’s assets are worth what Bank of America says they are worth.
Bundesbank questions legality of EU bail-outs
by Ambrose Evans-Pritchard – Telegraph
Germany’s Bundesbank has issued a blistering critique of EU bail-out policies, warning that the eurozone is drifting towards a debt union without "democratic legitimacy" or treaty backing.
"The latest agreements mean that far-reaching extra risks will be shifted to those countries providing help and to their taxpayers, and entail a large step towards a pooling of risks from particular EMU states with unsound public finances," said the bank’s August report. It said an EU summit deal in late July threatens the principle that elected parliaments should control budgets. The Bundesbank said the scheme leaves creditor states with escalating "risks and burdens" yet no means of enforcing fiscal discipline to make this workable.
There are no plans as yet for EU treaty changes to correct these distortions. "Unless there is a fundamental change of regime involving a far-reaching surrender of national fiscal sovereignty, it is imperative that the ‘no bail-out’ rule – still enshrined in the treaties – should be strengthened by market discipline, rather than fatally weakened," the report said.
German President Questions Legality of ECB Bond Purchases
by Spiegel
German President Christian Wulff blasted the European Central Bank’s policy of buying up bonds from indebted euro-zone countries on Wednesday, saying it runs counter to European Union laws. His comments highlight just how controversial efforts at propping up the common currency have become.
German President Christian Wulff on Wednesday publicly questioned the legality of the European Central Bank’s program of buying bonds of debt-ridden EU countries as a way of propping up their economies. Speaking at a conference of economists in the Bavarian town of Lindau, Wulff said: "I regard the massive acquisition of the bonds of individual states via the European Central Bank as legally questionable."
Germany fires cannon shot across Europe’s bows
by Ambrose Evans-Pritchard – Telegraph
German President Christian Wulff has accused the European Central Bank of violating its treaty mandate with the mass purchase of southern European bonds. In a cannon shot across Europe’s bows, he warned that Germany is reaching bailout exhaustion and cannot allow its own democracy to be undermined by EU mayhem.
“I regard the huge buy-up of bonds of individual states by the ECB as legally and politically questionable. Article 123 of the Treaty on the EU’s workings prohibits the ECB from directly purchasing debt instruments, in order to safeguard the central bank’s independence,” he said. “This prohibition only makes sense if those responsible do not get around it by making substantial purchases on the secondary market,” he said, speaking at a forum of half the world’s Nobel economists on Lake Constance to review the errors of the profession over recent years.
Eurozone industry shows signs of slowdown
by Graeme Wearden – Guardian
The eurozone economy slipped closer to stagnation this month as the region’s manufacturing sector contracted for the first time since September 2009. Data released on Tuesday showed that Germany’s private sector grew at its slowest pace in over two years in August, while France’s manufacturing output shrank, dragging the overall eurozone manufacturing sector into reverse. Economists warned that the European economy has slowed sharply in the last few months and may struggle to expand at all this quarter.
"The eurozone economy grew only marginally again in August, suggesting that recent months have seen the weakest expansion for two years," said Chris Williamson of Markit, which compiles the research. "The data raises the prospect that economic growth in the third quarter could be even slower than the disappointing 0.2% rise seen in the three months to June," he predicted. UK factories fared better during August, though, with the CBI reporting growth in order books and an increase in the number of manufacturers predicting increased output later this year.
The rich countries of the northern euro zone are bearing the brunt of bailing out their debt-stricken fellow members. Resentment is growing among their populations, helping euroskeptic right-wing populists to win support. But there is little awareness of how much the European Union has done for their own countries
Officially, of course, the one-euro coin is worth the same everywhere. But given the current state of the euro zone, you could be forgiven for thinking that the coin with the Greek owl or Spanish king on its reverse is worth less than one bearing, say, a German eagle or the silhouette of the Netherlands’ Queen Beatrix.
Silvio Berlusconi ally says Italy ‘condemned to death’
by Nick Squires – Telegraph
Silvio Berlusconi has been forced to dismiss dire warnings from his main political ally that Italy is doomed and the country is destined to split in two. Umberto Bossi, the mercurial leader of the Northern League, said that with Italy mired in a deep economic crisis, its political system no longer functions and the country is heading towards disaster.
He told his supporters to prepare for the creation of ‘Padania’ – an independent state in the wealthy north that would stretch from the Alps to the River Po and incorporate Lombardy, Piedmont, the Veneto and other regions.
