FedUpUSA

Archive for the ‘Balance Sheet’ Category

Wow, what a shock…

The bottom line from the chair of the International Standards Board is that the European banks are fudging their books. This is not the Blogs making this assertion. It’s coming from the highest authority that exists.

That’s supposed to be illegal if you do business here in the US, and many of these institutions do in one form or another.  Some are even primary dealers.

This is NOT just an intrepid blogger or three making this assertion.  It is IFRS, the highest authority there is in this regard.

Even when a model is used to measure fair value, that model must reflect current market conditions (including those as evidenced by observable transaction prices) and it should include appropriate adjustments that market participants would make for credit and liquidity risks. (ed: If there are liquidity risks the mark would be lower to reflect those risks, not higher)  Furthermore, the model must maximise the use of relevant observable inputs (eg market data) and minimise the use of unobservable inputs (eg the company’s own assumptions). A company cannot ignore relevant market data (including observable transaction prices) when it is clear that market participants would use that data in determining the price at which they would be willing to enter into a transaction for the financial asset.

It would therefore not be in accordance with either the requirements in, or the intent of, IAS 39 to measure a loss on government bonds classified as AFS financial assets solely by assessing the present value of the future cash flows arising from a proposed restructure of those bonds. It is hard to imagine that there are buyers willing to buy those bonds at the prices indicated by the valuation models being used. In my view it is therefore difficult to justify that those models would meet the objective of a fair value measurement.

That’s from August, by the same organization – and now it has been repeated, in public.

The DAX was pounded for 2.5% today and our market was down a similar amount.  Banks were the big suffers, with Morgan Stanley being hit particularly hard.

If this game is not stopped by someone – either the participants themselves or regulators – we are headed directly for a repeat of 2008′s meltdown and this time there is little or no government ability to interrupt it as the tactic of allowing firms to lie about valuations – the very tactic that interrupted the crash in early 2009 – has already been used!

The lies must stop NOW.

H/t Bruce Krasting

Here we go again:

The First National Bank of Florida, Milton, Florida, was closed today by the Office of the Comptroller of the Currency, which appointed the Federal Deposit Insurance Corporation (FDIC) as receiver. To protect the depositors, the FDIC entered into a purchase and assumption agreement with CharterBank, West Point, Georgia, to assume all of the deposits of The First National Bank of Florida.

All fine, right?  All insured depositors are protected, we’re all ok.

Right?

Yes, from that point of view – so far.

So what’s the problem, you ask?  Right here:

As of June 30, 2011, The First National Bank of Florida had approximately $296.8 million in total assets and $280.1 million in total deposits. In addition to assuming all of the deposits of the failed bank, CharterBank agreed to purchase essentially all of the assets.

….

The FDIC estimates that the cost to the Deposit Insurance Fund (DIF) will be $46.9 million. Compared to other alternatives, CharterBank’s acquisition was the least costly resolution for the FDIC’s DIF.

Let’s “do the math.”

As of June 30th, less than three months ago, if you believe this bank’s balance sheet the institution had an excess capital position (that is, assets .vs. liabilities) of 5.96%.  That is, it had 6% more assets than liabilities and thus was (almost) within regulatory capital minimums.

Today, we are told that the FDIC is going to lose $46.9 million on this transaction. 

In order for the reported balance sheet to be true the bank had to lose $16.7 million (its entire surplus) plus the $46.9 million the FDIC is now going to lose in less than three months.

That is, it had to lose $63.6 million in asset valuation in three months or about 22% of it’s asset value.

Note that this institution has been claimed to be “troubled” for quite some time with non-performing loans.

If you believe that the alleged balance sheet presented on June 30th of this year was materially accurate in all respects as to the valuation of those assets, and that in less than three months time the bank lost 22% of its asset value and thus placed the FDIC in the position of losing $46.9 million on this transaction you’re dumber than a box-o-rocks.

If you want to know why bank stocks are collapsing around the world and why credit markets are at risk of another seizure, you need only look right here for the reason.  12 USC Sec 1831o requires:

Each appropriate Federal banking agency and the Corporation (acting in the Corporation’s capacity as the insurer of depository institutions under this chapter) shall carry out the purpose of this section by taking prompt corrective action to resolve the problems of insured depository institutions.

We have a nearly-unbroken chain of bank failures going back to 2008 in which (c)(3) critical capital levels have been massively invaded without FDIC response and which in turn have led to these failures.

Incidentally the word shall appears in that statute 47 separate times.  The word “may” appears only 13 times.  The word shall has, quite simply, been repeatedly and intentionally ignored for the last four years and continues to be ignored today.

It is therefore only reasonable for the market to assume that all large financial institutions are similarly underwater on any sort of honest accounting basis and thus the only thing preventing them from blowing up is the ability to continue to roll over indebtedness and pick up dropped pieces of crack from between carpet fibers with which they can claim all is ok as they take another hit from the pipe.

