Financial Sector: More Damage to Come
Someone needs to inform the SEC that their job is to protect shareholders -- not wayward corporate management.
For an SEC commission staff to even hint that its okay to move sub-prime junk off balance sheets is not only wrong -- its outside of their jurisdiction. That's FASB's purview, not the SEC. The goal should be accurate, transparent accounting -- not sleight of hand and misdirection.
Allowing this kind of misleading reportage is simply unacceptable gimmickry from the regulatory body that is SUPPOSED TO STOP this sort of crap:
"Just when it seemed as if the mortgage mess had hit a new low, now comes this: The Securities and Exchange Commission's staff has granted the subprime-lending industry a huge exemption from the normal rules for off-balance- sheet accounting.
In effect, the move will let home lenders keep their balance sheets looking much smaller and less leveraged, even while the off-the-books loans they made get a makeover.
For months, banking regulators and politicians have been pressing lenders to freeze the interest rates on many adjustable-rate subprime mortgages that are scheduled to reset soon at higher interest rates. The idea is to minimize defaults and foreclosures.
While that's a noble objective, all good deeds must be accounted for, and that's been a sticking point for many banks. Through September, just 3.5 percent of subprime mortgages that reset in the first eight months of 2007 had been modified, according to Moody's Investors Service. Even lenders inclined to help don't want to hurt their financial results. And now they might not have to, thanks to a Jan. 8 letter from the SEC's chief accountant, Conrad Hewitt. . . .
The SEC and the FASB at least should acknowledge this subterfuge for what it is."
Strong words -- but it raises the question: Why is the SEC allowing investors to be misled? Aren't they merely delaying the eventual truth coming out? Why get in the way of that process?
Today's Heard on the Street column notes that some of the bigger banks have been dribbling out the write downs -- and there is very likely more to come:
"After racking up more than $100 billion in mortgage-related losses in recent months, banks and their investors had hoped they were out of the woods. They aren't.
UBS AG's warning yesterday that its 2007 write-downs would be $4 billion higher than it predicted last month signaled that further pain may lie ahead for Wall Street banks still vulnerable to the U.S. housing sector's strife."
And that's before we get to the issue of Counter Party Risk, and the losses that will result if Ambac (ABK) and MBIA don't make good on their derivative trades. Those losses potewntially range form $50 Billion to $150 Billion.
Me? I prefer to rip the band aid off all at once. I find Death by 1000 cuts totally unappealing . . .
>
Sources:
Subprime Lenders Get Big Accounting Break at SEC
Jonathan Weil
Bloomberg, Jan. 30 2008
http://www.bloomberg.com/apps/news?pid=newsarchive&sid=aPSScH5rRBLM
More Subprime Pain in Store
UBS Write-Downs, Insurer Downgrades Point to More Unraveling
DAVID ENRICH and PETER EAVIS
January 31, 2008; Page C2
http://online.wsj.com/article/SB120174693398030853.html
Banks May Write Down $70 Billion, Oppenheimer Says
Adam Haigh and Eric Martin
Bloomberg, Jan. 30 2008
http://www.bloomberg.com/apps/news?pid=newsarchive&sid=aVFVkFUo.XM4
Thursday, January 31, 2008 | 06:37 AM | Permalink
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BR says: I prefer to rip the band aid off all at once. I find Death by 1000 cuts totally unappealing . . .
~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~
So you want a 2-3 year near depression vs. Japanese style 20 year malaise. I'm with you. We may get both, as baby boomers are going to start retiring en masse, liquidating 401ks, selling stock options, downsizing homes, collecting SS and medicare and generally raising demand for healthcare and thus prices.
Have a nice day...Thank you Maestro.
Posted by: Steve Barry | Jan 31, 2008 7:06:07 AM
Bank runs may also be under that band-aid.
Posted by: wabisabi | Jan 31, 2008 7:19:06 AM
BR:
I know you don't like us politicizing your site, but isn't one of the problems with this administration is that they are politicizing the various departments? Maybe the reason the SEC is not protecting shareholders is that the people who have been appointed to run the SEC are ideologically predisposed to protect corporate management instead of shareholders.
Posted by: OkieLawyer | Jan 31, 2008 7:27:19 AM
"I prefer to rip the band aid off all at once"
Bravo. There is no such thing as "too big to fail".
We would never have gotten this deep in the s*** if LCTM was allowed to implode ten years ago. Instead the vampires got away with it, and then promptly leveraged the world.
