Xorthfred

The Mark-to-Market Bank Trade This Week

Good article. One thing however, for which to beware, is that the UYG or FAS could actually go to zero and not recover at all. This is because these leveraged ETFs are holdings in the futures market. So while say, Citi goes to zero and can come back from the dead, the leveraged ETF goes to zero and it is simply wiped out.

How Will This Depression Differ from Previous Ones?

I am not going to throw rocks at the inflationists or the deflationists because I feel that they could both be correct with the key variable being the timing of the advance or decline in the money supply. First comes the deflation, which would normally run its course over some indeterminable amount of time. However, the FED and fiscal policy are pushing the monetary base and velocity, thus counteracting the deflation. Milton Friedman's studies indicated that inflation follows quantitative easing by app. nine months.

Monetary easing began on Sept. 27, 2008. There was virtually no increase in the monetary based over the previous 12 months. I invite you all to do the math. The current deflation is partially the consequence of tight money from Sept. 2007 to Sept. 2008.

Suspending Mark-to-Market Accounting: A Tale of Two Cows

You have 100 cows. Nine get very sick and stop producing milk (9% default rate). You write off 78 cows. Your banker declares you must be saved, so he loans you more money and complains when you don't a) sell the sick cows and b) don't go buy more cows.

Mark-to-Market Accounting: Kill It Before It Eats Us Alive

Good article. Mark to market accounting eliminates demand by publicly held institutions to buy mortgage securities. It also increases supply as banks dump holdings for substantial discounts. No one has discussed the impact of mark to market accounting on non-performings. Current performing mortgages are classified non-performing. Then the OCC forces an increase in reserves as a percentage of non-performings. Mortgages that are not late are being written off. It is self flagellation.

Fed Creates Bank Margin Squeeze

Disagree. The lower fed funds rate lowers the cost of capital for banks, which are not lending any money at Prime anyway. Credit default swaps for lending to Berkshire Hathaway reached 600 over treasuries, so don't tell me that banks are lending money to borrowers at the Prime rate-maybe LIBOR +Prime+two but not Prime.

Our Clueless Congress Strikes Again

Thanks for your excellent article. I agree that Paulson made the right call to stabilize the banking system with the TARP money. I also think that commercial mortgages are now sitting in the bargain bin (for those properties not in California, NY, Florida, Arizona, Nevada and Michigan). The commercial mortgage delinquency rate remains (for now) below historical averages, yet the mortgages are BEING COMPLETELY WRITTEN OFF DUE TO MARK TO MARKET ACCOUNTING!

Read it again in disbelief but it is true if you understand bank accounting. The OCC auditors like to see Reserves (write offs) as a percentage of non-performing mortgages rise during downturns in commercial real estate. mark to market accounting forces banks to reclassify performing (paying on time) mortgages to non-performing. If a bank has reserves (write offs) only 20% of nonperformings and nonperformings are rising, then the auditors want to see that percentage rise.

Example: Bank has one billion $$ of nonperformings. They have reserves of $200 million. Under mark to market accounting, some $6 billion of commercial mortgages that are current with good debt service coverage now are selling for 80 cents on the dollar based on the cds and cmos (cdo) markets. The accountants force them to take a write off to market value of $1.2 billion. Now these loans are "non-performing". "Non-performings" (even though they are current and paying) now balloon to $7 billion. Reserves now are $1.4 billion. The accountants would like to see Reserves as a percentage of non-performings at 120%. Result: another write off of $7 billion.

This scenario played out at Citicorp in the 1989-1993 time period.

Mexico’s Guillermo Ortiz: The Anti-Greenspan

Enjoyed reading the article and comment. Certainly nice to read some where "good" or even exceptional performance has been earned and deserves recognition. More reinforcement for the historical lesson showcasing the need for sound money and traditional values or principles.

Why This Bailout Can't Work - And What Will

ONE REFORM WOULD REVERSE THE DEATH SPIRAL: go back to the pre-Sarbanes Oxley accounting rules. If a mortgage is performing, you shouldn't have to write it off. Period. No one should invest in any bank or insurance company until the quarterly mark to market death spiral ends with mortgages selling based on a 75%+ annual return to the buyers or mark to market accounting of performing mortgages comes to an end. It is just a matter of how heavy the hand of govt. intrusion into the markets will push this economy down!!!!!!!!1

Feel Free to Make up Numbers

I have lived this movie before in the great commercial real estate crash in the southwest (1988-1994) and elsewhere. If we had FASB 157, every bank in the country would have failed. Also, as i recall, writing mortgages to market when interest rates went to 19% in 1980-1982 would have also forced every thrift in the country to failure. Anyone with any real estate banking experience in appraisal or as a senior credit officer can tell you that the quarterly mark to market of long term assets (long term loans of any kind) will result in a rapid death spiral of asset values. After the spiral bottoms out in mass graves, the buyers pick up mortgages for pennies on the dollar, yielding as much as 95% per annum at "market value" because that is where they are traded. We sold office buildings in Dallas, Texas for $12 per square foot when rents were at $7 per square foot-which was where the forced sale "market value" whereby Canadians, Hong Kong investors and Brits bought our assets-(taxpayers FDIC taking the hit all along). Thank you so much (I am being sarcastic) Sarbanes Oxley, the "new RTC" (which was not a success but a govt. failure) and the heavy hand of regulation.

