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The Jehoshua Novels


FASB Caves in on Mark to Market Accounting

The Financial Accounting Standards Board succumbed today to intense pressure from the banking industry and Congress, by relaxing the rules surrounding mark to market accounting. These were already loose rules to begin with. Banks could use internal models rather than an outside price to determine the value of an asset. They had great flexibility on what went into this “mark to model” pricing.

That wasn’t enough, though, Certain assets like mortgage-backed securities had outside prices, but for the longest time these have been anywhere from 30 cents/dollar down to nearly zero. A small number of trades were being down at these greatly-reduced prices. The banks argued that their much large portfolio of trades, if forced on to the market at once, would drive even these low prices close to zero. Also, the assets over their shelf life of five to ten years will generate enough cash flow to justify much higher prices today – more like 60 cents to 70 cents on the dollar, the price which the bank was currently using for valuation.

The FASB said in situations where the market price was not orderly, or where the bank is forced to sell the asset for regulatory purposes, or where the seller is close to bankruptcy (that means Citigroup), the bank can ignore the market price and make up one of its own.

Here’s one thing you may want to remember about all this. Prior to 2007, you never heard about mark to market or mark to model pricing. No one in the banking industry was screaming for accounting relief, and Congress wasn’t hauling up the FASB to pressure for changes. That’s because even though the market price for a lot of these securities was coming from disorderly, thin, and dysfunctional markets, prices were going up. Every notch higher in prices for these securities and derivatives, even if the market price was overinflated and the transactions behind them were corrupt, meant more profit and bonuses for the banks.

The banking industry has pressured and now succeeded in having it both ways. It can draw all the benefits of mark to market pricing when the markets are heading higher, and it can abandon this discipline when the markets go down (and trading assets will now magically turn to investments in down markets). These accounting standards say that you cannot trust the financial statements of the large banks, since they have now been given gigantic latitude to fudge the books.

On the Great Seal of the United States the bald eagle holds a quiver of arrows in one claw and an olive branch in the other. I suggest both these be replaced by the newest, more appropriate symbol of America – bananas. That’s the sort of Republic we’ve become.

27 comments to FASB Caves in on Mark to Market Accounting

  • tjfxh

    These accounting standards say that you cannot trust the financial statements of the large banks, since they have now been given gigantic latitude to fudge the books.

    Money, banking and finance are all based on confidence = trust. When trust is lost, then money, banking and finance become con games. This is what is happening in all these foundational fields.

    When trust is lost in money, banking and finance, the real economy grinds to a halt. Finance is being wrecked by the derivatives con. Banking is being wrecked by the hide the toxic assets con. And money is being wrecked by the manipulations of the Fed and Treasury to prevent debt destruction and protect bondholders by pumping liquidity, reflating assets, and stimulating demand in order to reignite debt capitalism for another round.

    No wonder the real economy is tanking, which is going to cause even more severe delevering and debt destruction.

    The giant Ponzi scheme continues.

  • AMC

    But if they don’t fix this problem in the next 12 to 18 months, with hard and fast rules, it is an invitation to continue the kind of business practices we saw at most large banks from 2003 to 2007.

    Even if we do re-fix the problem, the damage is done. As you point out, accounting rules are not rules, they are now suggestions – words (not principles) that will have different “generally accepted” meanings based on who’s ox is being gored.

    It is funny that the Mortgage Bankers Association harps on the “moral hazard” of allowing bankruptcy judges to modify mortgages in the same way they treat other claims. But banks don’t see any “moral hazard” in made-up-number-accounting.

    The only ones who would lose their moral compass when hard numbers are softened based on circumstances are the the little people who can’t make the mortgage payment on their home – but not bankers. As you can see from their very responsible behavior of the last decade, we can trust the bankers.

  • tjfxh

    These manipulations just create zombies, and zombies have only one sure way of digging out of the hole and that is by making high-return (risky) loans. This is just setting us up for another round of the same, and next time the government is not going to have the same ammunition to keep the game going.

    Each round increases the debt hole and also reduces the debt multiplier, so that debt no longer stimulates demand.

