It's Like Trusting A Drug Addict To Arrange His Own Intervention

Markets this week expressed approval for the European Central Bank finally lowering interest rates a quarter point, down to 1.25 percent, with perhaps another quarter point to follow next month. But more importantly, there was celebration for the loosening of asset valuation rules by the Financial Accounting Standards Board, whereby it will be easier for bankers to avoid "mark-to-market" appraisals on their troubled assets. As bankers have argued, "mark-to-market" accounting -- valuing one's assets by their actual worth in the current market, as opposed to what they were once worth or could someday be worth given convenient assumptions -- should be forgone when markets "stop functioning properly."

Simplified, the rule changes this week will give bankers and holders of troubled assets more leeway to avoid finally biting the bullet and writing an asset off as a loss. As Patrick Finnegan told the Wall Street Journal, the new rule will now make companies' financial statements reflect the "management's assumptions", rather than something far less arbitrary or biased, such as the market. Or in other words, it is as if we are leaving it up to a drug addict to arrange his own intervention. As long as banks are allowed to continue denying the true toxicity of their toxic assets, the longer the current financial impasse will continue. But if these banks are all of a sudden forced to eat huge losses, their balance sheets will resemble Swiss cheese, and Timothy Geithner will be forced into the highly unfashionable position of groveling before an ever-more populist Congress for more funds.

Welcome to the Catch-22 of the financial crisis. Geithner's recently unveiled plan for toxic assets, the PPIP approach, calls for private investors to buy up toxic assets with government backing. Originally, the fear was that banks would not be willing to sell of these assets at market prices because that would mean finally accepting the loss. But now, with more lax rules for asset valuation, leaving it in the hands of the bankers, the Geithner plan's problems are reversed. It is now the investors who will have to be cajoled into action to buy assets that they will presumably consider overpriced.

And so, in the tradition of the financial industry during years past, short-term gains are trumping long-term sustainability. Investors relished the retreat from "mark-to-market" this week, and the market enjoyed moderate gains. But it could very well drop again. And the more long-term demand for finally biting the bullet and ridding the banks of their toxic waste could be shunted aside yet again. Geithner's plan surely wasn't perfect to begin with, but it had its merits. The government's power to manage the PPIP asset sell-off has been handed back to the bankers, whose argument foments fear of more bailout funds and further financial collapse. As it stands now, this argument is prevailing. The junky in the room is calling the shots with the claim that rehab will hurt more than continued dysfunction. And the prospects for finally breaking the impasse are kicked ever further down the road.

 

Follow Stuart Whatley on Twitter: www.twitter.com/stuwhat84

Comments

[denlong]

12:10 PM on 04/06/2009

HEY! Maybe if Geithner/Summers can find some new accounting TRICKS, they can get us out of this mess.

[itproinct]

10:16 AM on 04/05/2009

"It's Like Trusting A Drug Addict To Arrange His Own Intervention"

An absolutely perfect metaphorical statement.

We need to put thousands these people in jail ASAP! I don't want to hear any crap about them being irreplaceable either, because there are thousands of competent (and god willing more decent) people who can replace them. What has been done to the American people in my opinion is criminal and these crooks need to do some hard time.

Not just the CEO s either, I want waves of top level management prosecuted and put away as well.

[clarryr]

09:07 PM on 04/05/2009

It is time to throw in jail everyone involved with the current financial crisis. It is time to impeach all the politicians that supported deregulation. It is time to arrest and convict all the regulators that failed to do their jobs. The President should immediately seize all records of all of the banks and start issuing arrest warrants for anyone that sold a sub-prime mortgage, created a CDO, rated a CDO, or sold a CDS. As well as all of the managers and executives that approved these deals
After that, what do you do with the banks? What do you do with their toxic assets, their blown up CDO's and all the bogus CDS's? Will the banks survive? Will the economy? Do we care?

[mbaty]

10:30 PM on 04/04/2009

Is "toxic assets" an oxymoron? I'm surprised they haven't already re-branded these as "freedom assets" or "patriotic asset holdings." We want change we can believe in. Propping up a "zombie bank" is not something we believe in. A house of cards held up by tape and glue is still a house of cards. It's like the whole economy is "Weekend at Bernies," carting around a dead guy (sorry, zombies are technically un-dead) and pretending like it's alive and just needs a 5-hr energy shot, just a good dose of stimulants, to keep it alive and functioning. A "lack of confidence" is not what's going on. How do you have confidence in something that demonstratably just doesn't work? Or worse, in something that is clearly stacked against 90% of the populace? Anyone who has had a credit card or a bank account knows, money is the only motive. That's the game.

[JnrNorman]

08:49 PM on 04/04/2009

The TOXIC DERIVATIVE ASSETS worth 1-2 QUADRILLION must be deleted.
They multiply in bank and financial system servers and must deleted.

