IRA Goes Off The Rails - Mark To Market
The Market Ticker ® - Commentary on The Capital Markets
Posted 2010-03-07 13:41
by Karl Denninger
in Regulatory
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IRA Goes Off The Rails - Mark To Market
 

In what I can only describe as a self-serving piece for keeping banking "exactly as it is" (which is inherently unsustainable and thus can't be) IRA tries to refute the value of mark-to-market with a stunning piece.

Finally, on April 2, 2009, FASB allowed banks to use "cash flow" to value bonds when the market was illiquid - exactly like Bernanke said last week. This fixed the immediate problems in the system, and the economy and financial markets have been on the mend ever since. In fact, the stock market bottomed on March 9, 2009 - the very day markets found out that Representatives Barney Frank and Paul Kanjorski would hold a hearing to force FASB to change the misguided accounting policy.

No it didn't.

Remember FHLB Seattle again?  Their "at market" losses on a portfolio of trash, er, loans was some $300 million.  They claimed that the real loss to be realized over time was in fact $12 million, using model-based accounting.  After all, these loans, while deeply underwater, weren't really impaired.

Or so they told Congress.  I remember the testimony well.

But now, one year later, they are suing the banks that packaged up all this dog squeeze.  Among the pieces of trash being sued over are the very same securities against which they said that a model-based valuation system showed a tiny $12 million loss.

Are they suing for $12 million?

No.

That "tiny $12 million loss" in fact is some $311 million - almost exactly what the market price predicted it would be.

Remember, this was in the "depths of hell" time period too - March of 2009.  It was when the entire world was coming apart, Satan was chortling at the fate of our financial system and the S&P 500 traded - literally - at 666.

Yet that view - that market view - was correct.

To the regulators, it does not matter if the loan is still being paid on time. And it does not matter if the lower valuation of the collateral will force an already stressed borrower to come up with more cash. Regulators have decided that they want banks better capitalized and the way they can do that is to reduce the value of a bank's assets and then force these banks to raise money from shareholders.

It shouldn't matter to the regulators.

As I wrote months ago, the solution to this problem is One Dollar of Capital:

The solution is very simple, but you will notice that Jamie doesn't bring it up.  That's because he finds it unacceptable.

What's that solution?

Prohibit as a matter of Federal Law, and enforce it vigorously under pain of immediately dissolution, THE LENDING OF MONEY UNSECURED THAT EXCEEDS THE FIRM'S CAPITAL.

This is in fact the only way you can both end "too big to fail" and not constrain size or influence.

It is also the definition of sound lending.

It is also how lending was done prior to the banksters corrupting the government and literally usurping the sovereign credit of The United States.

This is what the regulators are trying to back into.

It is the right thing to do, because it is the definition of sound banking.

ONE DOLLAR OF (EXCESS) CAPITAL FOR EACH DOLLAR OF UNSECURED LENDING.

You enforce this, the problem with systemic risk disappears.  Banks can fail without harm to anyone else.  Banks can take all the risk they want - with their shareholders and subordinate bondholders money - but never with depositors or secured bondholders money.  At the point those bets go bad and deplete their excess capital the bank is closed - right then and there.

All secured lenders to the bank get their money back. 

All of it.

All depositors get their money back. 

All of it.

The shareholders and unsecured lenders to the bank take a haircut, which is determined by the actual over-time performance of the outstanding unsecured lending.

The FDIC Deposit Insurance Fund loss, if this regulatory framework is applied and enforced, is always zero.

This regulatory regime exactly matches the bank's lending risk with the expected risk of lending money to the bank.  Those who lend unsecured (e.g. shareholders and subordinate bondholders) have lent money with the expectation that they might lose it.  The bank in turn has lent out capital with the expectation that it might not be repaid.

The secured lenders to the bank - senior bondholders and depositors - lent their money with the expectation that it was a secured loan.  The bank in turn lent that money out secured by an asset that is valued (each and every day) at or above the loan balance.

Statutory law sets a reserve ratio (cushion) between secured lending out and secured capital in.  This gives the market room to move against the bank on the valuation of those secured loan assets without causing the bank to fail.  Management is free to increase that ratio should it desire, but not to dip under it (if they do, the bank gets closed.)

But for each dollar of unsecured lending that is out there from the institution, that bank must hold one dollar of excess capital beyond statutory requirements.

If it does not, at any time, then the bank is closed, haircuts may happen, and the bank's management loses their jobs.

This is the only stable fractional lending system that can be constructed folks. 

It remains difficult or impossible to find support for it precisely because it is so simple and yet it absolutely prevents the playing of "Heads Management Wins, Tails Taxpayers Lose."

If we want a stable financial system, we must impose this, and I call upon IRA, along with the other folks in the private and government sector, to wake up and smell the math.

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User Info IRA Goes Off The Rails - Mark To Market in forum [Market-Ticker]
Pika-steph
Posts: 54726
Incept: 2007-09-11
Gold A True American Patriot!
Live Free Or Die; US Army Est. 1775
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smiley

I hope Chris Whalen was not personally involved in this piece.

I will be very disappointed.

