[Cid_Yama]

<i>Cid Yama: I believe the gutting of FASB Statement 157 was not intended just to postpone the marking down of banking assets and allowing the banks to survive another quarter. Rather, I believe there is method to the madness of the SEC's opinion letter of March 28th(now backdated to Jan 1st).</i>

Fifteen years ago, the US government devised a clever trick in the aftermath of the savings and loans crisis, by conducting firesale auctions of S&L assets. This was brilliantly effective in establishing clearing prices and turning sentiment around, because as soon as investors saw some assets being sold at knockdown prices they starting jumping in, meaning that within a few months, prices were rising again.

But these days the US government faces a crucial impediment to repeating this trick. <b>Back in the days of the S&L crisis, US banks were not forced to mark their books to the firesale prices.</b> But now the mark-to-market creed has taken hold. And it is a fair bet that if US banks were forced to mark their books to the initial clearance price for a CDO squared, say, some would run out of capital. Hence the trap: in the modern financial system, you can have mark-to-market accounting systems, or quick action to establish clearing prices, but probably not both, without blowing up some banks.

<b>Of course one way to exit this trap would be to abandon the mark-to-market rules for a while</b>, or loosen capital adequacy standards.

link


<b>Return of Mark-to-Make Believe</b>

As we all know, the G7 financial authorities are fighting tooth and nail to rescue their financial systems. The bottom line of it is that they are INSOLVENT and require balance sheet repair of epic proportions. It will require a combination of MONEY printing, hocus pocus, smoke and mirrors and changing the rules -- whether it be the changing of balance sheet requirements at Fannie and Freddie, the expansion of the home loan banks, term lending facilities of one sort or another or opening the borrowing windows at the fed wider and wider in terms of eligible securities of participants (investment banks) which can access the lending.

In the last 6 weeks we have seen over 1 trillion dollars in combination of all of these things added to the pool of liquidity to underpin asset markets. Now comes the latest twist: “The return of marking to model” which was ended last November. Tedbits wrote about it at the time and it has bitten the banks and financial industry’s balance sheets HARD.

This is a picture of financial industry and banks’ balance sheets VAPORIZING before our very eyes. So what do the financial and banking authorities do? What else? Rewrite the regulatory guidance in respect to how to value them for REGULATORY reporting purposes. The SEC has issued an opinion letter informing financial and banking companies of how to deal with these thorny balance sheet and accounting compliance issues by telling them if they have a problem with the mark to market valuations then <b>declare the prices as the result of forced liquidation</b> and ignore them.

And how did they sidestep the horrendous losses due to be reported in the next three weeks from the 1st quarter? By backdating the interpretative notice back to January 1. Abracadabra: poof and money reappears on the balance sheets, hocus pocus of the highest order. That rule saw the light of day for a total of 45 days!!! Now it’s history.

link

<i>And this is the colonic to get those conduits moving again.</i>

<b>Securitization is Officially Dead</b>

It appears that the FASB has removed the concept of QSPEs, which is the enabling "piece" to make off-balance-sheet securitizations possible, from the FASB set of regulations, specifically, FAS 140.

As such it appears that all financial institutions will have to reclaim all SIVs back onto their balance sheets no later than the start of 2009.

This is a watershed event.

In short Investment Banks have ~6 months to get their act together and their capital up, and then they are going to have to start integrating these vehicles back onto their consolidated financial statements.

http://www.tickerforum.org/cgi-ticker/a ... post=38608

<i>This should be more than enough incentive to get that firesale moving.</i>

I want to say, I whole-heartedly endorse this solution, as some banks will survive their folly, but not without a great deal of loss and pain. No one will be able to call this a bailout.

P.S. With the Fed having taken alot of this stuff as collateral, they may be the first seller to get the ball rolling. It all looks like it was planned now. I may get up and applaud Bernanke before this is all over. The banks won't like him very much though.

[The_Virginian]

Thank you.

Took me a while to understand it all.

Now as I think I understand it : Banks must re-appraise assets when they fall in value.

They need these assets to continue to borrow from the Fed Reserve.

The Fed needs to pop bubles to get outside (often foreign ) investors to believe they are getting a "bargin." Otherwise the influx of capitol "dries up" on the investment side, And people increasingly pull monies OUT of the us economy.

The Fed wants to establish a FLOOR price.

The banks have overvalued assets relative to the FLOOR price in progress. They must (often) over collateralize in order to borrow more and keep the ponzi scheme going.

a 1-2 sucker punch from the fed...making some groups huge amounts of money...busting others.

All the Fed-Res would have to do is allow banks to NOT downgrade assets until those debts that are servicable are PAID OFF.


