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.

Tweet

CNBC Cheerfully Announces Housing Depression

Permanently bullish (probably by decree from the higher up) CNBC reports that home values have declined 26 percent since the housing market top in June 2006.

Since the decline is more than 25.9% decline during the Great Depression, by golly the housing market is solidly in depression! And it's the 53rd consecutive months (as of November) that home values have fallen!

But if you listen to the timbre of the article, you may conclude it's a jolly good fun thing, just like the comedy "Home Alone"...

From CNBC:

As the economy revs back to life, with signs of hiring on the horizon, the housing market is being left behind like Macaulay Culkin in “Home Alone.”

In the past few years, we’ve all been careful to choose our words carefully, not calling it a recession until it fit the technical definition and avoiding any inappropriate use of the “D” word — Depression.

Things were bad but the broader economy never reached Depression territory. The housing market, on the other hand, just crossed that threshold.

Home values have fallen 26 percent since their peak in June 2006, worse than the 25.9-percent decline seen during the Depression years between 1928 and 1933, Zillow reported.

November marked the 53^rd consecutive month (4 ½ years) that home values have fallen.

What’s worse, it’s not over yet: Home values are expected to continue to slide as inventories pile up, and likely won't recover until the job market improves.

And while the president is physically protected in an emergency, whisked to a bunker at an undisclosed location, the actual White House is not: The value of 1600 Pennsylvania Avenue has dropped by $80 million, or nearly 25 percent since the peak of the housing boom. It’s current value is $251.6 million, according to Zillow, down from $331.5 million.

At the end, the writer (Cindy Perman) even starts to sing the National Anthem. I just couldn't reproduce that singing above, as I felt so put off by her mindless dribble.

In many parts of the country, homeowners would be lucky if the decline is only 25%. After the real estate bubble burst, home values in Tokyo declined more than 90% from the peak, while commercial properties in central Tokyo saw the value dropped to less than 1% of the peak. Some parts of California so far have seen 75% decline since the top.

You would hope that is the bottom...

Tweet

Vampire Squid (Goldman) vs Vampire Squid (US Gov)

The match will be on tomorrow (Tuesday April 27, 2010), at 10:00 AM EST.

The government Vampire Squid is represented by the members of the Senate Permanent Subcommittee on Investigations (chairman Carl Levin (D-Michigan)).

Expect the trading on the US stock exchanges to be extremely thin, as most traders will likely be watching the show.

In February, the US government ganged up on Toyota over Toyota's sticking pedal recalls, which caused the then-world No.1 automaker's share price to plunge. Today, no one talks about Toyota.

Now it is ganging up on the top dog on Wall Street, as it tries to force the financial "reform" through the Senate. Shares of Goldman Sachs has lost 18% since April 16, when the SEC charges were leaked on New York Times ahead of the formal announcement.

The Senators will first beat up on 31-year-old Goldman trader "Fabulous" Fab Tourre, and then on to the showdown with the Vampire Squid incarnate Lloyd Blankfein. The last time he was on Capitol Hill, Mr. Blankfein was rather impatient with the Senators whose CPUs were clearly slower. Let's see how he does this time.

All for our entertainment, so that we can forget about the mountain of new taxes and regulations that are coming our way.

Tweet

Trump: Best Real Estate Investimg Market Ever Is Now

I saw this banner ad on a Yahoo Finance page yesterday. Donald Trump is offering a free seminar on how to invest in real estate. If you go to the site, you are greeted with a video that proclaims "This is the best real estate investing market in the history of our country!"


You would think real estate properties are the last thing that any sane person wants to invest, given what has transpired since 2007.

Anecdotal evidence in the local residential real estate market shows there are buyers, a great many of them, buying across the board - from trailer homes to multi-million-dollar beach properties. Real estate professionals in the area say many of these investors are cash buyers, including foreign buyers, buying up short sales and foreclosures. Higher-end properties that are not short sales or foreclosures have started to move. The inventory level is actually back to where it was at the peak of the housing bubble: mere 4.6 months.

Is it possible that the real estate market is clearing, at least the residential market? Or is it just the banks are withholding the inventory and the worst is yet to come?