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Stop the Looting; Start Prosecuting - http://www.FedUpUSA.org/
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"The only regulation that really works is failure."--Rick Santelli
Frat
Posts: 1935
Incept: 2009-07-15
Silver
NKY
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Can't say I'm overly surprised about anything any more. Kick, kick, kick that can. They've already extended far further than I thought possible, and from the looks of it, it's just the beginning. It's gonna be an ugly 2010 and even uglier 2011.

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We're ****ed. Where's Henry Bowman when you need him?
Nuke_engineer
Posts: 2699
Incept: 2007-08-19
Green
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2012 isn't too far off.Maybe it's truly the end of western civilization as we know it because of the banksters and corrupt politicians.

Wait until IRA starts changing its analytics reporting to reflect this philosophy and fool its customers.

A bitter pill is a lifesaving pill nevertheless....

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Trading and investing is understanding about people, emotions and corruption of government, corporations, banks and people using propaganda, lies, mathematics and bankster logic working against you.

Financeguy
Posts: 5283
Incept: 2007-08-10
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Charlotte
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Relax Steph....It is a guest commentary by Brian "the blind pumper" Wesbury and one of his paid schills. How much more money is this guy going to have to lose for his clients before they put him out to pasture with Cramer, Bove, Tom Brown and others. These guys are all bullish all the time and he is buddies with Kudlow- enough said.

I understand that the equity market has been kind during this counter trend rally. Nobody knows how long this may last. But to claim the fundamentals are bullish and to continue to lie about asset values is just plain dishonest.
Statusquojoe
Posts: 2784
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Land of the fees Home of the slaves.
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Quote:
At the point those bets go bad and deplete their excess capital the bank is closed - right there then and there.


Otherwise outstanding.

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There are so many rules no one knows which rules to follow. The only sure rule is more rules will follow. SQJ.
End_the_bubbles
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The New 3rd World
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The utter garbage being spewed by these guys is staggering. We are 100% PONZI now.......

Quote:

http://us1.institutionalriskanalytics.co.... -
Mark-to-market accounting needs to die. It should be stabbed in the heart with a cedar stake, shot through the temple with a silver bullet and then buried under six feet of garlic powder. Like the evil killer in a horror flick, we need to make sure it never gets up off the floor ever again. While we do not agree with everything Ben Bernanke is doing these days, his comments, which finger the impact of accounting rules and conventions on the economy, are right on the money. Hopefully, the SEC, Treasury, the FDIC, Congress, and FASB were listening.

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In the long run even the most despotic governments with all their brutality and cruelty are no match for ideas. Eventually the ideology that has won the support of the majority will prevail and cut the ground from under the tyrant's feet and rise in rebellion to overthrow their masters.
Judgesmales
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pika-steph wrote..
I hope Chris Whalen was not personally involved in this piece.

I will be very disappointed.
My god Pika, when I read the IRA post, I had EXACTLY the same thought -- almost to the word -- and was going to come here and post it. Whalen has been one of the few voices of reason. I'm hoping he didn't go along with this piece.

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Don't forget: Panic is also an animal spirit, and it spreads much faster than optimism. Be careful what you wish for, Bernanke.

Genesis
Posts: 130758
Incept: 2007-06-26
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If Whalen has been compromised on this then we're about to see the game come apart. Between the FDIC seizures and FHLB Seattle coming after the securitizers the half-life of this scam can now be measured in months, not decades

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I don't care if it makes sense -- only if it makes money. -- Me
Bank (n): See scam, fraud and theft. Eat a bankster -- they're low-carb.
What part of "shall not be infringed" was unclear?
Etz
Posts: 13890
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Don't be shy to let them know how you feel,

info@institutionalriskanalytics.com

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Legal chicanery and beneficent darkness are the banker's stoutest allies - F.Pecora.

Jswede
Posts: 9
Incept: 2009-04-16

Chicago
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Wesbury believes NONE of the crisis needed to occur. It was all a liquidity crisis caused by mark-to-market. seriously, this is what he touts. capital and equity are foreign concepts to him -- only thing that matters are liquidity and 'productivity'... productivity and innovation are his answer to everything.

check out his ~1999 book: "New Era of Wealth"... his stock #1 stock pick in that book? ....Global Crossing.

G'dammit Whalen... you were one of the people who 'got it'... now you were apparently bought as well.
Judgesmales
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Las Vegas
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When this whole thing comes apart, I've got dibs on Brian Wesbury. HE'S MINE! YOU GOT THAT? MINE!

You all can have Tanzillo and even Bend-Over and Timmy.

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Don't forget: Panic is also an animal spirit, and it spreads much faster than optimism. Be careful what you wish for, Bernanke.
Etz
Posts: 13890
Incept: 2007-06-26
Silver
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Thank you for contacting Institutional Risk Analytics. Our regular business hours are M-F, from 9:00 to 18:00 Pacific time.

For all sales and business development inquiries, please email cwhalen@institutionalriskanalytics.com

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Legal chicanery and beneficent darkness are the banker's stoutest allies - F.Pecora.

Hihoherewego
Posts: 931
Incept: 2009-02-25

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Oh hell. Here's a little more of that self-serving business for ya....................

http://www.ft.com/cms/s/0/0f1b6822-2a2c-....

......................

Debt and slavery are not separate concepts.....................

http://www.usdebtclock.org/
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