Saturday, July 11. 2009
Posted by Karl Denninger in Regulatory at 14:15
Stupidity Bites HARD: Dodd and Frank
These two are the "banking regulatory chiefs" in Congress of course; Dodd in the Senate and Frank in the House.
Both have steadfastly stood beside the banks through this crisis, especially the really-big banks that have given millions of dollars in campaign contributions.
The same banks that lobbied hard to "reform" bankruptcy so you cannot file Chapter 7 any more when you go bankrupt and stick lenders with the bad lending decisions they made of their own free will. That is, your credit and financial life is ruined, but theirs (which should also be ruined) is not.
The same banks that connived with Congress and The Federal Reserve to get the last pieces of Glass-Steagall repealed - the law that, had it been present, would have prevented nearly all of this crisis.
The same banks that (Citi-cough-cough) got Alan Greenspan to approve a merger with Travelers that Greenspan knew was illegal at the time it was consummated - a merger that was then retroactively made legal with passage of Gramm-Leach-Bliley.
The same banks that lobbied to get an exemption from bucket-shop laws and insurance regulation (indeed, any regulation) for credit-default swaps.
The same banks that, post-ENRON when we all learned about the outright fraudulent accounting enabled by "off-balance sheet" games, not only kept doing it but increased the size of such ventures.
And more importantly, the same banks that lobbied hard this spring to get an exemption from mark-to-market accounting for the "assets" they hold on their books - an exemption they were in fact using without having it, as I will shortly illustrate.
Well now Doddering Dodd and "I've never been frank" Frank are asking for the impossible:
Today, Senate Banking Committee Chairman Chris Dodd and House Financial Services Committee Chairman Barney Frank asked the heads of U.S. banking regulators to look into whether their companies are carrying home-equity loans at “potentially inflated values,” which “may contribute to resistance on the part of servicers to negotiate the disposition of these liens.”
Most of these loans are in fact worth nothing!
Here's the understatement of the year from the same article:
“It is well understood that the four major banks would likely need an additional capital injection should they be forced to mark the second-lien mortgages on their balance sheets to a realistic value,” Greenwich Financial’s Frey said.
Oh, so you mean our wonderful Congress has in fact encouraged and put into policy and law accounting fraud?
Why yes!
In fact the underlying reality is what I've been pointing out all along: the loss on a bad loan is taken when the bad loan is made; all you can do subsequent to that point is pick and choose who has to eat the loss.
The answer to that question should always be "the fool who made the loan", and nobody else.
Ever.
Before the "waiver" on mark-to-market accounting these loans were worth no more than they are today. Yet before that waiver, banks, as I have pointed out in The Ticker previously, were carrying huge books of loans at or very close to "par" - that is, 100 cents on the dollar, despite the fact that when these things trade at all nowdays they are trading for pennies - literal pennies, in some cases as few as one or two!
REALITY folks is that these banks (and many more) are in fact BANKRUPT, right here and now. Again:
“It is well understood that the four major banks would likely need an additional capital injection should they be forced to mark the second-lien mortgages on their balance sheets to a realistic value,” Greenwich Financial’s Frey said.
In English (translation by Tickerguy), for the financially less-literate, this is what Greenwich's Frey said:
These banks have less capital than the loss on these loans if the value of these loans are recorded honestly. That is, their assets are exceeded by their liabilities.
This is the definition of bankruptcy; ergo, these four banks are in fact BANKRUPT right here and now, have been bankrupt, and it is "widely understood", including by Congress, The Federal Reserve, The FDIC and OCC that this is the case. All of these "Regulatory Arms" of our government are in fact actively conspiring in violation of the "Prompt Corrective Action" law to hide this.
We have pledged some $12 trillion dollars in "aid" and spent over $2 trillion in actual money trying to prop up these institutions. The gambit has failed and indeed was doomed from the start, because insolvency always eventually asserts itself.
The lie of accounting fraud only works so long as you can mark to some "fantasy"; as soon as you're forced to reconcile what you claim something is worth against an actual transaction your ruse is discovered and the game is over.