    Stimulating demand is not the same as stimulating growth, since debt demand creates a drag (interest) on the system. The only way to stimulate growth is by increasing demand by increasing productivity and sharing that growth in productivity through increased wages. We are in this mess largely because that did not happen over the last three decades.

  • brodix

    without the demand?

    How long does the denial last?

    Peering into the abyss;

    http://www.ritholtz.com/blog/2009/04/aig-before-cds-there-was-reinsurance/#more-22986

  • tjfxh

    Baseline Scenario

    UPDATE: Infectious Greed: More Mark-to-Market Myths

    Wm. Buiter Mavricon: How the FASB aids and abets obfuscation by wonky zombie banks

    Conclusion

    It really is wonderful how the US political and regulatory establishment is riding out in support of its wonky banks.  First, the Treasury Secretary Timothy Geithner proposes a toxic and bad assets purchase scheme (the PPIP or Public-Private Investment Program) which subsidizes the private parties in the public-rivate partnerships  bidding for the toxic assets by leveraging the private and public equity involved in the bids through non-recourse loans or guarantees.  This permits – indeed encourages – private bidders for toxic assets to make bids far in excess of their estimates of the fair value of these assets.  There rents can then be split between the private bidders foir the assets and the banks selling them.

    Second, in case even this isn’t good enough, banks that would rather not sell these toxic or bad assets, even at these inflated prices, can avoid pressure (from the regulators or from shareholders) to sell by marking-to-model (that is, marking-to myth) the assets rather than marking to market.  This gives the management of the bank more time to ‘gamble for resurrection’ at the expense of the shareholders and other stakeholders, including the tax payers.  Most importantly, banks with large amounts of undeclared crud on their balance sheets will act like zombie banks, engaging in little new lending or new investment in the real economy.  While their managers sit, wait and pray for a miracle, intermediation between households and non-financial enterprises continues to suffer.

    The G20 have made many pious statements about the need to recognise the losses that have been incurred, on and off the balance sheets of banks and shadow banks, and to ensure that the dead hand of the overhang of past losses does not act as a tax on and deterrent to new lending and borrowing by banks.  Yet the primus inter pares in the G20, the USA, decides to give its banks another large figleaf behind which to hide their losses and gamble for resurrection.  This continues and prolongues the zombification of most Wall Street banks.

    The FASB, like the rest of the American regulatory and standards-setting establishment, appears to have been captured lock stock and barrel by the vested interests of the large Wall Street zombie banks (management, shareholders and unsecured creditors).  This may well have been another example of cognitive regulatory capture, like that which has afflicted the SEC and the Fed.

  • Tina

    Apr 3, 2009, 11:01 GMT

    New York – US banks that have received government financial aid to help to stay afloat due to investments in risky assets are considering buying back so-called ‘toxic assets’ for resale, according to a report Friday by British daily the Financial Times.

    Citing unnamed banking sources, the FT said the institutions considering the move included Citigroup, Goldman Sachs, Morgan Stanley and JP Morgan Chase, all of which have received billions of dollars from the US government to stay afloat in the ongoing financial crisis.

    The report quoted critics of the alleged move as saying that troubled banks were provided funding for the set purpose of helping banks sell, rather than buy, risky securities.

    Read more: Report: Troubled banks want to buy back toxic assets – http://www.monstersandcritics.com/news/business/news/article_1468680.php/Report_Troubled_banks_want_to_buy_back_toxic_assets_#ixzz0Bbxp7J50


    “Go confidently in the direction of your dreams! Live the life you’ve imagined.” -Henry David Thoreau

  • Jonathryn

    Like the repeal of Glass-Steagal, that the mainstream press doesn’t understand, won’t cover, or knows which side its’ bread is buttered on far too well to mess with. Think about it, what major news organ is not owned by, or indebted to, financial companies? And what are they going to be reporting in five or ten years? They’ll be reporting about how this was a big mistake.

    Far from taking steps to re-regulate and clean up the system, we are actually regressing. Moreover, in every major instance I can think of, our elected officials are creating financial double standards between average citizens and major corporations.