Tweet

Housing Boom in London (No, This Is Not 2007)

with low inventory, seller's asking price all-time high.

More green shoots.

London Agents ‘Sold Out’ as Home Asking Prices Jump to Record
(10/19/09 Bloomberg)

"Oct. 19 (Bloomberg) -- London home sellers raised asking prices to a record high this month and led gains across the U.K. as the shortage of properties for sale intensified, Rightmove Plc said.

"The average cost of a home in the capital rose 6.5 percent, the most since records began in 2002, to 416,157 pounds ($680,000), the owner of the U.K.’s biggest residential property Web site said today in a statement. Prices climbed 2.8 percent across Britain as transaction levels dropped by half from 2007."

...and

"“There’s an acute shortage of property,” said Robert Green, a real-estate agent at John D Wood & Co. in Chelsea, southwest London. “Demand is very strong. Also mortgage availability is improving. It’s unlikely we’ll see enough supply come to the market to see prices falling.”

"Demand from foreign buyers is also helping drive up prices in central London due to the weakness of the pound, Green said. The U.K. currency has dropped about 17 percent against the euro in the past year."

(You can read the entire article by clicking on the link above.)

Tweet

Government Blowing Subprime Bubble Anew

News headlines these days are dominated by the administration's health care "reform" (this blog included), but we should be on the lookout for what may be slipping through with very few of us even noticing.

Like securitization of subprime mortgages.

If you think that's so 2007 and 2008, think again. Here's a healine from Wall Street Journal last week.

The Next Fannie Mae (8/11/09 Wall Street Journal): [emphasis is mine]

"Ginnie Mae and FHA are becoming $1 trillion subprime guarantors.

"Much to their dismay, Americans learned last year that they “owned” Fannie Mae and Freddie Mac. Well, meet their cousin, Ginnie Mae or the Government National Mortgage Association, which will soon join them as a trillion-dollar packager of subprime mortgages. Taxpayers own Ginnie too.

"Only last week, Ginnie announced that it issued a monthly record of $43 billion in mortgage-backed securities in June. Ginnie Mae President Joseph Murin sounded almost giddy as he cheered this “phenomenal growth.” Ginnie Mae’s mortgage exposure is expected to top $1 trillion by the end of next year—or far more than double the dollar amount of 2007. (See the nearby table.) Earlier this summer, Reuters quoted Anthony Medici of the Housing Department’s Inspector General’s office as saying, “Who would have predicted that Ginnie Mae and Fannie Mae would have swapped positions” in loan volume?

"Ginnie’s mission is to bundle, guarantee and then sell mortgages insured by the Federal Housing Administration, which is Uncle Sam’s home mortgage shop. Ginnie’s growth is a by-product of the FHA’s spectacular growth. The FHA now insures $560 billion of mortgages—quadruple the amount in 2006. Among the FHA, Ginnie, Fannie and Freddie, nearly nine of every 10 new mortgages in America now carry a federal taxpayer guarantee.

"Herein lies the problem. The FHA’s standard insurance program today is notoriously lax. It backs low downpayment loans, to buyers who often have below-average to poor credit ratings, and with almost no oversight to protect against fraud. Sound familiar? This is called subprime lending—the same financial roulette that busted Fannie, Freddie and large mortgage houses like Countrywide Financial."

"On June 18, HUD’s Inspector General issued a scathing report on the FHA’s lax insurance practices. It found that the FHA’s default rate has grown to 7%, which is about double the level considered safe and sound for lenders, and that 13% of these loans are delinquent by more than 30 days. The FHA’s reserve fund was found to have fallen in half, to 3% from 6.4% in 2007—meaning it now has a 33 to 1 leverage ratio, which is into Bear Stearns territory."

Is anyone listening? Not on Capitol Hill, not at the White House. They are busy further "empowering FHA" in order to help American people buy/keep their homes. FHA's downpayment requirement is mere 3.5%; with the first-time buyer credit it can be below 2%. FHA refinances mortgages of the borrowers who are 25% underwater.

This is just mind-boggling to me. We're back to subprime bubble, this time 100% government job. The government is directly blowing a subprime bubble, with explicit government guarantee.

