Best of the Week
Most Popular
1.UK House Prices BrExit Crash NOT Likely Despite London Property Market Weakness - Nadeem_Walayat
2.BrExit Morning - New Dawn for Britain, Independence Day! - Nadeem_Walayat
3.LEAVE Wins EU Referendum - Sterling and FTSE Hit Hard, Pollsters, Bookies and Markets All WRONG! - Nadeem_Walayat
4.BrExit Implications for UK Stock Market, Sterling GBP, House Prices and UK Politics... - Nadeem_Walayat
5.Trading BrExit - Stocks, Bonds, Sterling, Opinion Polls, Bookmaker Odds and My Forecast - Nadeem_Walayat
6.FTSE and Sterling Brexit Trading, Deconstruction of the EU Referendum Result - Nadeem_Walayat
7.UK Interest Rate Cut to 0.25% Imminent and More QE Money Printing - Nadeem_Walayat
8.Trading BrExit - British Pound Plunges, FTSE Stock Futures Slump on LEAVE Shock Referendum Win - Nadeem_Walayat
9.The Stock Market is Reading it Wrong! - Chris_Vermeulen
10.Breakouts Galore in Gold and Silver - Jordan_Roy_Byrne
Free Silver
Last 7 days
Stock Market Insiders Are Secretly Selling, Cycle Top Next Month - 28th July 16
FOMC Interest Rates and Their Impact on the US Economy - 28th July 16
The State Of The Economy - 28th July 16
Elliott Wave Crash Course - 3 Ways the Elliott Wave Principle Enhances Your Trading - 28th July 16
Japan's "Helicopter Money" Play: Road to Hyperinflation or Cure Debt Deflation? - 27th July 16
Monetary Zika - The Insidious Nature of Credit Expansion - 27th July 16
Gold and Pork Bellies - 27th July 16
Silver Is Insurance Against The Worst Part Of This Depression - 27th July 16
Don’t Buy The SPX Hope Stock Market Rally! - 27th July 16
Bitcoin $650 Still in Play - 26th July 16
Deutche Bank Stock Price Crash - The EU Has Problems Far Beyond the Brexit - 26th July 16
The Forex Markets Are Getting Exciting! - 26th July 16
Underpriced Silver Is the “Rip Van Winkle” Metal - 25th July 16
Declines in Multiple Market Indexes - 25th July 16
Retailers Are Doomed as Most Americans Are Too Poor to Shop - 25th July 16
Here’s One Currency That Could Go to Zero - 25th July 16
Stock Market Top is Expanding - 25th July 16
Silver Manipulation – Because They Needed the Eggs - 25th July 16
Silver Market COT Stuns: What's Going On Here? - 24th July 16
Gold Demand Remains Stable During Sector Weakness - 24th July 16
Sernova, Diabetes and Haemophilia - 24th July 16
Russia: Tensions, Turmoil, and Western Hubris - 24th July 16
Soybean Commodity Price to Soar Again - 23rd July 16
SPX Stock Market Uptrend Continues - 23rd July 16
Gold And Silver – Debt Addiction Will Carry Precious Metals Higher, Guaranteed - 23rd July 16
Pokemon Go - How to Play, First Use, Balls, Stops, Catching Pokemon's... Great Excercise! - 23rd July 16
7 Signs That the Gold Market Remains Resilient - 23rd July 16
Basic Income in The Time of Crisis - 23rd July 16
Silver Bull Faces Correction - 22nd July 16
The Serious Warning No One’s Talking About - 22nd July 16
Stock Market Insight from Greed, Volatility, and Put/Call Ratio - 22nd July 16
What Will Happen To the Stock Market When Interest Rates Rise? - 22nd July 16
How to Escape the World’s Biggest Ponzi Scheme - 22nd July 16
Addicted to Debt - We Can’t Borrow from the Future Anymore - 21st July 16
Not Everything Is Bullish for Gold - 21st July 16
Don’t Get Sucked Back Into the Stock Market - The Big Picture Hasn’t Changed - 21st July 16
Silver – Caught Inside - 21st July 16
Forex: "The Markets Are Getting Exciting!" - 20th July 16
China Economic Troubles - Is Kyle Bass Finally Getting His Revenge? - 20th July 16
Why Lithium Will See Another Price Spike This Fall - 20th July 16

