“There’s a lot of losses in the system that investors haven’t seen yet,” he tells Henry in this clip. “All the industry is willing to do is admit to as much loss as they have cash flow, this quarter,” something banks are allowed to do now that the mark-to-market accounting rules have been removed.
Compounding the problem is a low interest rate environment that is becoming less beneficial to banks. Whalen says net interest rates margins are shrinking – meaning the spread between the rate banks borrow at and the rate they collect on their loans is shrinking, as older loans expire or get refinanced.
The big problem here is as I noted back in 07 and so have a few other people (including Chris) – Heloc and other loans that are being held under false valuations will eventually have to be recognized at the impaired (or worse) value that they have.
The entire point of things like QE2 is to find ways to give the banks the ability to steal some more money to try to paper over the hole – in this case off the spread in the transactions. But every dollar you take from someone to paper over a loss someone else doesn’t get to keep.
Listen to the little video clip – Chris details exactly what’s coming in terms of the Pension Funds and others who depend on fixed income. While ZIRP sounds good from a so-called “policy” perspective it totally screws any institution or person who is reliant on the ability to earn a return on their capital.
The din of the approaching tornado is getting louder and louder…..