Wednesday, January 26, 2011

FASB Capitulates (of Course They Do), and Perpetuates Mark-To-Fantasy for TBTF Wall Street Banks

The US stock market continues to levitate (thanks Ben), and now the FASB (Financial Accounting Standard Board) will make sure that it will levitate forever by forever securing the "solvency" of the TBTF Wall Street banks so that they can work their magic on the market forever.

From Zero Hedge's Tyler Durden citing the WSJ article and an outrageous comment by the former FDIC chairman Bill Issac, who blames the MTM (mark to market) as the reason for 2008 financial collapse:

As Bankers Kill Off Mark-To-Market For Good, Former FDIC Chairman Gloats

By now everyone is aware that following tremendous pressure by the banker lobby, which knows too well the Ponzi jig will be immediately up if Quantitative Easing's TBTF Madoffs are forced to disclose the true value of their worthless assets (yes, true value comes from asset cash flow generation, not from diluting money), the FASB decided to stop its push for a return to MTM. From the WSJ: "Accounting rule makers, bowing to an intense lobbying campaign, took a key step Tuesday to reverse a controversial proposal that would have required banks to use market prices rather than cost in order to value the loans they hold on their balance sheets." Transparency? What moron would propose that in an economy that is so obviously healthy and surging. After all, the only way to validate a surging stock market, er, economic recovery, is through bullshit numbers pulled out of the ass. That way they can pretend to tell us the truth, we can pretend to believe them, and everyone will frontrun the Fed who pretends not to be buying stocks. And it would have been great if it ended there. Alas no. Following the announcement, none other than Bill Isaac, current Chairman of LECG, but far more importantly, former Chairman of the FDIC under Ronald Reagan decided to send out a gloating email to his entire address book explaining what a moral victory it is to kill the MTM monster that is the sole reason for the near collapse of capitalism in 2008, and how truly wonderful it is for everyone to live in perpetual lack of knowledge of what the true value of any company's assets really is. Unfortunately, this just goes to show what the existing, extremely bribed, leaders of the nation's most vital organizations really think.

And before we present Isaac's note, here is some more on how the banker lobby scored one more over the US peasantry, from the WSJ:

The Financial Accounting Standards Board preliminary vote would allow banks to continue valuing many of their loans at amortized cost, an adjusted version of their original cost, as they do now. That backtracks on an FASB proposal last May to expand fair value to bank loans. The reversal is a victory for the banking industry, which says it would have hurt lending and unfairly reduce banks' book value. Supporters of the FASB fair-value proposal say it would have improved transparency and unmasked potential weakness at banks.

The FASB indicated the overwhelmingly negative reaction to its proposal from companies and investors played a large role in prompting the board to change its mind. The board received more than 2,800 comment letters on its fair-value proposal, most of them opposed to the move.

FASB changed direction on how to value loans because of "strong signals from the board's constituents," FASB Chairman Leslie Seidman said during a webcast Tuesday. She also noted that some loans—including those that banks trade actively instead of retaining in order to collect the payments on them—will have to be valued at market prices.

And the reason for why opacity rules:

At some large banks, their loans' fair value is billions of dollars less than their carrying amount.

That would dramatically reduce their shareholder equity—or assets minus liabilities—if the loans had to be carried at fair value.

Investors have said fair-value information is important to them even if they don't think it should be the criteria for valuing loans on the balance sheet, FASB members said.

Simply said, if everyone knew the truth, everyone would be insolvent.

For Bill Issac's gloating, go to the article.

Powers that be are so counting on the average Americans to remain financially ignorant so they shrug everything off.

"Fair value", if I recall, is not even a "mark to market" value. It is a value that the banks think they would get if the market were "normal". Who defines "normal"? Banks, of course.

Just like the Federal Reserve who just recently re-wrote its own accounting rules so that any loss on their toxic holdings (MBS, agency, and Treasurys) will be passed on directly to the Treasury Dept (aka US taxpayers, in case you haven't figured that out), TBTF banks write their own rules.

So why can't we write our own rules? Let's see. I think my house is worth $1.7 million, just as it was supposedly worth (so said these fine TBTF banks and their shills like Zillow) back in 2006 when the market was "normal" at 3 standard deviations away from the historical norm. And I demand that one of those fine banks give me a refi at 2% (they're getting free money, so the spread of 2% is very generous), and I want to take out equity up to 90% of the value of the house.

I have one nagging question, though.

These loans are carried on WHOSE book? The loan servicers' books? They are usually the ones who either bought or originated the loans and supposedly SOLD THEM TO REMICS. On the books of the REMICS, then? They supposedly purchased those loans but technically they didn't, as there was no proper transfer of loans in many cases (if not most, if not all - I'm leaning toward the last one).

It's all charade. Banks pretend that their loans, which they already sold long time ago, are as good as the day of origination; REMICs pretend that they actually own the loans, MBS/CDO investors pretend that their worthless paper is backed by real assets.

The only people who have taken the hit are the homeowners. It's just so sadly typical.


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