    If a citizen is insolvent, they go bankrupt, their house is foreclosed, they become homeless. If a bank is insolvent, it gets a breathtaking amount of money in what is not only a form of corporate welfare but also an illegal government subsidy. Then they take those billions and buy off senators for thousands in K-Street campaign donations. Or slap their name on a stadium, like those fools who drive (drove?) around in hummers and flashed bling. That’s essentially what the banksters are–hoods pretending to have, for lack of a better term, big cocks and thick wallets. It’s ludicrous.

    Given the depth, magnitude, and unmitigated gall of these actors, I’m not sure any average American owes this government or these corporations any cooperation whatsoever. I suspect that there will come a time when resisting that 1/10th of 1% of the people in this country who actually run things will no longer be “politically infeasible.” Either that, or anti-incumbent sentiment sweeps these bums out. Or we have riots and places like Detroit are burned to the ground.

  • Zman1527

    “After the Constitutional Convention had finished its work in 1787, a woman asked Ben Franklin what kind of government had been decided upon. He replied: “A republic, if you can keep it.”

    Well, we have kept it no longer. The nation as founded no longer exists: that nation of laws, and rules, and principles. First, after 911, Bush began to ignore the constitution and the laws blatantly and hardly anyone cared. Congress, the arm of the government that should have reined him in, did nothing but cower in fear.

    And now we have the mega-corporations, the too big to fail not being allowed to fail. In fact, our “government” is bending over backwards in every way shape and form, to prop up these failed enterprises. Just look at the vast sums of money we have thrown at them with no strings attached. Trillions of dollars? Are you kidding me? And no this? Changing the rules so they can pretend they are solvent (let alone the news that they will use TARP funds to participate in the PPIP fund, lmao; what chumps we are)?

    Government of the people, by the people, for the people, has perished. This is clearly a nation of the banksters, by the banksters, for the banksters.

  • Zman1527

    FHLB Chairman Disgusted With FASB Accounting Alchemy, Quits

    Thursday, April 2, 2009
    FHLB Chairman Disgusted With FASB Accounting Alchemy, Quits
    Posted by Tyler Durden at 10:49 PM
    When the man in charge of the second largest borrower in the U.S. is willing to lose his job due to his discomfort with the FASB’s shift in accounting rules, you can bet that the tragic fallout of all the “market buoying” recent events is only a matter of time.

    Somehow this noteworthy event, which happened over a week ago, passed substantially unnoticed until Zero Hedge friend Jonathan Weil at Bloomberg dug it up. Charles Bowsher, who was most recently Chairman of the Federal Home Loan Bank System’s Office of Finance and previously served as U.S. comptroller general may be the only truly honorable man in the socialist nexus of politics and finance. The reason for his departure from this critical post – his discomfort in vouching for the banks’ combined financial statements. And as Weil puts it succinctly: “Now the question for taxpayers is this: If Charles Bowsher can’t get comfortable with these banks’ financial statements, why should anybody else be?” Why indeed.

    If Bowsher was merely involved with some marginal organization, this could be perceived as a hypocritical attempt to score populist brownie points. However, the FHLB is among the governmental entities at the heart of the current problem. Zero Hedge has written previously about the FHLB and its critical role in the ongoing housing crisis, but in a nutshell “The Office of Finance issues and services all the debt for the 12 regional Federal Home Loan Banks. That’s a lot of debt — $1.26 trillion as of Dec. 31, making the FHLBank System the largest U.S. borrower after the federal government. The government-chartered banks, which operate independently, in turn supply low-cost loans to their 8,100 member banks and finance companies. If any of the FHLBanks were to fail, taxpayers could be on the hook.”

    Ah, the poor taxpayer about to get duped one last time. And the immediate reason for Bowsher’s decisions: his concern with the methods used for determining when losses on hard-to-value securities should be included in banks’ earnings and regulatory capital. And it gets much worse:

    For the fourth quarter of 2008, the FHLBanks said their total preliminary net loss was $672 million. It would have been many times larger, had they included all their red ink.

    The year-end balance sheet at the FHLBank of Seattle, for example, showed $5.6 billion of non-government mortgage-backed securities that it says it will hold until maturity. Yet the estimated value of those securities was just $3.6 billion. The bank, which reported a $199.4 million net loss for 2008, said the declines were only temporary. They’ve been anything but fleeting, though. Most of those securities have been worth less than they cost for more than a year.

