Best of the Week
Most Popular
1. The Trump Stock Market Trap May Be Triggered - Barry_M_Ferguson
2.Why are Central Banks Buying Gold and Dumping Dollars? - Richard_Mills
3.US China War - Thucydides Trap and gold - Richard_Mills
4.Gold Price Trend Forcast to End September 2019 - Nadeem_Walayat
5.Money Saving Kids Gardening Growing Giant Sunflowers Summer Fun - Anika_Walayat
6.US Dollar Breakdown Begins, Gold Price to Bolt Higher - Jim_Willie_CB
7.INTEL (INTC) Stock Investing to Profit From AI Machine Learning Boom - Nadeem_Walayat
8.Will Google AI Kill Us? Man vs Machine Intelligence - N_Walayat
9.US Prepares for Currency War with China - Richard_Mills
10.Gold Price Epochal Breakout Will Not Be Negated by a Correction - Clive Maund
Last 7 days
Reasons to Buy Pre-Owned Luxury Car from a Certified Dealer - 22nd July 19
Stock Market Increasing Technical Weakness - 22nd July 19
What Could The Next Gold Rally Look Like? - 22nd July 19
Stock Markets Setting Up For A Volatility Explosion – Are You Ready? - 22nd July 19
Anatomy of an Impulse Move in Gold and Silver Precious Metals - 22nd July 19
What you Really need to Know about the Stock Market - 22nd July 19
Has Next UK Financial Crisis Just Started? Bank Accounts Being Frozen - 21st July 19
Silver to Continue Lagging Gold, Will Struggle to Overcome $17 - 21st July 19
What’s With all the Weird Weather?  - 21st July 19
Halifax Stopping Customers Withdrawing Funds Online - UK Brexit Banking Crisis Starting? - 21st July 19
US House Prices Trend Forecast 2019 to 2021 - 20th July 19
MICROSOFT Cortana, Azure AI Platform Machine Intelligence Stock Investing Video - 20th July 19
Africa Rising – Population Explosion, Geopolitical and Economic Consquences - 20th July 19
Gold Mining Stocks Q2’19 Results Analysis - 20th July 19
This Is Your Last Chance to Dump Netflix Stock - 19th July 19
Gold and US Stock Mid Term Election and Decade Cycles - 19th July 19
Precious Metals Big Picture, as Silver Gets on its Horse - 19th July 19
This Technology Everyone Laughed Off Is Quietly Changing the World - 19th July 19
Green Tech Stocks To Watch - 19th July 19
Double Top In Transportation and Metals Breakout Are Key Stock Market Topping Signals - 18th July 19
AI Machine Learning PC Custom Build Specs for £2,500 - Scan Computers 3SX - 18th July 19
The Best “Pick-and-Shovel” Play for the Online Grocery Boom - 18th July 19
Is the Stock Market Rally Floating on Thin Air? - 18th July 19
Biotech Stocks With Near Term Catalysts - 18th July 19
SPX Consolidating, GBP and CAD Could be in Focus - 18th July 19
UK House Building and Population Growth Analysis - 17th July 19
Financial Crisis Stocks Bear Market Is Scary Close - 17th July 19
Want to See What's Next for the US Economy? Try This. - 17th July 19
What to do if You Blow the Trading Account - 17th July 19
Bitcoin Is Far Too Risky for Most Investors - 17th July 19
Core Inflation Rises but Fed Is Going to Cut Rates. Will Gold Gain? - 17th July 19
Boost your Trading Results - FREE eBook - 17th July 19
This Needs To Happen Before Silver Really Takes Off - 17th July 19
NASDAQ Should Reach 8031 Before Topping - 17th July 19
US Housing Market Real Terms BUY / SELL Indicator - 16th July 19
Could Trump Really Win the 2020 US Presidential Election? - 16th July 19
Gold Stocks Forming Bullish Consolidation - 16th July 19
Will Fed Easing Turn Out Like 1995 or 2007? - 16th July 19
Red Rock Entertainment Investments: Around the world in a day with Supreme Jets - 16th July 19
Silver Has Already Gone from Weak to Strong Hands - 15th July 19
Top Equity Mutual Funds That Offer Best Returns - 15th July 19
Gold’s Breakout And The US Dollar - 15th July 19
Financial Markets, Iran, U.S. Global Hegemony - 15th July 19
U.S Bond Yields Point to a 40% Rise in SPX - 15th July 19
Corporate Earnings may Surprise the Stock Market – Watch Out! - 15th July 19
Stock Market Interest Rate Cut Prevails - 15th July 19
Dow Stock Market Trend Forecast Current State July 2019 Video - 15th July 19
Why Summer is the Best Time to be in the Entertainment Industry - 15th July 19
Mid-August Is A Critical Turning Point For US Stocks - 14th July 19
Fed’s Recessionary Indicators and Gold - 14th July 19
The Problem with Keynesian Economics - 14th July 19

