Demoskratos

It’s scary that banks can change some numbers in their computers based on a FASB standard change and suddenly it has created profits.  Did this create jobs?  How will it help people stay in their homes and avoid foreclosures?  Do these profits allow dividends, i.e. cash paid out to shareholders?

The action by FASB, an independent accounting standards-setter, came after Congressional pressure to help banks that have been forced to record billions of dollars in lower values for distressed assets because of frozen markets.

Investor groups opposed the change, saying it would let big banks conceal the real value of their toxic assets.

KEY POINTS:

* FASB allows banks to apply new mark-to-market guidance in the first quarter of 2009.

* FASB says the objective of mark-to-market accounting is to set a price that would be received by a bank in an “orderly” transaction in the current, inactive market. It says an “orderly” transaction for accounting purposes does not include the forced liquidation or a distressed sale of an asset.

* FASB agrees to drop the presumption in mark-to-market accounting that all transactions in an inactive market are distressed unless proven otherwise.

* FASB clarifies when banks are required to take write downs on impaired assets, letting them record smaller losses on their income statements.

Even board members of FASB disagree when it came to a vote on the changes:

Two of the five FASB board members, Thomas Linsmeier and Marc Siegel, voted against the change in reporting of such impaired assets. They argued it was the sort of decision bank regulators should make, because it could affect banks’ capital positions, and that the FASB had been pressured by Congress to take it.

Many pundits have hesitations and have commented on the action:

“Now you’re going to leave pricing back in the hands of management teams that may not have done a great job over this cycle, and you’re going to have to trust them that they really are marking these things to a model and a price that is reasonable. It takes us back to the same thing: We’re probably going to give more leeway to the management teams that you trust … than those you don’t.”

Well, don’t feel alone.  As United Technologies announced today that 11,600 jobs will be eliminated in 2009, these future unemployed will join the 12.5 million Americans who are currently unemployed as of the end of February 2009.  Year to date figures shows 1.3 million jobs eliminated which is an average of 22,135 jobs lost every day.

In the midst of the economic decline, it appears that there is much debate about the causes of the recession and the government remedies to arrest job loss, foreclosures and restore confidence in our financial sector which is widely believed to be the epic center of the crisis.

Jim Puzzanghera of the LA Times wrote on March 9, 2009:

Some experts say what these ventures have done is make an AIG or a Citigroup that’s “too interconnected to fail.” And it’s not just the size that would matter. AIG’s interconnectedness with other companies, markets and economies is so huge and convoluted that it’s almost impossible to foresee what all the consequences of collapse would be.

The prime example of this problem is about $500 billion in unregulated credit default swaps held by AIG. Those complex financial instruments are essentially insurance policies taken out on mortgage-backed securities and other assets. The swaps were designed to pay out money to buyers who got caught in exactly the type of financial crisis taking place right now.

In essence, AIG was committed to insuring hundreds of billions, if not trillions, of dollars in investments. When the housing market crashed and the economy nose-dived, those investments tanked as well. And AIG was liable for the losses — a liability so large that it is now overwhelming the rest of the company, including the still-profitable parts.

What’s worse, because credit default swaps were unregulated and the layers of transactions so arcane that they are difficult to understand clearly, the true cost is essentially impossible to measure with certainty. Once the dominoes began to fall, no one knew where the process would end.

“People don’t know the exposure, so as a result there’s a huge premium on fear and the unknown,” said Kent Smetters, associate professor of insurance and risk management at the University of Pennsylvania’s Wharton School.

However, Ralph Vartabedian of the LA Times wrote on March 10, 2009:

But critics contend that what was originally proposed as an overwhelming gesture of government resolve to get banks on their feet now seems like an intravenous drip, barely sustaining the giant institutions that account for the majority of U.S. bank assets. As time goes on, the problems appear again to be deepening.

“Some of these banks are walking dead and should be closed,” said Sen. Richard C. Shelby of Alabama, a 20-year veteran of the Senate Banking Committee and its senior Republican. “We are propping up financial institutions that are insolvent and have already failed. The government has made a political decision to keep them going at the taxpayers’ expense.”

At the other end of the political spectrum, the AFL-CIO Executive Council voted unanimously last week to urge President Obama to nationalize problem banks as a way to stimulate and stabilize the financial system.

“Every day we delay is another day workers in this country feel the pain of a stagnant economy,” said Richard L. Trumka, secretary-treasurer of the labor organization, a powerful influence on the Democratic-controlled White House and Congress.

Despite, P. Parameswaran wrote of US Federal Reserve Chairman as saying,

“In the near term, governments around the world must continue to take forceful and, when appropriate, coordinated actions to restore financial market functioning and the flow of credit,” he told the Council on Foreign Relations, a think tank, in Washington.

Speaking ahead of a weekend meeting of the Group of 20 finance ministers and central bank chiefs in London, Bernanke said while fighting the current crisis, policymakers should embrace reforms to the financial architecture that could help prevent a similar turmoil from developing in the future.

“We must have a strategy that regulates the financial system as a whole, in a holistic way, not just its individual components,” he said.

“In particular, strong and effective regulation and supervision of banking institutions, although necessary for reducing systemic risk, are not sufficient by themselves to achieve this aim.”

Martin Crutsinger, AP Economics Writer reported today:

Treasury Secretary Timothy Geithner says that within the next couple of weeks the administration will unveil its plan for dealing with the toxic assets that lie at the heart of the current financial crisis.

Geithner says that the plan the administration has put together will provide low-cost government financing to private investors who are willing to purchase the bad assets that are currently clogging banks’ balance sheets.

It is clear that our despite the expectation of the US Government to always have the answers or solutions to the problems of society, it is abundantly clear that they don’t.  As painful as it maybe to experience first hand the fumbling of government, it appears that finally that the government leaders who are charged with turning the economy around are beginning to focus in on the issues and causes which is good news.  The first step to solving any problem is first identifying the problems and causes.

The Dow Jones Industrial Average rallied 380 points today as Citibank reported positive operating profits the first two months of this year.  Perhaps, we’re beginning to see a glimmer of light in this dark and winding tunnel.

There are a couple of passages from the article below that terrifies me.  One, taxpayers will be forced along with other private money to buy assets that nobody wants and to hold indefinitely without any indicators that these “sour assets” will ever yield a return on investment.  Second, the idea that banks are unwilling to sell troubled assets at a loss therefore implying that the government should buy these properties at inflated values.  Let’s keep in mind taxpayers have lost $78 billion already in Paulson’s first round of TARP money issued to banks and nothing has been changed with regards to better regulation in the banking, mortgage and lending industry.

No matter how Geithner is going to spin his plan, it reads to me that trillions of dollars of taxpayers’ money is about to go out the door and pay bankers and its shareholders for bad decisions and take these “sour assets” off their hands.  This is worse than any bank bonuses paid in 2008.

Source:  NY Times

February 10, 2009

Geithner Said to Have Prevailed on the Bailout

By STEPHEN LABATON and EDMUND L. ANDREWS

…It intends to call for the creation of a joint Treasury and Federal Reserve program, at an initial cost of $250 billion to $500 billion, to encourage investors to acquire soured mortgage-related assets from banks…

…There is no market value for most of those troubled assets because they are not trading. Investors want to buy them at the lowest price possible, but banks want to avoid selling them at rock-bottom prices and realizing huge losses.

The impasse is particularly serious for whole mortgages, which are loans that banks have kept on their own books instead of selling them to Wall Street firms, which bundle them into pools and resell them as mortgage-backed securities…