Posted by: Roger Thatchery | Jan 31, 2008 7:29:06 AM
They may be legally able to hide things from the book but who is going to invest in this companies? It will hurt the investor confidence in a whole sector. Brilliant SEC, just brilliant.
The only solution is to take the bad apples out before the whole box rot.
Posted by: mhm | Jan 31, 2008 7:30:17 AM
I meant LTCM
Posted by: Roger Thatchery | Jan 31, 2008 7:30:29 AM
I think OkieLawyer has hit the nail on the head here. The Administration's track record in this regard is well-established across virtually all Cabinet-level departments and other gov't agencies.
Posted by: bluestatedon | Jan 31, 2008 7:53:11 AM
From WSJ Onlin: Another $40-$70B writedown coming.
Ratings in Danger at MBIA After Loss
The credit crisis is hammering some important players in the financial world -- bond insurers. MBIA, the biggest of the bunch, posted its largest-ever quarterly deficit, swinging to a net loss of $2.3 billion in the period from a profit of $181 million a year earlier as write-downs in its credit-derivatives portfolio rose to $3.5 billion, Dow Jones Newswires reports. The results put MBIA's triple-A rating at Moody's in jeopardy, which could cripple its business, Bloomberg writes. MBIA's superior credit rating lowers the interest rate on municipal bonds, which is how it gets business, but like other bond insurers it has put that rating at risk "by straying from [its] core municipal-bonds business and insuring the exotic mortgage-backed debt instruments that have led to billions of losses throughout the financial services industry," as Dow Jones explains. The earnings announcement comes a day after Pershing Square hedge-fund manager William Ackman warned that MBIA and its rival Ambac Financial Group could see losses of as much as $24 billion on mortgage investments they have guaranteed, the New York Times notes, adding that Meredith Whitney, analyst at Oppenheimer, estimated big banks may have to write down their investments by $40 billion to $70 billion if the bond guarantors lose their ratings. That would be on top of the more than $135 billion in write-downs already taken, the Times says.
MBIA is looking for new ways to raise capital, through stock and bond sales, Bloomberg says. Yesterday, Warburg Pincus completed its purchase of $500 million of new shares and agreed to backstop a future share sale to help MBIA boost its capital. Adding to the subprime gloom, Standard & Poor's yesterday downgraded or threatened to downgrade more than 8,000 mortgage investments, The Wall Street Journal reports. That is likely to add further pressure on bond insurers because, as the Times points out, these are the kind of investments that MBIA and Ambac have insured and if homeowners default, the two firms will be left holding the bag.
Posted by: Len | Jan 31, 2008 8:00:09 AM
It is hard to believe that it was one full year ago that I wrote Is Market Fundamentalism the Problem?
As we are starting to discover: We are all Enron now.
Posted by: OkieLawyer | Jan 31, 2008 8:15:48 AM
I can't stand by while OkieLawyer misleads us about administration appointees at the SEC.
OL wrote: "the people who have been appointed to run the SEC are ideologically predisposed to protect corporate management instead of shareholders."
That is not so. The truth is that the people who have been appointed to run the SEC are committed to protecting corporate management instead of shareholders.
Posted by: ottnott | Jan 31, 2008 8:24:45 AM
BR wrote "Strong words -- but it raises the question: Why is the SEC allowing investors to be misled?"
There were several examinations over the past 18 months looking into naked shorting, FTDs and the role the SEC and the DTCC have in these issues. Bloomberg produced one, several others did as well. During these, and through their own admission, the SEC claimed their principle role, as did the DTCC, was to protect the overall functioning of the "system". BR, what you wrote is merely another application of what they see their principle mandate to be, i.e. "don't rock the boat" in order to ensure the system continues to function. Their primary concern is the system, not shareholders. This was screamingly clear by their own admission in the Bloomberg production. It's outrageous, completely irresponsible and although outside their role as you point out, that is what is going by pushing the FASB rules to "bend". This is one of the core issues affecting our broken financial systems these days. Their own perception of their role is simply just plain wrong.
Posted by: Stuart | Jan 31, 2008 8:35:44 AM
Following in the same vein as OkieLawyer and ottnott, I'd like to ask Barry a question: What do you tell your clients when they comment about such a move from the SEC? What can a fund manager, which fiduciary duty is good stewardship of his/her clients' assets, tell them when it becomes clear than the regulators themselves have decided the shareholders interests do not matter?
Of course, this dove into politics, but can the topic of politics even be averted when it keeps interfering with the normal conduct of the markets?