Market Oracle FREE Newsletter

Top AI Stocks Investing to Profit from the Machine Intelligence Mega-trend

Why Bank Regulators Can’t Tell A Dead Parrot From A “Resting” One

Politics / Market Regulation May 28, 2010 - 08:11 AM GMT

By: Andrew_Butter

Politics

Best Financial Markets Analysis ArticleCaught this one via Edward Harrison on the tedious business of bank regulation, capital adequacy, and other such delightful subjects, ideal for anyone who can stomach more discussion on something that many (particularly central banks and regulators), would prefer to be just swept under the carpet.


http://seekingalpha.com/..

There is a nice link to a clip of Hugh Hendry speaking his mind (and a lot of sense), also there was Gillian Tett of the Financial Times; she said:

“Many investors are saying that they can’t tell what the level of exposure and risk is in the European Banking system”.

Of course she is absolutely right, although I’m not sure what’s news? Investors couldn’t tell what the risk and exposure was five years ago; if they could have they never would have made the loans or greedily gulped down all that highly-rated toxic garbage, like a pack of BSE-infected piggies.

What’s new is that in Europe, they have only just realised that they don’t know what they don’t know.

The crisis in USA in 2008 and the crisis now is that investors – i.e. market participants, were not (and are still not), provided with sufficient truthful information that allowed them to make sensible investment decisions. That’s why they “can’t tell what is the level of exposure and risk”.

Tett goes on to say (I paraphrase)

The problem right now is that by avoiding talking about it and sweeping the problems under the carpet, that will just make things fester.

But what’s the big deal? First the government in USA and now the governments in Europe have committed to “stand behind the banks”, to pay-off their gambling debts, and reward their stupidity. And everyone will live happily ever-after, for a while, by which point the politicians who made those decisions will be long-gone.

So “Don’t Panic”, this problem is being swept under the carpet and will be “dealt-with” at a later date when the “market” is not so jittery.

I was rather amused by something else that Tett said which was that in USA the regulators went in and “did a proper audit”, and that although that was “not perfect” it was a start.

WOW!! That’s a good idea, why didn’t anyone think of that until now?…DO A PROPER AUDIT (even if it’s not perfect). Fantastic idea!!!

Err…but weren’t they supposed to do “proper” audits before?

Did I miss something?

I was also interested in a link to an excellent paper written by Eric Tymoigne and Randall Wray's (http://www.scribd.com/.. ), they make the point (correctly) that:

"The notion that legislated capital requirements (such as those inherent in the Basel agreements), can constrain growth (of bank landing(my brackets)) and risk, are therefore flawed".

One of the issues comes down to valuation. Many commentators have remarked that mark-to-market valuations report over-optimistic "values" at the start of a bubble; thus fuelling the bubble (under current banking regulations), and exacerbating the bust that inevitably follows, creating an illusion of a liquidity crisis (when in fact the issue is more likely to be a solvency crisis (which is the case at present)).

