Happy Days: Here Again?

Quite a week, no? If nothing else it was a testament to the power of happy talk.

Think about it, the markets soared and bank stocks led the way. There was some good economic news - if you think that flattening rates of decline for various indices is good news. The optimists say look at the second derivatives. The realists (or pessimists, depending upon your point of view) say that it just proves that economic activity won’t go all the way to zero.

So if it wasn’t fundamental economic performance, what goosed things up?

How about a bunch of bankers crowing about all the money they made in the first two months of the year. Citi (C), JPMorgan Chase (JPM) and Bank of America (BAC) informed us that they were virtually printing money. Earnings, um, make that net interest income, is going through the roof. Hallelujah and grant some bonuses. The mainstream media was all over this like you know what on a stick. No questions asked. Problems solved.

When a few souls said yes, but what about losses, Congress stepped in and made it perfectly clear they had a solution for that niggling problem. An accounting rule change was pretty much guaranteed so the banks won’t be bothered with recognizing any losses when it isn’t convenient. That works well since they have all discovered that they didn’t really intend to sell all those securities they created and intend to hold them to maturity. Everyone to Level 3!

So you see how easy it is to turn around a recession and financial crisis. You just have to turn your frown upside down and tell the world that the sun came out. Hey, the stock market bought it.

Comments

[{5U}]

Well done. Phase 1 of Operation TARP Removal complete.

Phase 2 will be Goldman beating estimates to drive the stock up so they can dump it to paydown TARP.

Phase 3 will be a few other banks to follow.

Then when we hit a barf in the summer, the banks will have better capital ratios and the government will have "fresh capital" to help private investors lever up with most of the risk going to the U.S. tax payer.

2009 Mar 15 09:06 PM

[Buy and Hold Plus]

I don't know why everyone thinks getting rid of mark to market will take care of everything.

The problem is that bank balance sheets are too opaque. Yes, they marked many assets down to the last sale price, but those were fire sale prices and they don't want to sell them at that price.

So, nobody knows what those assets are really worth. But at least they are being forced to report them at a value that isn't something they make up.

Get rid of mark to market, and now the banks get to decide what value their own assets are worth.

Is that supposed to make things more transparent?

That's like my brokerage allowing me to use the ask price I submit for my stocks as the basis for margin. If I ask for $100 a share and the last trade was at $50, then the brokerage will allow me to use $50 for margin purposes. They won't let me use $100 and they shouldn't.

So why should we allow banks to do the same?

2009 Mar 15 11:41 PM