Free Instant Analysis

Free Instant Technical Analysis


Market Oracle FREE Newsletter

The Power of the Wave Principle

Financial Crisis Triggered Shock and Awe Response for Accounting Driven Recovery

Stock-Markets / Credit Crisis 2010 Jan 28, 2010 - 06:29 PM GMT

By: Gordon_T_Long

Stock-Markets Diamond Rated - Best Financial Markets Analysis ArticleSHOCK & AWE

Beginning in October 2007, the world has survived a Financial Crisis like no other in modern times. It is the first truly Global Financial Crisis ever experienced. This crisis brought to light a vast array of financial instruments (CDO’s, CDS’s, CLO’s, etc.) being offered by murky financial entities (SIV’s, VIE’s, SPE’s, QSPE’s etc.) that were completely unregulated, often offshore, always off balance sheet and never traded through any regulated exchange. None of these are regulated nor understood by sovereign governments. Minimally, this is a recipe for fraud. But definitely, it has been a modern day financial “wild west” for the innovative and aggressive!


LEND, BEND or SPEND

LEND:  To pull the US and Global economies out of the abyss of the Financial Crisis the authorities have been forced to accept the implementation in the US of ZIRP (Zero Interest Rate Policy). A policy that has resulted in a Fed Funds LENDING Rates of 0.25% but 30 to 90 day Treasury Bills offered at absurd 3 – 7 basis points. With a +3.5% inflation rate [0.25 – 3.05] we have an unheard of -3.25% Real Rate. The tax payer is effectively paying the banks to borrow money.

BEND:  Since the banks aren’t willing to pour this money back into the US Economy and specifically into US expansion and consumer credit, the Federal Reserve has additionally implemented the central bankers “Nuclear Option” called QE (Quantitative Easing). As such the Fed has purchased $1.4T in Agency Debt and Mortgaged Backed Securities (MBS) & $300B in US Treasuries. This has effectively disconnected the US Debt market yields from any source of reality.

If this is not enough, we have implemented the greatest experiment in Monetary Policy in the history of the capitalist system with the implementation of: 1) TARP, 2) TALF 3) PDCF 4) TAF 5) TDWP 6) TSLF 7) CPFF 8) MMIF 9) AMLF and 10) Massive foreign currency SWAPS. All of these initiatives were aimed at BENDING a failed system back into operation through Government Guarantees that ‘temporarily’ removed inherent risk. It is to be seen just how temporary these programs will become. Remember, Income tax was originally implemented to solve the temporary funding crisis of WWI! These initiatives intentionally improve banking profits by an extraordinary degree and the banks will no doubt lobby to ensure some measure of the initiatives remains.

SPEND:  Further to the above Monetary Initiatives, we have implemented Fiscal SPENDING Policies based on 1930’s Keynesian Economic doctrine of Deficit Stimulus Spending as a framework in which to restore economic growth. This has resulted in a 2009 deficit of $1.4 Trillion and a 2010 deficit expected to be close to $1.8 Trillion. This will give the US a national debt of $14 Trillion, which will be larger than 12% of GDP, not including Federal Unfunded Liabilities of $62.5 Trillion, according to official government estimates.

The G-20 in total have now authorized 2.2 Trillion in stimulus programs to restore growth. The Global economies together have Lent, Spent or Bent $27 Trillion in financial assets. Meanwhile total US workers unemployed continues to rise.