One area that has been consistently “not talked about” and “swept under the carpet”; is that unless market participants (and regulators) can rely on the valuations of assets (read outstanding loans or collateral backing them up), any discussion of capital adequacy is simply absurd.

And that’s whether you have an audit or not, all an audit does is to report that assets have been valued in line with FASB, SEC, and or IFRS rules. And since those allow you to say that a parrot is “resting”, even if it is stone cold deceased and you can bang it’s head on the counter and it does not wake up.

Hence the acronym MPVS (Monty Python Valuation Standards).

I know that no one likes to talk about it, but this issue was addressed in the first edition of International Valuation Standards (published in 2000), where it was recognized that markets can sometimes be in what George Soros calls "disequilibrium" (both up and down).

Err…is that “news”? If it is, it’s certainly not something that people who do valuations talk about…perhaps some dogged reporter like Gillian Tett should break that story?

The solution to that problem put forward by IVS was simply that the person doing the valuation (ideally an independent person who is not taking kickbacks (directly or in kind) from the owner of the asset), should:

1:  Give an opinion on whether or not the market was (at the time of the valuation), in disequilibrium.

2: Make sure that if that was the case, it should be clearly flagged in the valuation, so that anyone who relies on the valuation knows about it.

3: And then, if there is evidence the market is in disequilibrium, work out using "sufficient market-derived data" (from when he thought the market (in the past) had not been in disequilibrium, and report the "other-than-market-value" which would be his//her opinion on what the value would have been, had the market not been in disequilibrium.

That’s as easy as One-Two-Three and it’s not a lot harder than working out if a parrot is deceased or “resting” (and on that score, I wonder what they will call the $1.25 trillion of toxic parrots that the Fed just bought whenever they do a “proper” audit, will they call them “dead” or “resting”?)

So if I was contemplating taking on some counter-party risk, buying a bond, or investing in a bank, I would as a matter of law have access to information on (a) what the assets held by the bank would fetch if they were sold today; and (b) what (in the opinion of a valuation expert that I trusted), they might have sold for if the market was not in disequilibrium (and by definition, the extent of disequilibrium of a market above it's "fundamental" is exactly equal to the extent below - over a long period of time, so if was smart I could work out the up-side or downside potential).

And with that information, I would be able to make an informed investment decision. Without that information, which is the case now, well I guess you just have to follow the herd (and which is why I consider any bond purchase outside of German debt and (perhaps) US Treasuries, to a be a complete blind gamble).

What's happening now is that counter-parties and market participants are being denied access to both information on the mark-to-market value (however bad that might be), and also to either (a) a professionally conducted and impartial estimates of other-than-market-value or (b) the necessary information to be able to do their own valuation.

So basically, the actual situation (good or bad), is impossible to determine with any degree of confidence; which explains the wild moods of the marketplace.

What I can’t understand is why everyone is so upset about Goldman Sachs and the crafty CDO that they stuck ACA and some sucker German banks with?

After all they provided the “customers” with a lot more relevant information, than is currently being provided to investors and counter-parties by American and European banks.

Until regulators and central banks start calling a dead parrot a dead parrot; and mandating that truth-full information on the health of the parrot should be shared with “the customers”, that state of affairs is likely to continue, as will the mood-swings.

Enjoy the ride!!

By Andrew Butter

Twenty years doing market analysis and valuations for investors in the Middle East, USA, and Europe; currently writing a book about BubbleOmics. Andrew Butter is managing partner of ABMC, an investment advisory firm, based in Dubai ( hbutter@eim.ae ), that he setup in 1999, and is has been involved advising on large scale real estate investments, mainly in Dubai.

© 2010 Copyright Andrew Butter- All Rights Reserved
Disclaimer: The above is a matter of opinion provided for general information purposes only and is not intended as investment advice. Information and analysis above are derived from sources and utilising methods believed to be reliable, but we cannot accept responsibility for any losses you may incur as a result of this analysis. Individuals should consult with their personal financial advisors.

Andrew Butter Archive

© 2005-2019 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

6 Critical Money Making Rules