Geithner's Master Stroke: The Official End of the Credit Crunch

Includes: BAC, C, JPM, WFC
by: Andrew Butter

The credit crunch ended the second that Bill Gross, head of PIMCO (The world's biggest bond fund manager), appeared on Bloomberg and said (I paraphrase):

"Sure the market is only paying 20 to 40 cents (for AAA "toxic" bonds), and the holders of those bonds say they are worth 70 to 80"...and listen closely, this was the precise second in time that the credit crunch ended..."so they will have to come down a tad for this to work" (Tim Geithner's fire-sale plan).

A tad - what's that 5 cents, 10 cents? A "tad" is certainly not 20 cents, not hardly even 10 cents.

How come that was THE END?

The reason that a good proportion of the banks and financial firms in USA are (were) what Nouriel Roubni calls "technically insolvent", is because mark-to-market, those AAA toxic bonds were written down to 20 cents to 30 cents. (By the way, I'm not quite clear whether that is a new ratings category "AAA toxic" as opposed to "AAA normal"; it makes a difference - perhaps I should suggest that to Moody's so that next time there is not all that confusion about what AAA actually means?).

Now you have the heard "the biggest bond fund manager in the USA" saying that he would pay 65 cents to 75 cents.

Hallelujah! After nine months of painful constipation, during which time there was no "movement", the "market" hath finally spoken. So now instead of relying on a few fire-sale transactions that happened months before, which were in any case probably not comparable (that 22 cents Loan Star paid was for CDOs), the auditors can benchmark to "the head of the biggest bond firm in the world". That's OK under FASB isn't it? After all, the Maiden Lane transactions were priced "mark to quote"?

Q.E.D. now everyone can mark those toxic assets back to two to three times what they were marked down to, so none of the banks in USA are "technically" insolvent (well most are not).

Sure it sounds crazy, but then mark-to-market is as crazy as a rabid cat, it was what dug this hole in the first place (by allowing banks to lend money to gamblers and to value the loans they made on the inflated prices that were as a direct result of the gamblers gambling), then, the gamblers went bust and mark-to-market under-valued the assets.

Sure it's crazy, but as the defenders of MTM say "it's not perfect but it's the best we got". Sure, like a Hummer with no brakes.

Tim Geithner's Master-Stroke

There isn't going to be an auction: that's the master-stroke. OK, there might need to be a "show auction", but now Bill Gross has put it all on the line - there is no need, you can hand that $200 billion or whatever back to the taxpayers, Tim.

So what's for an encore - another bubble? Well, we still have mark-to-market as the "it ain't perfect but it's the best we (accountants) can think of", so that's surely on the cards.

Unless of course Mighty Tim has the good sense to mandate that assets valued for the purpose of assessing capital adequacy are valued using International Valuation Standards, which would stop a bubble rerun in its tracks.

And yup - like I said in January, now that that's all cleared up, 6,600 on the Dow (or thereabouts – and sure, my timing was a bit off) was the bottom, mark-my-words-to-market.

And that dead cat is yodeling!!