    The FASB’s rules on this subject, which have never been well defined, are now in flux. Today, after caving in to pressure by the banking industry and members of Congress, the Financial Accounting Standards Board is set to vote on a plan to relax its rules on mark-to-market accounting, so that companies can disregard market prices and ignore losses on their securities indefinitely.

    Bowsher is not new to taking hard political stands:

    As comptroller general, he was in charge of the General Accountability Office, the investigative arm of Congress. At his direction, the GAO was among the first to warn the public about the brewing savings-and- loan crisis during the 1980s. He testified before Congress in 1994 that there was an “immediate need” for “federal regulation of the safety and soundness” of all major U.S. derivatives dealers. (How’s that for prescient?)

    Most recently, in 2007, he led an independent committee that issued a blistering report on financial missteps at the Smithsonian Institution, whose board of regents included U.S. Chief Justice John Roberts.

    And how does the FHLB spin this event?

    “Mr. Bowsher has expressed his concerns to me around the complexity of valuing mortgage-backed securities and the process of producing combined financial statements from the 12 home loan banks. I don’t think it’s appropriate for us to speak for Mr. Bowsher.”

    So: to paraphrase – one of the men who knows the ins and outs of the financials of banks involved in the mortgage crisis more intimately than even Bernanke and Geithner, let alone Obama, is saying that the newly implemented changes by the FASB will throw the whole system into tailspin and he want none of it.

    If this isn’t the most damning condemnation of the Kool Aid the administration, the Treasury, the Fed, the FASB, the FDIC, and all the other alphabet soups are trying to make the common U.S. citizen drink and have seconds, then nothing else possibly could be…. of course until Bowsher is proven right and everything collapses into the smoldering heap of defaulted MBS still marked at par on various liquidating banks’ balance sheets…

    Oh and yes, let’s hold a moment of silence for Lehman which held billions of mortgage backed securities that it too was “holding until maturity.” Well, Lehman is no more, and all these securities now trade, in the form of the company’s general unsecured claims, at the generous price of 12 cents on the dollar… Furthermore, one can’t say the market is illiquid – the bid-ask spread is only 1 cent. And as there are over $150 billion of these claims floating around, one can’t say the market is in any way limited from a price discovery standpoint.

    Maybe if more honest people follow in Bowsher’s unique example, the general population will finally start seeing though the everyday lies and misinformation coming out of D.C.

  • Scotjen61

    Anyone even know what mark to market is? Its been an unmitigated disaster from the day it was instituted.

    Cost accounting is absolutely the correct accounting method. Realize losses when they occur, when the asset is sold.

    I would argue that 80% of the crisis in banking this time around was entirely due to mark to market. Can you imagine a bank like Wells Fargo that actually holds their mortgages to term for its customers. Portfolios of active performing mortgages, the bank having no intention of ever selling them off being forced to write them down to basically zero because there is at the infinitesimally small moment in time there happens to be no buyers of these perfectly good mortgages? Utter stupidity.

    So I am sitting with $5 billion in performing mortgages paying on average 6%, cash flowing, perfectly fine. And because this market is demaning north of 20% return I have to write this down to $1 billion and take a $4 billion paper loss, a totally fake loss on my income statement for one quarter.

    It was sheer lunacy. Now at least if an asset is being held, and the institution has no intention of selling they can use cost accounting, which is basically the only form of accounting that should be used.

    Lets get some folks on here that understand banking.

  • Scotjen61

    If a bank goes insolvent, the bank is taken over by the Federal Government. The equity is wiped off the books, the assets are organized and resold to other banks.

    There have been 20 such takeovers by the Fed this year already. That is what occurs.

    What we are dealing with are banks who are not insolvent, who are cash flowing and who are being forced into a liquidity crisis by assets held on the books for which the market vanished, partly due to reality of the portfolio held, and partly due to an absolutely frozen market. The rules forcing mark to market on the banking industry forces the banks to take all losses immediately and this is what creates a paper insolvency. Not a cashflow insolvency. That is what the government is trying to solve.

    These folks in the finance community have done nothing less than an amazing job over the last five months. And the really amazing thing is they have gone ahead and done it in the face of nothing but vilification by folks who know nothing about what is happening.

