Saturday, March 28, 2009

The Economy's New Clothes

No- it's not another B-rated fable film noir. Or maybe it is. Watching this whole economic crisis play itself out has certainly been a total schlock-fest.

Surely, those financial marketeers who have been watching the plot unfold on their giant Best Buy (BBY) LCD TV's over the last 8 months must be wondering why those in charge of fixing this economic thing haven't yet simply granted capital forbearance to the big banks- and be done with this total financial market fiasco.

It's Logical. It's Free of charge. And, this Economic Nightmare would be over and done with. Make the banks keep necessary capital reserves- but only when it's necessary. This will instantly free up capital for loans and, yes, will immediately restore liquidity to the markets. Not for re-engendering perverse risk, but for healthy entrepreneurship and day-to-day corporate flow. Couldn't hurt the growing ranks of the unemployed either, of course.

Sure, if a bank anticipates credit losses, it should have to anticipate keeping the necessary capital on hand- but only when the credit losses actually come in. And, at the point where these credit losses actually come in and there isn't enough cash on hand- then the institution can be TARPED if required. It's not like the powers that be don't know where to wire the money in a heartbeat- as it's needed. And, it's not like the regulators don't have the road maps to the Big Boy Banks in case anyone's expecting a lack of fair play or excessive risk-taking in the making. Actually, no large bank is going to go leverage-crazy with the whole world watching. Those days are over.

Furthermore, why in the world are these banks being forced to keep capital reserves for non-credit losses: for depressed, distressed or, gadzooks, "toxic" assets that were meant to be held to maturity or sold at some future point in time if and when the market for them is much better. And, the assumption is, that for a whole lot of assets currently in the dumps- it will get better. Obviously.

If a bank isn't planning on taking the write-down, why should it be strangled by that decision because of a bunch of accountants at FASB?

Because marking assets to market was intended to create "transparency" for investors? You mean the same investors who day-trade on the markets as the "gang that can't shoot straight" - who don't care one iota about transparency- who are only looking for a quick trade based on herd mentality? In fact, the mentality created specifically by the financial media- and no one else.

Then there are those fund investors, big and small, who manipulate the markets for a living. Are these the people for which "transparency" was designed? The "window-dressing" close of the quarter truth-tellers, the rumor exploiters and the bid-pinners? The swap sharks? Yeah, right.

And, who's left in the investor population after funds and day-traders? Retail investors? So, what percentage of these investors actually know how to read a balance sheet? Very few, indeed. Most retail investors ask their brokers to recommend stocks. Inevitably, brokers pick stocks that are doing well as "sector plays" and based on what other brokers are doing- which are largely connected to what "analysts" are supposedly following and on what our spanky clean credit rating agencies are watch-dogging. But, when's the last time "transparency" played a legitimate role in relation to anyone rotating sectors or making a due diligent and clean upgrade or downgrade in between making a buck on the boys in the back.


Oh, and let's not forget the 401k set of investors- the ones who blindly pile their retirement money into the "blue chips" and the well-known large caps. To them I say: mark this!

So, what have we been doing here exactly with all this bank and FASB nonsense- except giving shorts a blank check to beat down financials- destroying the very investors and institutions that FASB and the SEC claimed it was trying to protect. Nothing against the SEC- they do what they can with what limited funding and manpower they have to deal with. But, enough is enough.

After two and a half years of FAS 157 destroying massive amounts of capital wealth- FASB is now finally been forced to kick out the M2M on distressed assets, yet exactly at the same time as Geithner's toxic asset PPIF plan rolls into town, which is, bizarrely, all about having sellers sell at the lower market mark rather than at the higher maturity or model price?

Can it get any more ludicrous than this?

And, what about the part of current M2M being exploited by buyers of distressed assets- who take advantage of the spread between the M2M price and the price these assets can actually fetch in the real world to turn a profit. So these buyers have been getting a free mark-to-market lunch while the sellers (uh, the banks) get strangled on the sale- on top of having to maintain capital stuck on the market mark? Who's side are we on- the private buyers of debt, or the sellers we are supposed to be easing up on in order to have them stop hording cash and lend in out instead?


Then, of course, you now have the large banks going through "stress tests" to determine how much capital they should hold in the event of an even greater disaster than the one we've been in?


If we're about to separate credit losses from illiquid asset "losses" with mods to M2M and encouraging increased regulator discretion (which they already had a long time ago, but didn't use), then, on the one hand, the banks would need more capital, but on the other hand they'd need less capital!? Who the heck is running this crazy ship! The regulators are going to need straight jackets and a trip to the white room.

I'm heating up. Hold onto your shorts.

I keep hearing about how the "taxpayers" are angry about Citigroup (C), Bank Of America (BAC) and General Motors (GM) bailouts and AIG (AIG) bonuses- that they're so incredibly livid out there on "Main Street" that bankers and highly-paid corporate execs better watch out. Take no bonuses- but better not jump ship for better-paying pastures. Work for the cause.

But, you see, the "taxpayers" are mostly rich and upper income folks and businesses. And you know, they're not angry! At least, not at each other- only at those who keep pecking away at their rightful keep.

That leaves the middle class and low income folks (who pay very little of the actual tax in this country). The middle class burb people aren't angry about bailouts and bonuses- at least they shouldn't be, they barely pay anything into the economy! They just want to get back to shopping and left alone to watch basketball and football on the tube. They only thing they should be angry at are all the jobs which have been sent to other countries (which was a problem that long preceded the mess we're in, and certainly didn't cause it). But, bailouts and bonuses?

Which leaves the poor folks- who pay nothing in the way of taxes and, in fact, receive most of their benefits on the backs of the richer set. So are you telling me that it is these "taxpayers" who are angry at the same Wall Streeters and corporate executives who already pay for them to subsist in the first place- as the poor and lower income set relentlessly drain our resources? Can you say Nixonian economic angst ten times fast?

Well, then, if it's really just the poor class and the jealous middle class "have-nots" who are so "enraged"- and they shouldn't be- then maybe they're being manipulated into thinking they're supposed to be, so that certain laws and regulations can get rushed through while they aren't paying attention, for the benefit of those in Washington and, in the end, those on Wall Street.

I've had it with all this garbage.

This whole "economic crisis" came about in the first place because there were those in charge who absolutely foresaw the ramifications of FASB 157 in a down market. The risk to capital. The credit agency downgrades following the downward spiral. The repeal of the uptick rule, when, in fact, there were those who tried to get a modernized version restored a long time ago- but were shot down. And on and on and on...

When does it end! When do the people of this nation take the blinders off and start effecting change they deserve themselves- instead of having it handed to them like heads on a silver (or rusted copper) platter!

Wake up people! Wake up!

People are getting rich- and are about to get a whole lot richer on the backs of this crisis. You are losing your jobs and living in tent cities because you aren't seeing things for what they really are. Because you are being kept blind and stupid.

Use a little logic. It will all make perfect sense.

Then, for the love of God, get off your collective butts. Stop with the class warfare- and see what you can all do as a united class.

The United Class Of A Truly Enlightened America.

Capital forbearance for our banks- the McDuffy Way. Write or Email your Congressional Representatives. Our write-in campaigns effected change on mark-to-market and the uptick rule. We can do this one, too. The last piece of the puzzle.

It's now or never. It's in your hands. It's got to change.

GT McDuffy

(Disclosure: author holds no positions in any of the stocks mentioned in the article above)

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