Treasury House of Cards

Discussion in 'Freedom and Liberty' started by Rockfish Dave, Apr 19, 2009.


  1. Rockfish Dave

    Rockfish Dave Monkey+++

    It just dawned on me the other day that the change in reporting the mortgage backed bonds from mark to market to book or par value had everything to do with the recent "better than expected" first quarter bank financials results and nothing to do with the banks financial solvency or the state of the economy.<?xml:namespace prefix = o ns = "urn:schemas-microsoft-com:eek:ffice:eek:ffice" />

    Initially the banks/financial institutions were reporting the mortgage backed financial instruments at book value. At that time the these "assets" were constantly appreciating on the secondary markets. So the true value was understated. The reporting rules were changed so that the inflated value would be shown on the banks balance sheets and P&L's as a profit (credit to owners equity/retained earnings).

    When things started to go really bad back in September the same mark to market reporting was responsible for the sudden and massive losses. The accounting explanation was: The assets value was reduced. To record the reduction in value it was credit to the asset account (a reduction) and a debit to the expense account (a increase in expenses which decreases net income).

    The treasury and fed could not have the banks with such lopsided balance sheets so the said that for reporting purposes it would revert back to par/book value for the assets. The entry was recorded as: A debit to the asset account (increase in the assets) and a credit to Owners Equity through the retained earnings account (increases net income).

    Now as you can see it is all smoke and mirrors. As an investor and finance guy by education and profession I feel this is extremely misleading and dangerous. Financial statements are intended to show the health of a company at a specific moment in time. If a bank were to liquidate all of its assets could it cover its liabilities (solvency)? Today I would say that most could not. So when the second round of foreclosures and defaults run through the system any faith in our banking system will have evaporated along with the imaginary profits.

    Second round of foreclosures and defaults you ask? Well the first round was from the sub prime melt down. When the risky and exotic arms were due to re-set many found that they could not afford the new higher interest rates along. Plus the value of their 100% financed home was no longer worth what the inflated value that they had originally financed the home for using an ARM. Now they must come up with the difference between the loan amount and the lower appraised value, or walk away... this was the first round.

    The second round that we are about to see will be the people with good credit that bought too much home, living from paycheck to paycheck and will be driven by lower income (commissions) or layoffs. The same will go for the commercial real estate...

    So the only thing keeping the banking system going and the stock market slowly clawing back up is the perception that things are getting better... reality?

    More layoffs ahead with a net increase in unemployment and lower profitability across the board.

    Just my .02

    Dave
     
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