    The Obama admin said it best, the biggest barrier to solving the problem is the need to do incredibly complex and difficult things within the financial community with no ability to explain what they are doing to the general public.

  • hvd

    You are, of course, correct but for the fact that these same banks had profited mightily from that accounting device. Perhaps the rule should be cost accounting for everyone but those who have profited from mark to market in the past and then for them if they manage to survive the consequences of their own greed. In the meantime, frankly, let BofA, Goldman and their like die. As they should.

  • Zman1527

    So, scot, we decided to change horses in the middle of this stream just because we came to our sense out of the blue? No political pressure from banking oligarchs?

    In a fundamental sense, you may be right about the best accounting method; I do not have the understanding to assess that. But I do know that a major accounting rule was just changed that fabulously benefits the wealthy and well-connected at the expense of the rest of us in one form or another.

  • Synoia

    The best, and probably only, way to value these mortgage backed bonds is on a cash flow basis.

    The decision point here is precise: To value things on a cash flow basis, net cash flow less costs (collection costs and delinquencies), requires a decision on desired Return on Investment. If the ROI used to calculated the value is published, then the process to calculate the vale of bonds is completely transparent.

  • Anonymous

    When did that happen? Not when they bought these securities. They declared them as trading assets or available for sale, not as investments. They wanted them off their balance sheet as fast as possible and they expected to mark them to market for the 3 -6 months it usually took to package them up for Wall Street. They were no different than any other big bank who expected to earn over 20% return on their equity every year. That only happens with leverage, which means it only happens by funneling assets in and out of the balance sheet as fast as possible.

    What is lunacy here is that Wells Fargo wants to change the rules in the middle of the game. It wants all those trading assets declared investments, or it would like to treat them as investments by using its own projections of cash flow, which will be the current paying rate of 6% projected out for the life of the asset. Too bad that no investor would use such a projection if he were buying these assets today.

    I know something about mark to market accounting. I worked with Bankers Trust, Bank of America, and Citibank to get the first ever mark to market treatment for long term trading assets and derivatives in the 1980s. As trading management, we asserted at the time that only assets with readily available marks would be eligible for this treatment, and that we would take haircuts every month to reflect possible losses from illiquidity. Somehow it seems these promises have long since been forgotten. Today I teach accounting for college students and keep up with these technical matters. There is very little I see that makes me sympathetic to the banking industry on this subject.

    By the way, mark to market has never been a disaster for the instruments that merit such treatment. Have you heard of any problems in the foreign exchange or interest rate swap or option markets? These markets have been functioning with integrity and transparency throughout this crisis. The disaster occurred with products that should never have been given this treatment.

  • brodix

    For a peek into the future, from The Market ticker;

    http://market-ticker.denninger.net/archives/930-Asshat-Award-John-Dugan.html

    And this is what Dugan’s OCC says about it:

    “The OCC said it still does not have a solid explanation for why the modified mortgages are sinking into trouble. The agency revealed the trend in data released in December, which at the time threatened to scuttle a nationwide modification plan being pushed by the Federal Deposit Insurance Corp.”

    I have a solid explanation: it’s called mathematics.

    If someone got a “mortgage” that wasn’t really a mortgage at all (defined as a time payment for money intended to lead to the free and clear ownership of the underlying deed) but instead was effectively either a balloon note or worse, a bought-down short-term rate paid for by loading the fee to buy down that rate into the fees associated with the loan (added to principal) then it is not possible to modify that loan on a sustainable basis, if the borrower could not make a fully-amortizing payment in the first place.

    By the way, that is every single “Option ARM”, “teaser rate attached” note, I/O loans and 2/28 or 3/27 subprime mortgages. The latter two have largely all defaulted; the former three categories have the bulk of their blowup still to come and they not only constitute a much higher dollar volume than 2/28 and 3/27 in terms of origination they’re also concentrated in the “high value” areas such as California and Florida.

    Since the presumptive reason that these loans were made in the first place (as opposed to a 30 year fixed mortgage) was that the buyer did not have the income to support a 30 year fixed mortgage, we are left with a house that the borrower cannot afford.