This is where the confidence problem is rooted in the current market volatility and neither political party in the United States Congress nor either of the other two branches of government has done a damned thing about the wanton and outrageous violation of this section of law — law that was put into place after the S&L crisis which arose due to the precise same willful and intentional aversion of regulatory eyes.

If this crap is not stopped the market will continue to press this bet on insolvency whenever it sees an opening to do so and eventually one or more large financial institutions will collapse exactly as occurred with Creditanstalt.  Since the governments of the world have “blown their wads” with lower interest rates, balance sheet expansion and outrageous deficit spending trying to cover up their own internal corruption and willful refusal to enforce the law that led to the 2008 market collapse when, not if, the market manages to tip one or more of these institutions “over the edge of the cliff” there will be no ability to stop the cascade of defaults and bank failures.

This is the legacy of our government on both sides of the aisle and will be written in the history books as the root cause capital market implosion that appears at this time to be utterly inevitable – not because we can’t stop it but because our government refuses to hold the responsible parties accountable for both their actions and intentional inactions.

Oops:

• FDIC OBJECTS TO BANK OF AMERICA MORTGAGE-BOND ACCORD
• THE REASON FOR THE OBJECTION IS THAT THE FDIC DOES NOT HAVE ENOUGH
  INFORMATION TO EVALUATE THE SETTLEMENT

Time to sell the other half of that China Constricution Bank stake… And Merrill… and Countrywide (goodluck), and pretty much anything else that is not nailed down. But don’t worry: it’s a liquidity, not a capital issue, or something. In other news, the Buffett “Eureka alert” is on BathCon 1.

Full FDIC objection attached:

bofaMBC–fdicpetition

ZeroHedge

Bank of America stock jumped over 9% Thursday on news that Warren Buffett is making a $5 billion investment in the bank. But, at $7.65, the stock closed more than a $1 below its high of the session and BofA shares were falling anew Friday morning, trading as low as $7.45 before stabilizing.

When the news broke that Buffett was investing in BofA, the chattering class rejoiced….Buffet has “saved” Bank of America”…Buffett Deal Is “Seal of Approval” … “Time to Buy Bank of America“… and my personal favorite: Buffett’s vote of confidence in B of A, US economy.

Warren Buffett is a great investor but the idea his deal with Bank of America is good for anyone but Warren Buffet is baloney.

Warren Buffett is investing in Bank of America for one simple reason — to make money. A lot money.

Follow the Money

Bank of America will pay Buffett a 6% dividend for the privilege of getting access to his money — and his brand. Shareholders will have to pay for that and live with the threat of a massive dilution as Buffett also got the right to buy up to 700 million shares of Bank of America stock at $7.14 per share. (See: Buffett: The One-Man Blue-Chip Bailout Machine Strikes Again)

From Salomon Brothers in 1987 to Goldman Sachs and GE in 2008 to Bank of America today, Buffett has always been willing to help a fellow corporate citizen who’s down on their luck — for the right price.

Not that there’s anything wrong with that… but don’t confuse Buffett’s profit game for altruism, patriotism or any other “ism” other than capitalism.

Buffett has carefully cultivated an image of America’s kindly grandfather. Just a simple, humble guy from Omaha who just happens to be one of the world’s richest men. Many journalists and pundits eagerly peddle this glorified version of the man they call “The Oracle of Omaha” because it’s a good story and appeals to the huddle masses yearning to be free — and looking for a hero.

In recent years, Buffett has opined about why we should ‘Buy American’ — stocks that is — to tax policy, and his prognostications have been greeted as gospel by everyone from the thousands of individual investors who flock to Berkshire’s annual “Woodstock of Capitalism” up to and including President Obama, who cited Buffett’s recent complaint that he and other ‘super-rich’ super-friends aren’t taxed enough. (See: Buffett Blasts Low Taxes On Billionaires, Says Congress Must Stop Coddling Them)

But I’d like to take these Buffett brown nosers to Task for failing to see that Buffett is nothing more than an investor, and like any other good investor, his only goal is to make money.

Buffett: Myth vs. Reality

By putting his “stamp of approval” on Bank of America, Buffett no doubt hoped to profit not just on the BofA deal, but also on his massive holdings in other blue-chip stocks — including financials like USBancorp and Wells Fargo, which would be at risk if a “systemically important” bank like Bank of America were to get into ‘real’ trouble, as appeared to be the case earlier this week.

The idea Buffett is doing the rest of us a favor is naïve, at best. He’s not saving our economy, nor is he giving us a road map on how we can make money. He’s just trying to make money for himself and his shareholders.

Again, not that there’s anything wrong with that…but it says something about our society that we deify this billionaire rather than celebrate researchers seeking the cure for cancer, scientists trying to solve the world’s energy crisis or our children’s school teachers, not to mention our soldiers in uniform.