EXTEND & PRETEND:  An Artificial, Manipulated Recovery

All of the US $11 Trillion “Lend, Bend & Spend” Initiatives, on its $12 Trillion economy, could at best be described as “Triage” actions to stop the immediate hemorrhaging & stabilize the Financial System. The next stage has focused on the effective “Recovery”. Despite the $787 Billion “American Recovery & Reinvestment Act”, ‘we have not achieved a real recovery. We have achieved an artificial perception of a recovery through policies that simply ‘kick the can down the road’! Since March 2009 we have witnessed an ‘Accounting Recovery’ driven by the implementation of the modern Behavioral Economics theory of MOPE (Management of Perspective Economics).  The prime objective has been the recapitalization of the banks through asset appreciation and capital raising versus the unpopular nationalization alternative debated at the onset of the financial crisis. With an elevated stock market the Fed has been very clear to the banks that NOW is the time to increase capital. Consequentially in recent secondary offerings, Citigroup has raised $21.1B, Bank of America $12.2B and Wells Fargo $12.2B. Unfortunately we feel this is only a precursor to increasing centralized planning and an era of Big Government.

AN “ACCOUNTING” DRIVEN RECOVERY
In March 2009 the market bottomed and began a dramatic recovery. This occurred immediately with the reversal of FASB 157 in March 2009. Congress placed such pressures, including potential legislative measures, that it forced the Accounting Standards Boards to reverse the Level 1 Capital Ratio standards regarding the treatment of “Mark-to-Market” of the massive ‘toxic’ assets on the books of the banks.  This change took insolvent banks and obscured problems by making them completely non-transparent to any analysis. The government ‘stress tests’, nor their economic assumptions, were subsequently ever made public.

As Commercial Real Estate values plummeted and are now approaching 45 – 60% declines, the government in July changed the accounting regulations so banks and financial institutions would not have to reflect their true market value. This problem is so huge it makes the Sub-Prime Crisis look like child’s play but has been ‘removed’ through accounting treatment. This treatment was called ‘fraud’ before the changes and was a felony that involved prison time. This does not take away from the fact there is a $2.7 Trillion iceberg floating ‘dead ahead’!

As the Housing foreclosures mounted the government additionally changed the accounting, in this case on how non-performing mortgages could be treated. As an example, many of the 8 Million homeowners who have completely stopped paying their mortgages are presently being left alone so that their mortgage loans can be accounted for at the original loan-value book value by the banks and other financial institutions. More accounting games!  

MARCH 2009
FASB 157

04-02-09 - Summary - FASB Pre-Codification Standards
04-02-09 - FASB approves more mark-to-market flexibility - MarketWatch

03-18-09 - UPDATE 2-FASB issues proposals on mark-to-market guidance s.  Reuters
04-03-09 - FASB Eases Mark-to-Market Rules - WSJ.com
04-14-09 - FASB Looks to Expand Mark Rules - WSJ.com

OCTOBER 2009
BANK REGULATORS: PRUDENT COMMERCIAL REAL ESTATE LOAN WORKOUTS POLICY

10-31-09 - Policy Statement on Prudent Commercial Real Estate Loan Workouts
10-31-09 - Bank regulators extend and pretend
10-31-09 - Banks Get New Rules on Property  WSJ    

NOVEMBER 2009
BANK REGULATORS: THREE ‘CAULDRONS’ EASING

11-14-09 Bankers hold houses, manipulate market Pittsburgh PG
11-11-09 Housing- 'Shadow Inventory' Dwarfs Loan Modifications  CNBC
10-28-09 Strategic Non-Foreclosure                                                          
09-23-09 Delayed Foreclosures Stalk Market  WSJ

01-15-10 Big Banks Accused of Short Sale Fraud CNBC

DECEMBER 2009
FASB Financial Accounting Statements:

Standards Issued in January 2010
Nos. 166 (Transfers of Financial Assets)
Nos. 167 (Amendments to FASB Interpretation of No. 46(R))

12-15-09 FDIC Approves Giving Banks Reprieve from Capital Requirements 

WHAT THESE ACTIONS ATTEMPT TO OBSCURE

WHAT THIS MEANS:  A ‘Back-of-the Envelope’ Analysis & Some Common Sense.

HOME MORTGAGES

The banks have in addition to not yet accounting for Mortgage values in a realistic manner, have not prepared for the next major wave in mortgage resets & defaults!

The Case-Shiller 20 City Composite indicates a -7.3% drop in national prices (1). 

Robert Shiller, co-founder of the composite, has indicated he would not be surprised to see another 5% to 10% drop in the spring (2).