NO To The Paulson-Bernanke Derivatives Bailout
By Webster G. Tarpley. 9-23-8 ... These derivatives now amount to a total worldwide notional value that can be ... DERIVATIVES ARE FINANCIAL AIDS ...www.rense.com/general83/deriv.htm

[clarryr]

09:51 PM on 04/05/2009

I'm betting the CDSs will have to evaporate as well. My question is how do you determine who takes the loss? Who gets to decide when there are multiple nations involved? It's not like AIG can just say no we can't pay - not when it's another country they're saying it to.
Similarly, many countries bought CDOs based on AAA rated mortgage backed assets. How do you determine who takes the loss on those? Who gets to decide? Many US banks were selling these improperly rated securities to other countries. How do you unwind all the CDOs to know what the true value of each actually is? It's got to be done and it's a long, intricate process, with many international interests in the mix.

[peterg76]

01:18 PM on 04/04/2009

The banks are not in denial - they're lying. It's everyone else that's in denial at being scammed.

[w&cheneysuck]

09:41 AM on 04/05/2009

you are right on!

[Kassandra]

01:14 PM on 04/04/2009

You're preaching to the choir, Sir.

[Carl Caroli]

08:17 AM on 04/04/2009

Geithner and Paulson got to go. I trust Obama, but I don't trust them. They are co-authors and recent beneficiaries of the current deregulated situation and not inclined to do what has to be done, which is break the ailing banks and financial firms apart and re-regulate the hell out of banking and finance. Smaller firms would prevent CEOs from getting overpaid, since the number of CEOs would be higher and competition amongst them would keep salaries lower.

[dadw5boys]

06:53 AM on 04/04/2009

Getting the BANKS to change from the BUSH BAILOUT to the OBAMA BAILOUT is hard .

Obama has stricter rules and more oversight !!!!!!!!

The Bush Bailout just gave them cash ...

[DaCoach]

12:06 AM on 04/04/2009

If I have a bundle of mortgages that no one is willing to buy, it's market value is zero. Now the truth is that these mortgages do have some value. Even in foreclosure they are worth something. The real problem is establishing an appropriate value. What the FASB should be doing is help establish what value should be placed on those assets.

[taikan]

03:35 PM on 04/04/2009

There is a simple method of determining the value of an asset (such as a bundle of mortgages) that provides an income stream. A reasonable multiple of annual income has long been accepted as one of the methods of valuing commercial real estate, and there is no reason such a method could not be used to calculate the value of a bundle of mortgages.

The trick is in defining the appropriate multiplier. Years ago, for commercial real estate the multiplier used was 10. Then it migrated upward to 15. Whether that reflected a real change in value or merely resulted in an artificial inflation of prices that helped contribute to a "bubble effect" is another matter.

[tapeatsbill]

11:25 PM on 04/03/2009

Get your arse down to the credit union and put your accounts there.

Get out of debt as soon as possible. Will it fix this mess? No but it will sure be good for your house!

[000Jade000]

07:21 PM on 04/04/2009

And invest some in gold bullion. If we could all afford to do it, we could create an artificial gold standard, and the bankers wouldn't so easily be able to destroy the value of our currency.

[larry278]

09:09 PM on 04/03/2009

Where is the change, Tim, Barack?

[TJCole]

08:57 PM on 04/03/2009

We are a government of the banksters, by the banksters, and for the banksters...not the people..

[EGB]

08:48 PM on 04/03/2009

I caught a couple of words on the radio today indicating that banks would trade these assets among themselves at low prices, with each bank thus seeming to unload its own toxic assets by trading them for another's. Then, of course, they would sell them to government-subsidized investors at inflated prices. Well, they are clever, aren't they - these flowers of American civilization? They are, indeed, smart, but more importantly, they are thieves who would steal from others with their last breaths, taking us all down with them - again. If the government does not set the price of these assets on its own terms, or those of the non-bank, private investors, the bankers will again inflate the values and re-establish the disaster. It's time to stop them from robbing us and the rest of the world. Like rodents and insects, where there's a sliver of light under the door, they will get into the granary. Get out the De-Con.

[grateful4thedead]

08:41 PM on 04/03/2009

Mr. Whatley says: "As long as banks are allowed to continue denying the true toxicity of their toxic assets....."

Mr. Whatley: your statement presupposes that banks are denying the true value of their toxic assets. Please tell us what the real numbers are. Like most in the media, i've yet to see anybody break the numbers down. It seems that the popular and widespread conception is that the vast majority of banking assets are toxic.

So, please be specific. Frankly, I know you can't but I would be curious to see your attempt at defining and identifying said assets. Thank you.

[RoloTomassi]

03:45 PM on 04/03/2009

So much for the "let the markets work" BS; yeah yeah, I know there are probably thousands of hardliners out there who will continue to sing that same old song, but I just don't see any aspect of that crap as being credible anymore. I say that because all of our Wall St. sycophants pretty much drink from the same trough in practice, and I have no illusions that there are really any hardcore Randian capitalists out there who would refuse help and take the lumps that their poor decisions had earned.

As far as I'm concerned US financial industry players are all a bunch of hypocritical cowards; they've lost all rights [if they ever really had any] to tell ANYONE to pull themselves up by their bootstraps.

Our stalwart capitalists--so-called masters of the universe--are a bunch of namby-pamby posers who can only handle the game when the house stacks the cards in their favor.

DISGUSTING.

[AMP43]

09:10 AM on 04/05/2009

AMEN