Makes sense no? A simple answer....no downgrades...a good loan is still a good loan...as long as the homeowner is honest/sucker enough to care about his credit rating.

What do you think Cid ?

[Cid_Yama]

Currently, these derivitives have no buyers. The conduits have seized up. The music stopped and the banks were caught holding what was in the conduits.

The term 'clearing price' refers to a price where investors are again willing to purchase the derivitives, and geting trades going again. FASB 157 stated assets would have to be repriced at that level, reducing the capitalization of the banks which in turn would cause them to face margin calls and further delevering, terminating in a death spiral.

The SEC opinion letter allows the banks to ignore the clearing price with regard to valuing their assets by saying the clearing price was set as a result of forced liquidation.

Disenabling off-balance-sheet securitization, forces the banks to either dump this stuff on the market or take it onto their balance sheets by the end of the year. This initiates the firesale, as banks are now able to dump it onto the market(forced liquidation) without taking the valuation hit.

As this stuff is dumped onto the market, a low enough price will be established that investors consider a bargain. Trades commence, the conduits begin to flow again, and the next bubble can begin to inflate, passing the problem onto the next administration.

Or at least that's how it's supposed to work in theory.

Frankly, I think it's too late to work. Capitalizations have become non-existant, delevering has progressed too far, too much wealth has evaporated.

You can't resussitate a dead body. 6 months ago this might have worked. Unfortunately, rigor mortis has now set in.

[Cid_Yama]

Tired of not having a dedicated place to post your economic news and analysis? Well now you do.

[The_Virginian]

ok I get it.


Thanks!

[Ainan]

Thanks Cid_Yama, i can see how something that many complicated words could easily destabilize the economic system itself.

This may be the wrong page to post this question but i think you are knowledgeable enough to answer. Where would be a good place for a British citizen to store no more than £10000 safely over the next 2 1/2 years. I wish to emigrate but I'm worried all the money I'm saving will be worthless by then on the whims of some banker. I would like to avoid physical 'assets' like gold since i can't keep it securely myself.

[roccman]

Ticker Forum meet Peak Oil...sit down and stay a while Denninger and bring your veggie VW with you...you're gonna need it....just a note...talking about PO last year on the TF was considered tin foil...so was an engineered economic collapse...amazing what happens when reality kicks in...

[Cid_Yama]

Ainan,

First find a property with access to water and sun should have a substantial woods and somewhere off the beaten path, moderate climate(long cold winters will kill many). Install well, and solar. Heat pump. Below ground residential construction will provide optimal insulation and reduce energy needs.(fiber optic lighting to provide daylight).

The money saved by being off the grid and property paid for will provide guaranteed return on investment and a self-sustaining place of retirement when TSHTF.

Don't forget your fishing pole and bow.

No reason the End of the World can't turn into an enjoyable life-long vacation.

[Ainan]

Ainan,

First find a property with access to water and sun should have a substantial woods and somewhere off the beaten path, moderate climate(long cold winters will kill many). Install well, and solar. Heat pump. Below ground residential construction will provide optimal insulation and reduce energy needs.(fiber optic lighting to provide daylight).

The money saved by being off the grid and property paid for will provide guaranteed return on investment and a self-sustaining place of retirement when TSHTF.

Don't forget your fishing pole and bow.

No reason the End of the World can't turn into an enjoyable life-long vacation.

I have every intention to, but not on an island of 60 million people, namely the UK. But to emigrate i need to finish my University degree and keep hold of some money.

[Cid_Yama]

I'm sorry, Ainan. I cannot even imagine having any investments in anything I do not personally have possession of. Collapse appears to be imminent. Any paper, and any commodity not physically held in your possession is mearly a 'promise to pay'. Good luck on collecting once TSHTF.

I am personally filling my underground warehouse with everything I will want or need over the next 20 years, including an extensive library(books, not electronic).

The only investments I can endorse are investing in yourself and your personal infrastructure. These are the only investments guaranteed to maintain(or even increase) their value.

[Cid_Yama]

<b>The end of the road</b>

This on Automatic Earth:

Ilargi: $945 billion in losses. That's today's number from the IMF. They’ve all known this for a long time, rest assured. They’re just feeding it to you piecemeal, so you’ll keep on borrowing and spending as long as possible. Meanwhile, this means less than 25% of the total has been accounted for so far, and booked as writedowns and losses.

I’m willing to bet that as the derivatives start falling like Jericho, $1 trillion is just a beginning. Even if we accept the notion that only 2% of the total outstanding poses actual risk, that still would mean, considering an estimated $700 trillion derivatives “market”, losses of $14 trillion. Don’t believe it? Keep watching.

