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John Lounsbury, Managing Editor and Co-founder of Global Economic Intersection, provides comprehensive financial planning and investment advisory services to a small number of families on a fee only basis. He has a background which includes 34 years with a major international corporation, 25... More
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  • Bill Black: U.S. Using "Really Stupid Strategy" to Hide Bank Losses 1 comment
    Aug 11, 2010 6:36 PM | about stocks: KRE, KBE, XLF

    Hear an interview with Bill Black and read  Peter Gorenstein's summary at Tech Ticker.  Prof. Black says we are following the "Japanese strategy".

    Disclosure: No positions.

    Stocks: KRE, KBE, XLF
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  • Mark Bern, CFA
    , contributor
    Comments (7337) | Send Message
    John - I have thought along those same lines for some time. And I have also thought that the losses can only be hidden for so long before they are brought to light. I may be mistaken but I believe there may be a significant difference between Japan and the U.S. banking disasters. Much of the Japanese losses that had to be hidden came from cross ownership in stock of many of their major customers. The real estate was also a major problem but I believe they weren't able to continue to hide that and that those losses had to be taken, though they were stretched out over as many years as possible. But even after those losses from bad real estate loans were written off the Japanese banks were still stuck with all that stock that has gone absolutely nowhere for two decades.


    On the other hand, the U.S. real estate boondoggle has been magnified by the CDOs which served to exacerbate the problem. Now we have not only thousands of nonperforming mortgages on real estate that is worth less than the debt, but we also have all those derivative security instruments that are based upon the defaulting, underlying mortgages.


    As I see it, there are no accounting rule changes that will allow the banks to hold the toxic assets indefinitely like the Japanese banks can with the stock certificates. Stock certificates do not get broken into, catch on fire, or deteriorate and as long as the company stays in business the holder can carry them at cost. There are consequences to holding REO or mortgages in default. Eventually the U.S. banks will need to foreclose on nonperforming mortgages and sell their REO properties to raise cash. And since many of the mortgages were sold and repackaged, the holders of the CDOs (banks) will be affected negatively.


    I may not have the details all straight, but my gut just tells me that our problem is going to come to a head sooner than the problem in Japan.
    11 Aug 2010, 07:52 PM Reply Like
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