    That’s the underlying reality and no amount of arm-waving can fix it.

    The correct solution to this problem is simple: default the damn mortgage and force the bank to eat their imprudent loan.

    This will of course cause the value of the house to be “reset” (at foreclosure auction) to its economic value – a process that must take place.

    Everyone in government and banking has for the last two years and change tried to avoid the fundamental reality: house prices must reset to their economic value, which is relatively easy to define – it is represented as a house price of approximately three times median income. Since median income was also “expanded” through bogus and in fact fraudulent financial activities, it too must contract, which means that in terms of “overinflated” salaries (and parts of the country where that was a major component of the wage base) house prices probably need to contract to two times those overinflated incomes!

  • Numerian

    I knew Charles Bowsher when he was Comptroller General. He was one of the few civil servants willing to stand up to any branch of the government and tell the truth, and it didn’t matter how important the Congressman was or which administration. He was exactly the sort of person you wanted in an oversight role. When he retired it was good to hear he was continuing with government service, and I am not at all surprised he gave up running the Home Loan Banks finance division when he can no longer rely on accounting to tell the truth even to his management.

  • Scotjen61

    There’s a HUGE market for interest rate swaps and exchange markets. They are so liquid one can readily identify the market to mark to. I have no issue with mark to market when there is a market. There were two main areas of abuse, and they were systemic. First – investment banks were allowed to merge with mortgage banks; and you get Citi Group. The mortgages were securitized and sold off by the investment side. They never should have allowed that type of merger, the two together create a very unstable mortgage banking, and too much capital for lending from the investment side. Second – allowing the lend to equity ratio to go from 1 to 8 to 1 to 30. That is the core cause of everything. Defaults could have gone to 12% under the old regime without a problem. Under the new 2004 rule defaults over 3% sent the system into a tailspin. Defaults on housing in the present market are below what they were in the 1982 recession, banks did not fail then.

    Wells Fargo did not participate in the mortgage backed securities racket anywhere near the extent of a BoFa or Citbank. They do not have an investment bank merged entity. They are not even in the same league. They absolutely have an enormous collection of mortgages they do not sell as a point of contact with customers. They maintain a huge loan servicing division.

    Wells Fargo did not even want any TARP funds, they are not in any need. The Fed made them take TARP funds so that there would not be any public ability to identify ‘good’ banks from ‘bad.’ Then the Fed swarmed the place.

    The accounting rules made them treat some of their mortgages as if they were for sale because they ‘could be’ put up for sale. They make you write these things down by the way, and then never allow you to write them back up. So Wells Fargo is in the worst world. They have an asset they intend on keeping to term, were being forced to write them down, and then when the market returns to normal they cannot write them back up again.

    Wells Fargo did not participate in the CDO racket either, they stayed out of derivitives. They wanted to buy troubled banks too, but were repeatedly stopped as the ‘marriages’ were arranged at the top, they had to sue to buy Wachovia.

    These rules were just that bad. Did certain banks abuse mark to market?? How could they, you can’t use it to write an asset up, only to write it down. Impairment is the only test.

  • Numerian

    Wells in particular has been avoiding some of the pitfalls of securitization and the whole CDO market. However, because they kept a larger portion of the mortgages on their balance sheet, they are more exposed than most banks if their mortgages, even though of high quality, continue to deteriorate.

    I don’t understand your statement that banks cannot write an asset up. That is not how mark to market is supposed to work, and in fact it seems like the banks had no problem writing these assets up before 2008. The rules should allow them to do so any time the market prices start increasing.

  • Scotjen61

    Mark to market is a downward adjustment for goodwill, mortgage backed securities and anything that is not say public stock market securities, currencies, gold or other commoditized asset where the market is highly liquid and readily available.

    Mortgage backed securities can only be subject to impairment and write down. When they are sold the gain can be realized, but no revenues from a write up in a marked to market asset can be realized. Them’s the rules.

    These assets can be marked down but they cannot be marked back up. Once goodwill for example is found to be impaired, and is written off its taken as loss in the year it is written off, and can never be returned and added as income. The same is true of mortgage backed securities, and credit default swaps, etc.