And while Buffett has never been accused of breaking the law, he’s not without sin either. Consider:

• Buffett is the largest shareholder in Moody’s, one of the rating agencies that placed AAA ratings on subprime mortgages that later proved toxic — arguably one of the biggest causes of the crisis of 2008 and its aftermath, including up to present day. And Buffett started selling Moody’s once the rating agencies’ role in creating the crisis became evident.
• More recently, Buffett came under scrutiny for defending former executive David Sokol, who bought shares of Lubrizol last winter just ahead of the company’s purchase by Buffett’s Berkshire Hathaway. But once public opinion turned against him, Buffett threw Sokol to the curb faster than you can cook a minute steak. (See: The Sokol Saga: Buffett Can’t Remove “Black Mark,” Tuck’s Paul Argenti Says)
• Berkshire subsidiary General Reinsurance paid a $92 million fine to the SEC last year after being found guilty of helping insurance clients like AIG mislead investors about their financial health.
• Buffett has had other run-ins with the SEC, including over Berkshire’s recent purchase of Burlington Northern and as far back as 1974 over a transaction to buy Wesco Financial, The NY Post reports.

Moreover, investors who’ve followed Buffett into investments like Goldman Sachs and GE got burned, assuming they adhered to Buffett’s dictum about “forever” being the best holding period. The rest of us didn’t get the big dividends Buffett earned and both stocks are currently trading below the levels when Buffett made his “confidence-boosting” investments in 2008, Goldman by 12% and GE by 37%.

Finally, shares of Buffett’s own company, Berkshire Hathaway, have underperformed the S&P 500 in the past year and the company recently split its B-shares, violating yet another of Buffett’s not-so-sacred tenants.

Nobody’s perfect but you wouldn’t know it listening to most of the coverage surrounding Buffett where there’s way too much fawning and not enough ‘fair and balanced’ analysis.

Aaron Task is the host of The Daily Ticker. You can follow him on Twitter at @atask or email him at altask@yahoo.com

The UK Guardian, October 4, 2010

FedUpUSA – Bear Stearns Protest, April 25, 2008

FedUpUSA On Glenn Beck August 21, 2008

It is disappointing to me that the Tea Party has gone so far astray from what it was intended to be.  It was always supposed to be about stopping the looting and starting the prosecuting.  Today, as so eloquently put by the film, Inside Job, not a single person responsible for this catastrophe has gone to jail.  To the contrary, the same people are still in charge of the same enormous financial institutions, and those same institutions continue to rob us blind by contributing large sums of money to the campaigns of those in our government who allow these institutions and their officers to remain un-prosecuted by writing laws that exempt them from the criminal penalties that would apply to the rest of us. 

There’s a word for this:  Kleptocracy

klep·toc·ra·cy

[klep-tok-ruh-see] noun, plural ‐cies.

a government or state in which those in power exploit national resources and steal; rule by a thief or thieves.

Hiding commercial real estate losses by laundering bad loans through the Federal Reserve.  Trillions of dollars in bailouts were made while banks told the public all was well.

Part of the massive challenges facing our brittle financial system is the opaque and secretive nature of the Federal Reserve.  It is difficult enough to confront a challenge with all information present but make it purposely convoluted and dark and we have a crisis of historical proportions.  The recent market volatility is simply a dire reflection of a system unsure of what is going on.  Markets despise distrust and that is what we are finding.  A few years ago we were told that the banking system was fine yet we now have data showing over $1.2 trillion in emergency loans were made to countless too big to fail banks.  In other words we were being lied to by both the Federal Reserve and the giant banks that largely created and spread this financial crisis like wildfire.  As more information leaks out we are starting to get a grim picture of how the Federal Reserve assisted and is assisting banks not only to hide residential real estate loans but also toxic commercial real estate debt.  Over $3 trillion in commercial real estate (CRE) values has evaporated since the crisis took hold yet banks continue to tell the public all is well while shifting these toxic bets onto the taxpayer balance sheet.

The collapse in CRE values

Source:  MIT

CRE values have already experienced a lost decade and are likely to remain depressed for years to come.  Many of these properties were developed with lofty aspirations and with future growth in mind yet an economy that is contracting has little use for more commercial space.  It is also the case that many of these CRE projects were designed for high flying easy money days.  Take for example some of the condo mix projects in Las Vegas.  Many now sit empty when they were once envisioned as selling for millions of dollars to high rolling aficionados.  Those days simply did not materialize because austerity is taking hold across the world because the debt bubble has burst.  The chart above is data collected monthly by MIT on CRE values.  It is rather obvious that the trajectory of CRE values has imploded since the crisis hit.  Yet somehow the Federal Reserve is openly shifting CRE debt onto its trillion dollar balance sheet even though it knows these are failed projects.  Why?  To aid and protect the banks it serves, not the nation’s economic wellbeing.

Read the rest at My Budget 360