In this case if those loans are restructured the insolvency is exposed because the actual cash value received to extinguish the obligation is recorded on the firm's books and the embedded, hidden loss is flushed out into the open.
This is also why you have people living in homes for a year or more without making a payment and without being foreclosed on, and it is why you have foreclosed properties that have not been sold. So long as the bank doesn't actually do something that forces a market price to be put on the house where there is a delinquency they can claim their mortgage with a $500,000 principal balance outstanding is actually worth $500,000. If they sell the house for $300,000 the $200,000 that they have already lost but are hiding through these accounting shenanigans must be recognized.
This is out-and-out fraud folks, and it is far, far bigger than Madoff ever was. If you remember some months ago I penned this:
That is, you cannot prevent a loss from appearing and being recognized unless you allow people to lie about the value of securities, place them off-balance-sheet in opaque containers where nobody can see what's inside (and thus how they're performing) and "lever up" to issue yet more debt (credit) to cover the cash flow that should be happening but isn't.
If you're wondering why I keep harping on the same points over and over it is because I have been warning of this catastrophe and its consequences, along with the willful blindness and complicity of our government in this charade and scam for more than two years.
Those who have paid attention have managed to mostly-avoid the catastrophe, at least for their stock market holdings. They got out in the beginning of 2008 when it became evident that despite months of warning and clear evidence our government was going to conspire with these robber barons to commit fraud right up until the moment when the truth became impossible to hide any more and our entire economic system came crashing down around our ears, all in the name of protecting a handful of companies and their cronies, along with their ill-gotten "gains" and "bonuses."
Folks, this bubble and the consequence thereof for our economy and nation was not an accident. It was not merely a matter of "greed". Greed, all on its own, is not necessarily bad, despite what The Bible says. Greed drives human ambition, and ambition in turn drives true innovation. Absent "greed" we would not have the personal computer, electricity in our homes, air conditioning, microwave ovens, mechanical refrigeration, the Internet or cell phones. All of these things exist because someone got "greedy" and decided to try to make a profit.
It is when greed combines with fraud - that is, the knowing and intentional deceit practiced by one for the purpose of screwing someone else, that we have a problem. It is when honesty is discarded in favor of a "faster and simpler way" to make money - that is, instead of a fair bargain someone decides they would rather steal, either by lying, bribery or "convenient" omission.
We will not exit this economic downturn on a durable, sustainable basis, nor will we normalize our economy - that is, return it to a structure where economic prosperity is based on production instead of the scam of lying about asset values - until the hidden insolvency of institutions is flushed to the surface and recognized in bankruptcy court. In turn we must reverse the disastrous "bankruptcy reform act" so that both creditor and debtor, whether they be corporations or individuals, are afforded both the same harm from going bust and the same protection.
Until Chris Dodd and Barney Frank, along with the rest of the clowns that inhabit The Capitol, 1600 and 1500 Pennsylvania Avenue, come to the realization that the game-playing cannot possibly work and that it is time to tell the truth, we will continue to spiral down into the abyss.
The important point to take from this is not that forcing honesty will make the pain go away. It will not. It will, however, limit the duration of the pain, and stop compounding the errors and thus the necessary economic harm that must come.
We had a good deal of economic pain that had to be taken in the year 2000. The vast majority of it was not.
As a direct consequence of the willful fraud that our government and banking interests engaged in to avoid that economic pain in 2000, we have now more than doubled the economic pain that must be taken in 2008 and 2009.
What must be recognized is that there are only two choices: We can accept that amount of economic pain in full, here and now, or we can continue to add to it and try to put it off until later.
Doing the latter appears to be beyond our ability to succeed, meaning that we are only adding to the harm that must be absorbed at a rapidly-increasing rate.
It has been time to face the music since 2000, and it still is. We are now in the "exponential blow-off top of pain" phase, and instead of garnering years of respite (at the cost of even more trouble) we are only gaining weeks or months.
The clock has, quite simply, run out.
Posted by Karl Denninger ,,
http://www.tickerforum.org/cgi-ticker/akcs-www?post=102137
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