  • tjfxh

    What we are dealing with are banks who are not insolvent, who are cash flowing and who are being forced into a liquidity crisis by assets held on the books for which the market vanished, partly due to reality of the portfolio held, and partly due to an absolutely frozen market.

    Please cite evidence. This simply restates the official line, which is greatly disputed by many authorities. Pretty much everyone agrees that no such evidence exists because of complete lack of transparency. The conclusion of critics is that the absence of transparency is a matter of “silence is consent,” since the Fed and Treasury are in a position to know. If things were OK, the numbers would be made available, since that is what the markets want, and lack of transparency is continuing to depress values.

    The facts seem to be that Team Obama does not want to confront the possibility of insolvency in the case of the largest financial institutions for several reasons — political, economic and practical. The most significant problem in their minds, as I read it, it that it would not be as simple as an FDIC restructuring of a smaller bank, or even an IndyMac. Citi and BoA, for example, are behemoths that would be difficult to unwind without possibly creating “unforeseen consequences.” Or maybe they have foreseen the consequences, since they have access to the data, and decided that the web of finance could unravel.

    My sense is that there is genuine fear among Team Obama of slogging into this swamp, even though many very savvy people are saying that it must be done, and it will be less expensive to do it sooner than later. But it seems that Team Obama has decided to take the chance that the situation can be papered over with bailouts, looking the other way, and rule changes while reflating asset values by “increasing liquidity” aka overall loosening and continued laxity — which is what got us here in the first place.

    Let’s hope they are correct because the alternative is unappetizing. But my sense at the moment is that it won’t work as planned, based on my understanding of economists like Galbraith, Krugman, Stiglitz, and others of similar stature.

  • tjfxh

    OK, let’s refigure the last several years and let the bankers return the bonuses they received under the old rules.

  • Joaquin

    If things were OK, the numbers would be made available

  • Scott R.

    “Second – allowing the lend to equity ratio to go from 1 to 8 to 1 to 30. That is the core cause of everything.”

  • Zman1527

    My impression is that Obama does not want to deal with some of these things because they will get in the way of what he really wants to accomplish: health care, energy, global warming. Thus he is willing to paper over and “hope” that some of these things can be relatively held at bay while he attends to his goals: Afgan, financial mess, Bushco crimes.

    Unfortunately for all his, by not dealing with the fundamental issue, following the rules and the laws, he is continuing to put the entire system into jeopardy. This is the true moral hazard here: people have been abusing laws, rules, and just an understand sense of fair play and are not being called on it. He needs to drain this swamp first.

  • Zman1527

    by CalculatedRisk on 4/04/2009 08:52:00 AM

    From the WaPo: Administration Seeks an Out On Bailout Rules for Firms

    The Obama administration is engineering its new bailout initiatives in a way that it believes will allow firms benefiting from the programs to avoid restrictions imposed by Congress, including limits on lavish executive pay, according to government officials.

    Administration officials have concluded that this approach is vital for persuading firms to participate in programs funded by the $700 billion financial rescue package.

    The administration believes it can sidestep the rules because, in many cases, it has decided not to provide federal aid directly to financial companies, the sources said. Instead, the government has set up special entities that act as middlemen, channeling the bailout funds to the firms and, via this two-step process, stripping away the requirement that the restrictions be imposed …

    http://www.washingtonpost.com/wp-dyn/content/article/2009/04/03/AR2009040303910.html

  • greensmile

    Yes I expect the bankers to plead [by spending TARP money for lobbying!] for fantasy accounting rules so they can keep their Maserati and 3rd homes and boats…but why congress? and why obama’s team? The most benign thing I can imagine is that these enablers of the banker’s every wish to escape consequences for bad judgment or worse is a belief that we are all tied to the bankers: that if the bankers suffer the complete wipe-out of wealth they have actually brought about, the rest of us will suffer too. But that seems like a problem that a congress and administration not in thrall to bankers and bank lobby monies could solve.
    When the rating agencies went unreformed in spite of their key role in foisting junk on investors, you have to feel that the fix is in. Transparency is not conducive to the protection of banker’s greed and special interests…so it aint gonna happen.

    Freedom is not more important than fairness, just easier to sell and a lot easier to fake.

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