And this administration got elected not once, but twice?
Fuck me plenty!
Posted by: Francois | Jan 31, 2008 8:46:43 AM
I view Bush as a mediocrity, not a crook. Mediocre people tend to appoint people like themselves to positions of power and influence. Many of us who are fundamentally mediocre learned (from Al Capone, Maximilian) to appoint the strongest people possible so we could look like we were smart. Bush is of the former school, appointing unremarkable people left and right (Myers to SC) and these people are failing.
Posted by: Howard Veit | Jan 31, 2008 8:47:14 AM
"Their primary concern is the system, not shareholders."
Hence the key question: Cui bono? (Who profits?)
Posted by: Francois | Jan 31, 2008 8:50:13 AM
Here is another reason the losses reported to date have been understated. GAAP requires that impairment calculations are done at the interest rate in effect when the initial contract was made, as opposed to the rate that is in effect at the time of impairment. The risk premiums on the securities that are impaired have increased tremendously, but are not part of the calculation. A simple example imagine that a bank holds a 30 year mortgage paying $1M per year which originally carried a 10% rate. If it appears that payments will only be $500,000 per year then the loan is impaired and the payments would be present valued back to today at the 10% rate to obtain the loss.. The problem is that the interest rate is today much higher. Watch for more losses to come
Posted by: Don | Jan 31, 2008 8:54:37 AM
They could induce a depression by pinching themsleves while slowly pulling off the band-aid.
At one point, no one will be able to discern the good from the bad. Total chaos. We saw what happened with commercial paper, imagine with everything else!
Posted by: D. | Jan 31, 2008 9:02:04 AM
I was just reading that the commercial real estate market lags residential by 5qts...what's going to happen in that arena - CMBX - commercial real estate asset-backed securities? Would one of you gurus please fill us in?
Posted by: Justin | Jan 31, 2008 9:03:35 AM
No one will rock the boat until it is clear to everyoen that the system is broken and must be fixed.
A lot of optimists out there still think that markets are wobbly because of perma-pessimsits.
We're still a long way from seeing a change in paradigm.
The last 2 decades have been 99% about cutting rates when times get tough. A one trick pony economy. And considering the last few rate cuts, that way of thinking is still prevalent
Posted by: D. | Jan 31, 2008 9:12:52 AM
1) the SEC is responsible for setting accounting rules. It usually defers to the FASB, which uses a community process for setting rules (proposal, comments, foot dragging, evaluating the politics, decision).
2) Both groups (FASB & SEC) deserve to be flogged for allowing the screwy off balance sheet investment reporting rules that currently exist. I thought Enron was the death of that. Nope. It just became institutionalized and blessed by both groups. All this boils down to is that the financials of banks and other large financially based companies can not be believed. Your investment is nothing more than betting which shell covers the pea, if in fact a pea even exists.
On the other hand, only a double dumbass would put good money down on something that had its value set by a computer program. I'm talking serious retard here.
BTW, thanks, BR, for the nice email. You showed a lot of consideration to an anonymous blogger. It looks like a lot of the regulars are back. And I'm feeling better now.
Finally, I'm convinced that the current market vacillations are nothing more than normal bouncing on a big bottom. Low rates will invite buyers back to housing. Bargain hunters who waited are getting their best deals now. Improvements there will raise the tide for all boats.
Market uncertainty will go on for another few weeks. It's a good time to buy if you have a horizon of several months and aren't an excited trading puppy. I'm in nearly 100% now and expect to clean up this year. Value will be king this year.
In spite of the popularity of Fed bashing, I think Bernanke is spot on and has been. Screaming finance babies want another cult of personality that covers up massive incompetence. Somehow, lowering rates in dribbles became popular and anything other than that process invites criticism. All that does is drag out the downturn that lowering rates is supposed to correct. This is another example of advanced retardism.
BTW, the Fed succeeded in breaking the back of inflation. Most uninformed economic types confused oil prices with inflation. Nope. That's just being at the unpleasant receiving end of supply and demand. ASSET prices were the real problem and those that were set by oceans of liquidity have been settled down.
Please note that copper has found a floor, has risen from it with conviction, and appears stable. Please also note that the yen appears to have found a top and is showing slight cracks of weakness.
Also, if you are attuned to personal subtleties, note how the CNBC commentators are hand wringing about the morning weakness in the markets and talking BIG DROP IN THE FUTURES! Please also note how it doesn't seem to sound scary anymore. This is called a change in sentiment and is bullish. Last call for buyers!