Ginnie Mae is a U.S. government-owned corporation within HUD (Department of Housing and Urban Development), and FHA is a U.S. government agency.

This will not end well, I'm afraid.

Tweet

Bank Auctions Florida Woman's House, Kicks Her Out By Mistake

Nice people at Washington Mutual, which was acquired by J.P. Morgan Chase last year after FDIC shuttered the bank, auctioned off a house and kicked the owner and her family out the door with their belongings. Except it was clearly a wrong house.

My Bad! Woman's House Mistakenly Auctioned by Bank
(8/19/09 NBC Miami)

"You know times are tough when people are getting kicked out of their house when it’s not even for sale.

"That’s what happened to Anna Ramirez after she found all of her stuff out on the front lawn of her Homestead home last week and a strange man demanding she get out of his newly purchased house.

"The eviction came after Ramirez’s home was mistakenly auctioned off to the highest bidder by her bank, Washington Mutual...."

"The man who bought the house told Ramirez he paid $87,000 for it, which shocked Ramirez, who bought the house for $260,000.

"What's worse is her husband, daughter and grand children were also kicked out by Homestead and Miami-Dade police officers, said Martha Taylor, who witnessed the unexpected eviction..."

"The sale was eventually reversed by a Miami-Dade judge, allowing Ramirez to return to her old digs. Ramirez said she wants to sue for the damage to her furniture."

She should sue for more than that.

Tweet

Cause and Effect: Washington to Main Street to Wall Street

The president had finished his speech today about his new proposal (yet another) on the sweeping reform (and another) in the nation's financial institutions.

The prepared text of the speech was already available before the speech (here), so I took a look.

It's basically the same as what was leaked by an anonymous administration official on Tuesday night and reported on this post here.

After the preamble about the administration's favorite topics (energy, education, and heath care, which quickly made me wonder what they've got to do with financial reform), the president starts to talk about financials. And I start having problems right away. I quote:

"It is an indisputable fact that one of the most significant contributors to our economic downturn was an unraveling of major financial institutions and the lack of adequate regulatory structures to prevent abuse and excess. A culture of irresponsibility took root from Wall Street to Washington to Main Street. "

Is it? Indisputable? Fact? An unraveling of major financial institutions didn't quite occur until after September 2008. The nation's economists tell us that the U.S. went into the economic recession in December 2007. How could an unraveling in September 2008 contribute to a recession started in December 2007?

But more importantly, I think he got the flow mixed up. If I were to craft the last sentence, it would read: "A culture of irresponsibility took root" from Washington to Main Street to Wall Street.

The super easy money policy of the Federal Reserve actually started in the 90's to get out of the mini recession in the early 90's. The Federal Reserve didn't come up with this idea on its own. It was guided by the policies of Washington. It contributed significantly to the sharp rise in all asset prices in the mid to late 90's and to the dot-com bust in 2000. (Read this article written in September 1999. The writer predicted an imminent stock market crash at the time when Dow was high but the global political and economic indicators as he saw them were deteriorating.)

Then this policy was re-instituted anew in 21st century in order to get out of the recession in the wake of the dot-com bust and 9/11.

One of the main focus of Washington for nearly 2 decades has been home ownership. Home ownership was increasingly treated as American Dream, and some kind of "right" of the U.S. residents. President Clinton started it by rewriting the rules for Fannie and Freddie, and then broadened Carter-era Community Reinvestment Act and unveiled his National Homeownership Strategy. "Having your own home is the ultimate expression of optimism," the president said. (See this video from 1994 speech before National Association of Realtors.)

Please watch this video of President Bush back in 2002. He was proposing taxpayer-funded (he spoke so softly when he said the word taxpayer) down payment fund for low income buyers, affordable housing in "certain" neighborhoods (i.e. inner city), "streamlining" the application process so that "fine print" doesn't discourage the buyers (and now Washington is saying the bankers lied), bringing in the real estate industry in, encouraging measures to create a sustained commitment by the private sector. 5.5 million new, minority home owners was Mr. Bush's goal. He challenged the private sector to get after this goal, get focused. $440 billion more capital would be available for minority home owners from Fannie and Freddie, and FHA, who would also quickly securitize the loans made by the banks so that the banks could make more loans.