For every dollar in losses or writedowns that banks have to put in their books, 10 dollars of available credit disappears. There is now consensus among the more aware “experts” that aggregate losses will be at least $1 trillion. Do the math. And keep in mind what I said above: $1 trillion is just the start. The inevitable consequence: there will be no money left for banks to hand out as credit of any kind. Which in turn will mean that banks lose their reason to exist. This money will not magically re-appear, it is gone. And it is time we all start realizing that.

We are witnessing the first preliminary stages right now, with credit vanishing for instance in housing, leveraged buy-outs, municipal bond issues and auction rate securities. But they are not the full-blown disease, they are the first slight headache that precedes it. This is still the denial phase. Fear and anger are around the corner.

Experts and analysts, for a long time to come, will keep insisting that central banks can save the markets by pumping in cash and credit. They cannot. Nor can they cause inflation. George Soros was right yesterday when he said: "I think we have come to the end of the road".

link

[PenultimateManStanding]

I don't have a background in financial matters, but I read TheAutomaticEarth blog daily. The thing that astonishes me the most is that these new financial instruments that got everyone in hot water were apparently all dreamed up by kids in their twenties and early thirties. Whiz kids turned out by academia with heads full of numerical models. The Black Swan guy, Taleb, got it right when he pointed out that the kids couldn't be reached by older more practiced players. The kids were indoctrinated by their professors and weren't listening to real life experience. Now we're screwed as a result.

[Cid_Yama]

I think the kids raised the bar with regards to profits, and the older traders were told to check their reservations at the door or leave their keys on the desk.

[wisconsin_cur]

Tired of not having a dedicated place to post your economic news and analysis? Well now you do.

I am a bit confused.

Is it that you have a problem with the Economics Forum

or the Current Energy News Forum?

Or are you looking for Peak Oil.Com to expand its mission fill all of your news posting needs? For that we do have the Open Discussion, which is where you put this, but then why not post them story by story as we have in the past?

A good headline of a piece of breaking news might get my attention (like some of your middle east news posts cid) regardless of what I think of the source or the content but I'm not going to check a generic thread just because. It is spring and I've got too many other things to do.

[Cid_Yama]

We do not have an Economics Forum - We have a Depletion Economics Forum - which the moderator uses as an excuse to dump to Open Discussion anything that might make the Bush Administration look bad. Since ALL the economic news in the US is now bad, it happens alot. So we now have our own Pure Economic thread in Open Disscusion. Viva la Revolution!

[wisconsin_cur]

We do not have an Economics Forum - We have a Depletion Economics Forum - which the moderator uses as an excuse to dump to Open Discussion anything that might make the Bush Administration look bad. So we now have our own Pure Economic thread in Open Disscusion. Viva la Revolution!

Both are in open discussion so I fail to see the difference. If your problem is with the Bush administration than why don't you reflect that in the title?

Well, whatever. Have fun.

[The_Virginian]

"One option is for the Fed to take the unprecedented step of issuing debt, which it would then lend on into the credit markets. Another plan is to ask the US Treasury to issue more debt which the Fed could put to work."

[url=http://www.independent.co.uk/news/business/news/us-fed-prepares-to-replenish-war-chest-807075.html]
Fed to Issue Debt?[/url]

I took all FRN as instraments of debt

[Cid_Yama]

Problem is not with Bush. Problem was no Pure Economics Thread and the Depletion Economics thread being censored along purely political lines. Economic news is dumped all over the place. Those of us interested in discussing Economics want it all together some place.

Got a problem with that, or just my politics?

[Cid_Yama]

Paul Volcker, the former Federal Reserve chairman whose legacy has not crumbled since he left office, was right this week when he said the financial engineers had created “a demonstrably fragile financial system that has produced unimaginable wealth for some, while repeatedly risking a cascading breakdown of the system as a whole.”

But it is far from clear what should replace it, or if it can somehow be mended.

link

[Kylon]

One of the solutions to the problem is to allow private currencies to be formed.

The reason why the Fed(and the banks in general) is so crooked, is because it has less accountability.

By allowing people to create private currencies backed with real assets and infrastructure, along with strigent regulations on how those currencies do business, we could effectively eliminate a lot of the manipulation and possible collapse we are seeing.

Another way they could eliminate most of these problems is to increase the short term capital gains tax. Effectively eliminate the incentive for flipping stocks, commodities and other assets.

Problem is, the government doesn't like that. They LOVE being corrupt, therefore the problem will NEVER go away.

The same people screwing the country, sucking it's wealth out are the same ones pulling the strings. With that situation in mind, it's IMPOSSIBLE to fix the Fed. So long as the government, and hence the Fed and the banks are heavily influenced by those with ill gotten wealth, things will never get better.

I hope you brought your umbrella, cause it's gonna be a shitty storm tonight!