There was a great commentary in Barron's today on what the catalyst might have been for stocks on Monday. Unfortunately it was a rally for the wrong reasons. The SEC came out on Friday and attempted to clarify accounting rules on its website in terms of how you price assets like CDO's that are held on your books:
" Companies should use market prices to value assets, even when markets are less liquid than normal -- "unless those prices are the result of a forced liquidation or distressed sale."
"Ay Caramba!" as Bart Simpson might say. This lets everybody off the hook.
These days, when it comes to a CDO or anything that's not an off-the-rack security, the holder is apt to contend that any sale is "a forced liquidation or distressed sale." That means those assets shouldn't be marked to market, but marked to model or, as some cynics say, marked to myth."
This made me sick after I read it. The SEC is basically allowing these banks to hold onto assets if selling them during times of distress lowers the value of them. This is ridiculous and will only make things worse!!! There is zero trust right now in the markets and accounting rules like this will just allow these shady shenanigans to continue!!!
Right now there is ZERO trust in the markets. Banks refuse to lend to each other because they don't trust the banks they are lending to because they don't know how much bad debt they have on their books. TRANSPARENCY is needed to regain the trust in the markets. Accounting rules like this ensure that the credit markets will continue to stay frozen because it will continue to allow banks to hide their bad debts. This transient, shady, shadow accounting needs to stop NOW!!
Who is to say these assets will be worth more down the road. They will only become more distressed by holding onto them because the credit crisis will only deepen because people don't trust the system. This will make these assets worth less.
There is this little country called Japan that allowed their banks to hide all of their bad debts during a housing bubble. The result of this was a decline in their stock market from 38,000 points down to 13000 over 10 years. Housing prices are currently about the same as they were in 1989 when Japan's housing bubble popped. If we continue to copy Japan then there is no doubt that we will see the exact same results here.
I thought our government would be smart enough to learn from other countries mistakes. I wanted to post the ending of this commentary for those who did not click on the story because it is VERY important to understand what is happening here:
"The markets seemed to say the worst is over. Surely, after UBS' monster writedown, that should be it. And Lehman's financing indicates banks can readily refill the coffers drained by credit losses.
But to Bank of America's credit analyst Jeffrey Rosenberg, the market's response represented the proverbial victory of hope over experience. Weren't Citigroup's losses suppose to mark the nadir? Or was it Merrill's writeoffs? Or the Bear Stearns debacle?
Or perhaps it was the license given by the SEC not to mark to market anything in a distressed sale.
For the moment, these developments have jolted the market from what Market Semiotics' Woody Dorsey called their "double purgation lows" resulting from massive negativity about financials. Shorting financials had gotten to be a rather crowded trade, as had being long commodities and Treasuries and short the dollar. All those positions reversed dramatically in Tuesday's trade.
But beyond the market's sugar rush, the medium-term implications are less positive.
"The SEC's actions [on SFAS 157] seem to create a safe harbor for those institutions that would choose to obscure their exposures," writes Joshua Rosner of Graham Fisher & Co. In other words, it provides a pass-fail option where the students can argue that nobody deserves an F.
But there are consequences for institutional investors' not owning up to the value of what they own.
"A failure of institutions to rectify opacity will propel us further down the road toward a Japanese-style 'lost decade,'" Rosner contends."
Everyone needs to realize what is going on here. Our economy is being destroyed right in front of our eyes as they save Wall St. at the expense of the taxpayers. We need to start calling out our regulators when they make rule changes like this that allow for more secrecy.
The Fed and Congress need to do just enough to keep the financial markets from failing. I understand that things need to be done to keep the markets stable but there is a line at which you need to say enough is enough. Make the financials mark to market and let the weaker firms fail. I am really disappointed by this decision because this just delays the inevitable. WE are the ones that will have to pay for this mess. The longer we hide these bad assets the more it will cost to dig out of. Housing will never come back until this is fixed.
We have proof that hiding losses and delaying pain only makes it worse down the road! Make sure you let your politicians know during this election year that saving Wall St. instead of fixing the markets and helping distressed Americans is wrong and you won't stand for it. There is a petition on here that will make your voice heard if you care to sign.