You'd think that with the ample proof that lying just leads to people shunning your debt and equity issues that global financial institutions would choose to come clean and tell the truth.
You'd be wrong. Grievously wrong.
Now there is a proposal out there that threatens to make a mockery of the foolishness already in the market and multiply it a few times over:
"The action by the four banking agencies provides more favorable accounting treatment of so-called good will, an intangible asset that reflects the difference between the market value and selling price of a bank. The move is similar to a step taken in the midst of the savings-and-loan crisis that helped many institutions in the short run.
Over the longer term, that decision increased the overall costs of the bailout after the government took away the good will benefits. Under the proposal issued this week, the regulators would permit buyers of banks and thrifts to count some of the good will toward meeting their regulatory capital requirements."
Let me decode this for you.
If I buy a bank for $30 billion but the "net" value is only $20 billion, then there is $10 billion of "Good will" on the balance sheet. That's the difference between what I paid and what "fair value" is for that particular transaction.
What this proposal - which will be adopted after only 30 days of comment - will do, is encourage banks to overpay for other banks in deals, because they will be able to count this "phantom" value toward regulatory capital requirements!
This is blatant, out-and-out fiction - another word for it would be "fraud".
Nor does it stop there. Unable to control the FedFunds trading rate or LIBOR, Ben Bernanke has now taken to literally showering the world with dollars - $180 billion worth last night.
In theory these sorts of swaps are inflation-neutral. In reality what often happens is that the "other end" plays "blatant print" to cover their end of the swap, which looks neutral to their economy (since the money immediately goes over to The United States) and effectively is exported here!
I doubt this will do anything of value and it may be tremendously destructive. LIBOR continued to move higher this morning even after this swap line increase was announced, saying quite clearly that the market isn't buying the effectiveness of this move. The danger here is that if The Fed fails to get LIBOR and the EFF under control then they will have truly lost the capability to manage anything in this environment. Add to that a rather explicit threat by China to put together a pan-Asian "new reserve currency" paradigm, plus the fact that agency spreads have blown out again and now are above where they were before Fannie and Freddie were nationalized, and you have all the ingredients for a true market panic.
Never mind that it appears that some "market participants" may be intentionally quoting false bids and asks on Agencies.
No, what you saw Monday and Wednesday was not a panic - that was the fat lady clearing her throat.
Watch the credit markets. They're where the real "tell" is.
I suspect you're going to see a few day bounce here - the selloff yesterday was totally unexpected by me, as I expected the AIG bailout would get thunderous applause and what it got instead was recognition that the house of cards had the Big Bad Wolf breathe on it.
That was a first during this credit crunch - the "short bus" (equity) traders figured it out fast that this wasn't "good news" at all.
But as the credit noose continues to tighten the upward fuel will wane, and we are very likely to see a "no bid" situation develop in some issues.
It if develops in the overnight lending markets or worse, in the Treasury market generally, the game is over.
Don't think it can't.
It can, and if the response to market conditions is to allow the lying to ratchet up instead of to force firms to face the truth it is simply a matter of time before it does.
