Thursday, April 2, 2009

Another Financial Atom Bomb

I simply cannot fathom the stupidity of American lawmakers anymore. For months now, they have been lobbying for mark-to-market accounting to be suspended, cheered on by Wall Street. On Thursday, they got their wish.

The Financial Accounting Standards Board decided on the change after Congressional hearings during which they had been severely pressured by politicians from both parties.

Mark-to-market means that banks have to value their assets at market price. When banks have worthless assets that nobody wants to buy, that used to mean bad news for the bank, as if a fruit stand were full of rotten apples. Not anymore.

Thanks to this change, banks can just make up what they think the assets “should be” worth. This will make it seem as if the banks are doing much better, and we will most likely see a big change already in the first quarter reports that are coming out soon.

This change is nothing short of ridiculous. Is anyone going to believe that the trouble that the banks were in is all of a sudden over? Did the rotten apples become red and shiny again?

Another reason for the change is that Geithner thinks he has come up with a round-about way of giving more taxpayer money to individual bankers. It works like this:

1. the banks are allowed to decide themselves what assets are worth and put that on their books

2. when the recently announced "public-private partnership" to buy toxic assets (to the utter detriment of the taxpayer) will start, the government will be able to grossly overpay for the toxic assets, because by that time these assets will have been marked up dramatically by the banks themselves.

It looks like the government is not overpaying, because they're just paying what's on the books...

3. again, an enormous transfer of wealth from taxpayers to bankers has occured.

The most significant factor in all this is not that one would be well advised to stay away from bank stocks; it is the implications for the whole economy. Until the problems at the banks are exposed, we cannot solve the financial crisis.

What the suspension of the mark-to-market rule will do is to bury the toxic assets even further away from sight of regulators and the public, and enable banks to go on with their zombie existence until its time for the next bailout.

And there will have to be more bailouts as a result of this disastrous policy.

This policy change is, in essence, a complete endorsement of the “Enron Accounting” that has already brought the world financial system to its knees. Why U.S. politicians have decided to legitimize it is totally beyond me, and it is an unbelievable outrage.

Moreover, I advise that the winner-takes-all voting system should be destroyed


an average patriot said...

This is sick! They do not care about average Americans and our America only their party's and keeping capitalism alive. We will largely go by the roadside but they will simply start over or so they think!

Anonymous said...

Unfortunately, only arianna huffington is talking about this.

The general public has no understanding of what mark to market means. All they care about is "jobs". They are not making the connections between these rules and their effects on the overall economy.

Maybe you can extrapolite for a neophyte like me how this will ultimately affect the job market.

I think Obama is well intentioned, but not very well versed in economics and so he is relying on this horrid advice from Geitner.

Did you read the story in the post about the administration finding ways to try and scuttle congress's legislation at limiting executive pay?

Jacob said...

With respect to mark-to-market and jobs the answer is simple: look at Japan. Hiding bad assets is exactly what they did there for a decade, and it wasn't until they exposed them that jobs could be added in the economy again. Suspending mark-to-market will most likely cripple the economy in the long term, and cost taxpayers an enormous amount of money.

I did not see that story about executive pay.