Is there still any doubt that it all came from Washington?

The government passed a series of legislation to make home ownership "affordable". Now people who wouldn't have qualified for mortgages before or who never thought of owning a home could be the home owners. American Dream. This was the Main Street component of the flow.

Then came the banks. There was clearly a huge demand from the Main Street for mortgages, and the government legislation and various schemes by non-profit organizations put increasing pressure on the banking system to come up with innovation to satisfy this demand. And satisfy they did, with innovation.

They came up with mortgage plans that allowed the borrower a super-low teaser rate, no money down, interest only mortgages. They sold off these mortgages off to Fannie and Freddie who quickly securitized them. Banks securitized the mortgages themselves, too, creating complex bond securities that were supposed to reduce risk by slicing up the mortgages and bundling back together. Prime mortgage slice and sub-prime slice together, but supposedly risk well managed. Investors who wanted more risk and higher return could opt for the lower tranches of mortgage-backed securities.

Then, housing advocate organizations, emboldened by the government measures and pressure, grew more aggressive. Here's an article from October 2007, describing how one such organization, Neighborhood Assistance Corp. of America under Bruce Marks, effectively forced Countrywide (now part of Bank of America) to modify at-risk loans. The very fact that the deal was announced in Washington D.C. shows it was a political issue, not economic or financial.

The hilarious story I heard involved Washington Mutual: a Hispanic man walked in to a WaMu branch, wanted to get a mortgage. The bank gave him the mortgage after reviewing a photograph of him dressed as a mariachi singer.

The housing market, by all indicators, topped in 2006. Smarter investors in real estate, particularly in residential real estate, got out then. But the party continued, on inertia, and people were fooled by continued low-interest and easy access to credit. It's not just Main Street people, but Washington people, too. The policy makers, the Fed officials, they all continued the mantra of "Everything is fine", "Our financial system is sound". Pundits on financial news channels like CNBC openly derided a few people who sounded alarm. (Remember this? These people openly laughed at Peter Schiff and they said Merrill Lynch was ridiculously cheap at $76 and recommended WaMu.)

Washington and its enabler Federal Reserve started it. Main Street and Wall Street followed. Main Street started to buckle first. Two years later, Wall Street collapsed, because the pillars, or the foundation, substrate that supported Wall Street (i.e. Main Street), collapsed. The economists say the current recession started in December 2007. The spectacular collapse of Wall Street didn't happen until September 2008, with a scare of Bear Stearns in March 2008 along the way (which feels like such a trivial event right now, but at that time it felt like the whole world was collapsing).

Who's still standing? Washington.

If the new policy is to be crafted on the assumption, in my mind wrong assumption, that it all started because of Wall Street's greed which dragged Main Street and unwilling Washington into the mess and recession, the policy will not address the core issue (= Washington) at all. I doubt therefore it will achieve the desired result - stable financial system - unless "stable" means "dead" or "near-dead".

The title of the speech says "21st Century Financial Regulatory Reform". Piling more regulation and more bureaucracy doesn't seem to me to be 21st century thing. I cannot help feeling that the speech writer missed the date by nearly a century.

Here's the plan itself, from the Treasury Department special website (www.financialstability.gov). (So that's another new czar right there: Financial Stability Czar.)

The stock market, with 45 minutes to trade, has remained listless. Dow Jones Industrial Average is up 22 points to 8,526, S&P 500 up 1 point to 913, Nasdaq up 17 points to 1,813. Nasdaq's outperformance is not surprising, as it has more companies far less affected by the government regulations and controls.

Tweet

Paul Krugman’s Advice to the Fed, 2002, from the LRC Blog

Amusing find from Lewrockwell.com's blog site:

Paul Krugman’s Advice to the Fed, 2002 (6/15/09, The LRC Blog)

It has a link to Krugman's article on August 2, 2002. About 2 months later in early October, instead of double-dipping, Nasdaq bottomed. Mr. Greenspan did exactly what Krugman recommended, and here we are, 7 years after.

Tweet