Will Automakers Switch to Natural Gas?

The Pickens plan involves federally subsidized conversion of municipal fleets to ng; massive investment in wind; closing the ng to electric plants; and lastly a move to consumer ng run cars.

While some of the above is financially feasible and makes sense (save for the expensive closing of the ng to electric plants). A financially better, although not green, solution involves: 1) building coal to diesel and coal to electric plants; 2) doing the Pickens ng municipal car fleets and rich subsidies for wind; 3) building heavy oil refineries; 4) allowing the oil shale reserves and offshore drilling currently roped off by Congress to be exploited; and 5) continue the subsidies for electric cars and hypbrids. If you want to win, make sure and give it the full effort, the real Vince Lombardi. Half measures have been tried before but failed.

Does Big Oil's Apathy Justify Proposals to Tax Windfall Profits?

Firstly, the implication that all of the public lands made available to oil companies has oi underneath it is beyond stupid! The fact that so much oil has been found on public lands made available by the Bush Administration is AMAZING! Finding oil is more like finding a needle in a haystack than pumping water out of a lake! The oil royalties are substantial to the federal govt. Much of it has been pumped into the strategic oil reserve during May and June.

Secondly, the oil companies face an extraordinary situation at home and abroad whereby all of the leases and contracts are subject to unilateral cancellation and renegotiation. No Government in the world can be counted on to be true to their word or their contracts. Unilateral nationalization without compensation is becoming the rule. Blasting companies for being cautious in this environment shows an alarming lack of objectivity. Even Obama is proposing canceling oil leases currently in effect. No democrat is willing to admit to the amazing technological innovations in the oil business, nearly all of them the result of American corporate efforts (horizontal drilling, offshore technology, more efficient refineries, etc.).

Third, a trillion dollar mass transit or Manhattan project for alternative energy funded by taxing oil companies by necessity involves taking money from poor states with low per capita incomes (Louisiana, Texas, Oklahoma) and giving it to the politically powerful high income states and DC: New York, Pennsylvania, DC, Massachusetts, Connecticutt, Rhode Island, and California).

In fact, no state in the country recieves less per capita than Texas, which ranks 39th in per capita income. New York and California are the richest states in terms of per capita income in the country.

Also a point in fact: Exxon wrote off over a billion dollars in alternative energy projects in the 1980s. Shareholders are very happy that they have not been pressured to jump into the ethanol financial fiasco, whereby the companies are losing money; the taxpayers are being taken to the cleaners; and the consumers are forced to pay more for gasoline than otherwise.

Oil companies are acting very rationally given the likelihood of special taxes just for them and much more subsidies for their competitors. But anyone who has studies history knows that virtually every one of the govt. initiatives will fail. Examples of similar failures include the current ethanol fiasco; synfuels subsidies programs during the 1980s; the Japanese Fifth Generation Project; and the Microelectronics and Computer Technology Corporation (MCC) consortium under Admiral Inman.

Just as Apple Computer, and later Dell, revolutionized computers, some entrepreneurs will come up with the innovations to transcend the piston engine and the use of home heating oil. I actually anticipate that the government will be in the way trying to stop the innovators throughout the entire process with lawsuits, regulations, securities enforcement actions and special taxes.

An Alternative to America’s Gasoline Crisis

Some very good points. America must use all the tools in the chest. This means that we need to unleash the private sector. Take the shackles off of coal, natural gas, oil, hydrogen, nuclear and shale. We will not need a trillion dollar taxpayer funded Manhattan Project if we allow the existing and near term technologies to be used by business. Otherwise, all we have is another government created crisis for which we must pay massively for govt. to "find" the solution.

Long-Term Ugliness

The quality of the governed's life is eventually equal to the quality of government. Every one of the above stocks have suffered from fundamental and technical misallocations in the economy as a result of govt. mistakes. GM, although a poorly run company, suffers due to high oil prices-a situation caused by outlawing drilling in America in the areas where oil resides. PFE is a victim of the ghastly and enormous costs in terms of time and money imposed by the FDA to get patent drugs approved. The financial stocks plummeting in the above charts are the result of a congressionally enhanced housing bubble caused by extraordinary low down payments to buy housing over a very long time. This situation would have not been possible without the creation and subsidization of FNMA and FHLMC; extremely cheap money; and the 3.5% down FHA. Keep voting in politician lawyers who know nothing about economics and hate business, then we will become a very poor country indeed!