Bank of America’s share nosedive fuels fears of a second credit crunch
by Tom Bawden – Guardian
The rapidly declining housing market is heightening concern that the bank will need to make huge write-offs
Bank of America continued its tailspin on Tuesday as shares in the largest US bank tumbled by another 6.4% to their lowest level since March 2009, fuelling fears of a second banking crisis. As concerns mounted that BoA will need to take huge additional write-offs on bad mortgages, the cost of insuring the group’s debt jumped to record levels and investors became increasingly concerned that the financial system could be facing a fresh credit crunch.
Bank of America: Could it Need $200 Billion in Capital?
by Mark Gongloff – Wall Street Journal
Bank of America shares are bouncing back this morning from a ghastly fall yesterday, but worries about the bank haven’t gone away. Shira Ovide over at Deal Journal points out there’s at least one relative optimist out there, who thinks the market is too worried about the bank’s need to raise capital. This is in contrast with Jefferies analysts, who said yesterday that the bank needed $40 to $50 billion in fresh capital.
And this view really, really clashes with that of Henry Blodget, who this morning writes that the bank might need $100 to $200 billion in fresh capital. Building on groundwork laid by Zero Hedge and Yves Smith, Mr. Blodget runs through all of the chunks that should be bitten out of BofA’s $222 billion book value and concludes:
So, taking some back of the envelope numbers, it looks as though we could easily come up with, say, $100-$200 billion in write-offs and exposures to “clean up” Bank of America’s balance sheet.
Derivatives ‘data gap’ could pose systemic risk
by Philip Stafford – FT
International regulators and central banks have warned that moves to safeguard against the systemic risk posed by the vast $600bn over-the-counter derivatives market could be undermined by potential “data gaps” in the information warehouses that store details on trades.
A report published on Wednesday by the Bank of International Settlements proposed a global minimum set of data to be reported by banks on their derivatives trades. However the report cautioned further information on off-exchange trades “would be helpful in assessing systemic risk and financial stability”.
New York Attorney General Eric Schneiderman on Tuesday was kicked off the committee leading the 50-state task force charged with probing foreclosure abuses and negotiating a possible settlement agreement with the nation’s five largest mortgage firms, according to an email reviewed by The Huffington Post.
Schneiderman was one of roughly a dozen state attorneys general leading the talks with the five companies, alongside representatives of the U.S. Department of Justice, the Department of Housing and Urban Development and other federal agencies. The government launched the negotiations in the spring after widespread reports of foreclosure irregularities, such as so-called "robo-signing" and illegal home seizures, emerged.
Obama Goes All Out For Dirty Banker Deal
by Matt Taibbi – Rolling Stone
A power play is underway in the foreclosure arena, according to the New York Times.
On the one side is Eric Schneiderman, the New York Attorney General, who is conducting his own investigation into the era of securitizations – the practice of chopping up assets like mortgages and converting them into saleable securities – that led up to the financial crisis of 2007-2008. On the other side is the Obama administration, the banks, and all the other state attorneys general.
This second camp has cooked up a deal that would allow the banks to walk away with just a seriously discounted fine from a generation of fraud that led to millions of people losing their homes.
A survey of China purchasing managers signaled a second straight monthly decline in manufacturing activity in the world’s No. 2 economy, and the country’s Commerce Ministry warned that its export sector is facing new difficulties. The reading of 49.8 in the preliminary HSBC China Manufacturing Purchasing Managers Index, issued early Tuesday in Beijing, came in higher than some analysts expected, and above the index’s final reading of 49.3 for July.
While the number was above the July reading and higher than some analysts had expected, it was still below the key level of 50, which separates growth in the industry from contraction. "The data reflected the basic situation, that the manufacturing activity of small- and medium-sized companies has improved moderately," said Standard Chartered economist Li Wei. He added that he expects industrial production to stabilize in the near term.
China’s Looming Debt Disaster
by Gordon C. Chang – Daily Beast
The United States has made painstaking efforts to reassure China about the American economy. Yet it’s China that should be doing the reassuring.
In the aftermath of Washington’s debt-ceiling debacle, Vice President Joe Biden was in Beijing on Friday, desperately trying to reassure the Chinese government that the American economy is not in a downward spiral. “And very sincerely, I want to make clear that you have nothing to worry about,” the vice president said.
China squeeze drives boom in ‘black’ banks
by Olivia Chung – Asia Times
China’s smaller private companies, starved of loans as the country tightens credit to fight inflation, are driving an underground banking boom by turning to unofficial sources for funds to stay in business. Some are even becoming lenders, given the prize of high returns.
About 3 trillion yuan (US$470 billion) of bank loans have been channeled into underground lending in the eastern coastal provinces, China Banking Regulatory Commission chairman Liu Mingkang told a recent closed-door conference with lenders.
