By Automatic Earth
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.
In 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:
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. (my emphasis)
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.
By The Automatic Earth
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