Posted by: cinefoz | Jan 31, 2008 9:13:50 AM
CNBC...is blowing smoke up everybodys' asses! They are trying to tacitly stop the markets from reaching their equilibriums. The media, the government...who next god? How can they get away with this stuff? REPORT JUST WHAT IS OUT THERE PLEASE, LEAVE YOUR OPINIONS TO YOURSELF.
Posted by: Justin | Jan 31, 2008 9:14:28 AM
Barry and others smarter than I-
Does this post I recently read at Jack Haddad Trading mean anything to you - just how key is this reserve requirement and the fact that they are borrowing to fund it?
--
Check out the corruption by our banks
from Jack Haddad Trading by Jack Haddad
Team,
Below are statistics and balance sheet datas regarding our bank reserve. Check out the corruption for your own amusement! Last month i posted a video link of three series on the high-powered money that banks conduct. Do you recall? Banks are required to keep reserves with the Federal Reserve Bank. The amount of this reserve has dropped from 43 billion in early december of 2007 to 199 million on january 16th of 2008. Look under non-borrowed reserves in the third column. Banks are using borrowed money to fulfill the reserve requirement right now!!!
tinyurl.com/2fykqe
Posted by: Brian | Jan 31, 2008 9:25:13 AM
Why does there seem to be such a level of defensiveness by government and regulatory officials - up to and including the Fed - this time around? What has changed and why do they suddenly act like they are part of the business world? They now are starting to 'own' the whole problem and are taking the burden of public accountability off the shoulders of some very guilty parties...
Posted by: wally | Jan 31, 2008 9:29:18 AM
Barry, Barry, Barry.
You're using the wrong medical analogy with "ripping off the bandaid." What's happening isn't a financial "boo-boo."
No, think of it as a all four coronary arteries blocked off.
So, here's your choice: full blown heart attack or dangerous, but life preserving, yet very dangerous quadruple bypass surgery.
I find the notion -- "Let's have a 2-3 year depression" -- appalling and irreponsible.
That's the equivalent of saying, "oooh...let's have a heart attack and see if we make it."
We need methodical controlled write downs. We need skilled surgery go get rid of all the gunk that's clogging are financial arteries.
But, Jesus, we don't need to kill the patient. Bad, bad, REALLY bad idea.
Posted by: Karl K | Jan 31, 2008 9:46:11 AM
I said:
Value will be king this year
How to spot value:
If a mainstream sector or logical group had the crap kicked out of it, beyond reason, to the point has to rise significantly just to look bad, you might have a good value candidate.
Throw a rock in any direction. It will likely land within 100 feet of an exceptional value candidate for investment.
If you can't find a good value candidate now, to the point where you don't have enough cash to satisfy your avarice, you don't belong in the stock market.
Posted by: cinefoz | Jan 31, 2008 9:50:02 AM
Wait, I'm not done yet.
One poster in another thread wants banks to "take their medicine." I see. So a $14 billion write off yesterday by UBS is what...a glass of 1st growth Bordeaux??
Another said these Fed cuts are designed to "prop up the markets." As far a the equity markets are concerned, Ben Bernanke could give a rat's rear end about what happens to the price of Amazon, Clear Channel, or Pfizer.
But what he DOES care about, and what is proper for him to care about, is the prospect of a credit market liquidity dry-up like Death Valley. And that's would it be, ladies and gentlemen -- Death Valley.
You know, I wonder how many of the truly bearish on here have ever taken a microeconomics course. Oh, that's right, this is a blog about the MACRO perspective. Sorry.
So, a little micro lesson for you all. You see, it would be great if the currency were worth more, it really would. The problem is that if there's isn't any DEMAND to accompany it, it's "worth" is purely academic.
So when the machine tool guy comes to the bank and says,
"Hey, could you lend me some money so I can buy a machine/hire people to make stuff to sell?"
the bank is going to say,
"Sorry, our spreads aren't there any more, and besides, WE have to go out and get our own money. Come back to us in, oh, about 24 months. By then we'll have our balance sheet in order. . .maybe."
Rinse and repeat this scenario -- about 10 million times.
THAT's what a credit market meltdown is.
No investment. No unlocking of value through acquistions and sales. No constructing of value through the buying /building of assets. No nothin'.
But, hey, we've got a really GOOD currency. Yessiree, really good. Thank god I have room under my mattress for all of it!!
Posted by: Karl K | Jan 31, 2008 9:51:38 AM
