Okay, now, I want people to read this

[solarbird]

A large global group of banks is calling for accounting changes to let them mark securities at any price they want, regardless of market, if they can find an historical valuation to match the price they want. Seriously:

The world’s leading banks have stepped up pressure to relax controversial accounting rules with a new plan aimed at breaking the “downward spiral” of huge writedowns, emergency fundraisings and fire-sales of assets.

The proposals on “fair value” accounting by the Institute of International Finance (IIF), an alliance of 300-plus companies chaired by Josef Ackermann, Deutsche Bank’s chairman, would enable financial companies to cushion the blow of financial crises by valuing illiquid assets using historical, rather than market, prices.

[...]

Here is an example of historical pricing: A house was valued at $1,000,000 two years ago. There are no bids on it today [meaning nobody will buy it -- sb] so let's keep it on the books at $1,000,000.

Let's all pretend we have no losses ever!

This is already going on, but on a smaller scale, via a category called "Level 3 assets." These are generally mocked as mark-to-fantasy assets, as banks are taking securities they can't sell at prices they want, declaring them "Level III" (or "illiquid") assets, and pretending - pretending is the actual correct word here - that they have whatever value the bank wants. The values of many unmarketable goods that no one will buy has actually been rising over the last few months as this particular kind of fraud has grown.

This change would, at first reading, make everything Level III. It would make all valuations untrustable.

It's not just that this is obscene; of course it's obscene. But it's also economically crippling, as no one will trust anything anymore, and without at least some degree of trust, you can't have financial transactions of any scale.

Go read Mish's report. I linked to it at the top; go read it. This can't be allowed to continue. (Unless you're one of the actual Marxists on my friendslist, in which case you might think it's probably a gift to you. I don't think so myself; I think this is the wrong kind of implosion for what you want. But I could be wrong.) The Fed could stop this, at least in the US, but has mostly been busy encouraging it instead until now, hoping that this is more a liquidity crisis than a solvency crisis, when really, it's been the latter. Congress could make the Fed do something. You know what I think about that, but maybe letters would help - particularly if yours aren't being ignored, unlike, say, mine. I don't even get form letters back anymore.

A lot of banks are insolvent. A lot of banks need to fall down and die, and have their FDIC depositors insurance paid out. That's unpleasant, but it's part of the process. They're going to fight it all the way down, of course, but more importantly, they're going to try to get bailed out in any way possible. This transfers to bill to someone else, probably you and me. For bonus points, it cripples the economy. But hey, if it saves the bonus of one large bank's CEO, doesn't that make it all worthwhile?

PS: As I write this, the market shows selling in both bonds and stocks this morning.

Comments

[(Anonymous)]

"Let's all pretend we have no losses ever!"

Let's pretend this is what actually happens, not just on the small scale Level III trickery you mentioned. It's crippling to the economy, but in what way, specifically. I've heard phrases like "the largest upward redistribution of wealth in history" and "the public would never stand for it and would put Congress right to the wall", but I don't know what that means.

Somebody has to take the fall and eat it. If it's not the banks, who? If the taxpayers, what does that do? Can you outfox the fox?

- paul

[solarbird]

The reason this can work is that at least for the time being they're being allowed to use these as collateral for indefinite-length "loans" of treasuries, at par. But you can't swap these forever; it's not like, say, a traincar full of coal, you can't just store it for a decade or two. These instruments perform or don't, and have a finite lifespan, and they're being shoveled onto the Fed's balance sheet, diluting the assets and credibility of the US central bank. This makes treasuries riskier, which makes the rates they have to pay go up, which makes the Federal deficit more expensive to finance, which takes money from all taxpayers.

[llachglin.livejournal.com]

This represents the legalization of unrestrained looting by the financial class-what Marxists would call the capitalist class. This *is* capitalism--the complete control of the means of production by a small class of financiers working for their own private benefit. It's not free market, it's not laissez-faire, but it's capitalism.

I suppose if you were an old-school Communist you might see this as the crisis before the Revolution, but the reality is that this is a massive step in the wrong direction, against the rule of law, against the proper regulation and function of markets, against democratic decision-making in the economy, against everything that people believe in regardless of their ideology (liberal, conservative, or radical), except for the crony class that plans to make out like bandits.

[brazilrascal.livejournal.com]

Was it ever that restrained? More and more, it's obvious that social democracy and several worker rights had their day in the sun simply because the aforementioned capitalist class needed to bribe the masses with something while there was a competing block around.

Not that it's all tidal gravity of petro-dollars, electro-dollars (Mr. Beale!!), it's back to the rules being what it's convenient for them to be. It's not stable except for the people at the very top, but that's a feature, not a bug...until a societal shift happens, be it through collapse, revolution, or the Left Behind book series turning out to be a documentary and Rapture taking place first thing tomorrow.

[angharads-house.livejournal.com]

being an old-school Stalinist who's deeply devoted to keeping the lights burning regardless of the storms, I suspect that we are in for some nasty nasty times, most of us. Have some ideas of how to turn things around but they'll be painful, especially for substitutable retail/service sector.