Is it any wonder he has this “suspicion” when you consider the chart to the right?

THE REALITY:                         - 7.3% Composite 20 city Drop (1) & about to get much worse!

BANK ACCOUNTING:            - 1.5% Drop in Home Mortgage Asset Values

From a recent report from Deutsche Bank's Bill Prophet, entitled "Alternative Universe" (5)

COMMERCIAL REAL ESTATE

Does this look like a 1% drop in Commercial Real Estate Values to you?

THE REALITY:                        - 40% + Drop in CRE Asset Values (3)

BANK ACCOUNTING:            - 1% Drop in CRE Asset Value Holdings

From a recent report from Deutsche Bank's Bill Prophet, entitled "Alternative Universe," (5)

HOME EQUITY LOANS

Home Equity Loans dominated loan growth for years. Do we really believe people are defaulting on their mortgages, going into foreclosure and yet paying their Home Equity Loan?

Solid numbers that isolate the real levels versus bank reporting are difficult to find.

Is it any wonder?

Do we really believe it is only 4.3% ever mind the insignificant 1.2% the banks haven taken from an accounting stand point?

THE REALITY:                        - 4.3 + Rate as of Q3 2009 and getting worse (4)

BANK ACCOUNTING:            - 1.2% Drop in Home Equity Loan Values

From a recent report from Deutsche Bank's Bill Prophet, entitled "Alternative Universe" (5)

RESULTS

The above does not include the approximately $500B of troubled Off Balance Sheet Assets that Barclay Bank suggests are not accounted for due to the deferral of FASB 166 / 167 granted by the FDIC. (6)

For anyone buying Banking stocks or LONG the market ...   Caveat Emptor!

SOURCES:

(1)          12-29-09 - S&P/Case-Shiller Home Price Indices
(2)          01-05-10 - Get ready for another housing downturn?  Boston Globe
(3)          10-19-09 - Moody's- US Commercial Property Prices Down 40% from Peak
(4)          01-15-10 - What If Everyone Stops Paying Their Mortgage?
(5)          01-15-10 - Here's Why The Financial System Isn't Out Of The Woods, And Still Has A Ton Of Deleveraging To Do
                  The Business Insider January 15, 2010
(6)          01-16-10 – King World News Broadcast – Bill Laggner
(7)          12-15-09 - FDIC Approves Giving Banks Reprieve from Capital Requirements

Gordon T Long          gtlong@comcast.net   Web: Tipping Points
Mr. Long is a former executive with IBM & Motorola, a principle in a high tech start-up and founder of a private Venture Capital fund. He is presently involved in Private Equity Placements Internationally in addition to proprietary trading that involves the development & application of Chaos Theory and Mandelbrot Generator algorithms.

Gordon T Long is not a registered advisor and does not give investment advice. His comments are an expression of opinion only and should not be construed in any manner whatsoever as recommendations to buy or sell a stock, option, future, bond, commodity or any other financial instrument at any time. While he believes his statements to be true, they always depend on the reliability of his own credible sources. Of course, he recommends that you consult with a qualified investment advisor, one licensed by appropriate regulatory agencies in your legal jurisdiction, before making any investment decisions, and barring that, we encourage you confirm the facts on your own before making important investment commitments.

© Copyright 2010 Gordon T Long. The information herein was obtained from sources which Mr. Long believes reliable, but he does not guarantee its accuracy. None of the information, advertisements, website links, or any opinions expressed constitutes a solicitation of the purchase or sale of any securities or commodities. Please note that Mr. Long may already have invested or may from time to time invest in securities that are recommended or otherwise covered on this website. Mr. Long does not intend to disclose the extent of any current holdings or future transactions with respect to any particular security. You should consider this possibility before investing in any security based upon statements and information contained in any report, post, comment or recommendation you receive from him.


© 2005-2016 http://www.MarketOracle.co.uk - The Market Oracle is a FREE Daily Financial Markets Analysis & Forecasting online publication.


Post Comment

Only logged in users are allowed to post comments. Register/ Log in

Catching a Falling Financial Knife