Panicking Fed Scrambles to Hide Credit Crisis Truth
Stock-Markets / Credit Crisis 2008 Aug 01, 2008 - 04:44 PMBy: Mike_Shedlock
The Fed, now in continual panic mode, Extends Emergency Borrowing Program . The Federal Reserve said Wednesday that it was extending its emergency borrowing program to Wall Street firms and was taking other steps to ease a tight credit market that has hobbled the national economy.
The Fed said the program, in which investment houses can tap the central bank for a quick source of cash, will be available through Jan. 30. Originally the program, started on March 17, was supposed to last until mid-September.
Another program, in which investment firms can temporarily swap more risky investments for safer Treasury securities, also will continue through Jan. 30, the Fed said. It also will let commercial banks, in a separate program, bid on cash loans that last longer — for 84 days — besides the 28-day loans now available.
FASB Postpones Off-Balance-Sheet Rule for a Year
On July 30th, FASB Postpones Off-Balance-Sheet Rule for a Year .
The Financial Accounting Standards Board postponed a measure, opposed by Citigroup Inc. and the securities industry, forcing banks to bring off-balance-sheet assets such as mortgages and credit-card receivables back onto their books.
FASB, the Norwalk, Connecticut-based panel that sets U.S. accounting standards, voted 5-0 today to delay the rule change until fiscal years starting after Nov. 15, 2009. The board needs to give financial institutions more time to prepare for the switch, FASB member Thomas Linsmeier said at a board meeting.
"We need to get a new standard into effect," Linsmeier said, though " it's not practical " to begin requiring companies to put assets underlying securitizations onto their books this year.
Citigroup's Mysterious Shadow Assets
Of that $11 trillion in total bank off balance sheet entities, Citigroup has $1.1 trillion of it. Enquiring minds may wish to consider Citigroup's $1.1 Trillion in Mysterious Shadow Assets .
If Citigroup is looking for an award, it can take the blue ribbon for greed, arrogance, and stupidity in the off balance sheet category. There are plenty of other categories and more blue ribbons will be awarded. Nominations are being taken now.
Did Citigroup Know In Advance?
On July 23, the Citigroup CEO said Citi Off-Books Risks `Well in Hand' .
Citigroup Inc. Chief Financial Officer Gary Crittenden said earnings will probably be strong enough to absorb any losses created when new accounting rules force it to move off-balance-sheet securities onto its books.
"There's likely to be a fair amount of time between now and when that event actually takes place, and that's a time period in which we intend to generate a very significant amount of capital," Crittenden said today on a conference call with investors. "We think we have it well in hand."
SEC may turn a blind eye to this
If the SEC wants to investigate something, it should investigate how Citigroup might have been aware of an important rule change a week in advance.
But contrary to what Crittenden says, Citigroup does not have things well in hand. Citigroup will be in worse shape two months from now and in even worse shape one year from now. The value of that $1.1 trillion in garbage that Citigroup is holding off the books is declining every day. Look at Merrill Lynch for an example of what some of Citigroup's assets might be worth.
Merrill Lynch Sells CDOs at 5.5 cents on the dollar
On July 29th it was reported that Merrill Lynch "raised capital" by selling CDOs. See Ratchet Provisions Soak Merrill Lynch, Will Sink WaMu . Merrill got an initially reported 22 cents on the dollar for this sale. Commentators went "gaga" on the news with another ridiculous round for "bottom calls" from nearly every corner. Well for starters 22 cents on the dollar is one hell of a writedown and nothing to cheer over. And the plain fact of the matter is that Merrill really only got 5.5 cents on the dollar as explained in Merrill Gives Up Gains, Is `On Hook' for CDO Losses .
Nonsense Does Not Stop There
Even as Merrill Lynch and Citigroup are in a mad scramble to raise capital, both continue to pay huge dividends. Please consider Merrill Lynch Declares Dividends on Common and Preferred Stocks .
Paying dividends while raising capital is like trying to bail water from a sinking ship with a bucket that has huge holes in the bottom. One has to start questioning the competence of the new Merrill and Citigroup CEOs.
OK For USA To Turn Japanese
Barry Ritholtz on the Big picture is as disgusted with these delays as I am. Please consider FASB: OK For USA to Turn Japanese .
Just when you think there is a glimmer of hope that some of these ne'er do well, lying, cheating, sniveling, cowardly bank CEOs might finally be forced to step up to the confessional and tell all, this comes along: FASB Postpones Off-Balance-Sheet Rule for a Year.
Question: How can anyone value a financial company if they cannot tell what are on their balance sheets?
Answer: You cannot. If you buy a financial under these conditions, you are flying blind.
Investment Thesis: Ritholtz Rule #1: Know What You Own.
Whoever buys Financials under these circumstances loses the right to whine down the road about companies not being forthcoming. If you own them, don't complain when you get what you deserve. Not "Practical" To Tell The Truth
It's NEVER "practical" for the Fed, the SEC, Banks, CEOs in general, the FDIC, Congress, the Treasury Department, or the President to tell the truth.
This is what it all boils down to: Somehow it's never "practical" to stop a drunken credit-financed orgy, yet when the party ends, it's never "practical" to discuss the consequences.
In this case, the credit orgy lasted so long, and there were so many players, that the most important truth right now that needs open, honest discussion is that the entire US Banking System Is Insolvent. I listed 25 reasons in You Know The Banking System Is Unsound When....
One of the few people always speaking on the practical side of matters is Minyanville's Mr. Practical. Inquiring minds will want to read what Mr. Practical has to say in The Bigger Picture . Here is a small snip:
We hear from apologists that banks selling stock will "heal" the system. But again that's not how it works. It only transfers wealth from one part of the system to another because wealth is not being created. There's no production, only transfer. It's a hallmark of deflation that companies sell stock. That is deflationary. People have to use cash to buy stock. So cash goes from investors who have less cash to buy things with, to banks who use it to write down debt. But the point is banks selling stocks to investors reduces liquidity, it does not increase it.
The government's strategy is to buy time. It always is. Time allows it to slowly drain wealth from the poor/middle class and re-distribute it to the rich who own the financial system.
The Fed, the SEC, and the Treasury department are all jumping through hoops attempting to disguise this fact, but their collective panic to bail out the wealthy at the expense of the poor tells the truth, even as they find it "impractical" to do so.
By Mike "Mish" Shedlock
http://globaleconomicanalysis.blogspot.com
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Mike Shedlock / Mish is a registered investment advisor representative for SitkaPacific Capital Management . Sitka Pacific is an asset management firm whose goal is strong performance and low volatility, regardless of market direction.
Visit Sitka Pacific's Account Management Page to learn more about wealth management and capital preservation strategies of Sitka Pacific.
I do weekly podcasts every Thursday on HoweStreet and a brief 7 minute segment on Saturday on CKNW AM 980 in Vancouver.
When not writing about stocks or the economy I spends a great deal of time on photography and in the garden. I have over 80 magazine and book cover credits. Some of my Wisconsin and gardening images can be seen at MichaelShedlock.com .
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