Tuesday, September 30, 2008

The VooDoo Accounting Continues

Good Evening Everyone!

Anyone feeling bipolar after today? Whoaa, can you say BOUNCE? I expected a decent one, but 500 points! Its official, the inmates are now running the asylum.

Expect Washington DC to dictate where the markets head over the few weeks. I think the market was purposely sold off to an extreme yesterday in order to send a message to Congress that the bailout needs to be passed. This set us up for an extremely over exacerbated bounce today.

It appears that some version of the "rescue plan" is headed back for another vote by the end of the week. God only knows how this will play out. I smell a rat here, and I highly doubt that Congress would be heading back to the floor unless they were fairly confident that they had reached some common ground on a bill that will pass.

Now who knows what they have conjured up. I expect that its probably a much milder version of the Paulson Plan. The big rally in the markets is another indication that something is in the works. The credit market remains in disarray so I am sure both sides believe something must be passed.

You can only be assured of one thing. The new plan will result in more tax dollars being flushed down the toilet!

Its obvious they still don't understand that transparency is the key problem holding the markets back.

Today's news on the SEC's decision to not change the accounting rules is proof that they still don't get it:

"Sept. 30 (Bloomberg) -- The U.S. Securities and Exchange Commission probably will resist calls to suspend the fair-value accounting rules that some members of Congress blame for exacerbating the global financial crisis, people familiar with the matter said.

The SEC and Financial Accounting Standards Board instead issued ``clarifications'' today on how banks should interpret existing rules that require them to review their assets each quarter and report losses if values have declined. A suspension isn't being considered, said the people, who declined to be identified because the plan hasn't been complete.

``In the past couple of weeks, fair-value accounting has been under attack,'' JPMorgan Chase & Co. analyst Dane Mott wrote in a report today. ``Blaming fair-value accounting for the credit crisis is a lot like going to a doctor for a diagnosis and then blaming him for telling you that you are sick.''

The SEC and FASB, in today's statement, said companies can rely more on their own judgments, such as expected cash flows, in determining the current value of assets that aren't trading. The regulators also said price quotes provided by brokers when markets are frozen may not be the most reliable way to determine how much securities are worth.


Norwalk, Connecticut-based FASB, which writes U.S. accounting rules, is preparing ``additional interpretive guidance on fair value measurements'' to be released this week, the SEC said.
``Suspending the mark-to-market prices is the most irresponsible thing to do,'' said Diane Garnick, who helps oversee more than $500 billion as an investment strategist at Invesco Ltd. in New York. ``Accounting does not make corporate earnings or balance sheets more volatile. Accounting just increases the transparency of volatility in earnings that already exists.''

My Take:

Great idea SEC, give companies more power to mark down their own assets. This is just what the market needs! NOT! Is this a frickin joke or just a bad dream?

The SEC should be doing the exact opposite. Relying more on the banks to value and mark down their own assets is ridiculous. I would rather have Osama Bin Laden in there marking down assets versus the pigmen themselves!

Folks, allowing this type of accounting is a one way ticket to Japan part 2. Are you ready for a 20 year recession? This is what we will get if the "hide the sausage" insanity continues. In case you forgot, here is a look at the Japanese stock market since '84:

Bottom Line:

If this continues, our market is going to look the same 24 years from now. Until we mark these securities to market, stocks are going nowhere. This could go on for decades folks! It took Japan 8 years for them to finally force their banks to mark to market. This resulted in 20 years of economic misery.

The street continues to try and say that "there is no market "so how do they set a price? This is hogwash. If there is no market because these AAA subprime specials are sprinkled with too many shades of dog doo then break them up!

Hire private equity firms to come in and break down each crap sandwhich loan by loan. Place the crappy assets in a new securitization and allow distressed debt buyers to set a price. If its .02 on the dollar because almost all of the loans are bad then sell it. Take the hit.

The next step would be to take the prime loans out of the same securities and do the same thing. Who knows? You might be able to sell these without a loss! I think every AAA rated subprime sandwich needs to go through a process like this.

Transparency would then be back, and banks would know who they were lending to. We could then begin the rebuilding process.

The issue here is the banks don't want to do this because most of them can't survive if they have to puke up their losses.

Well you know what? Tough ****! If this allows us to avoid going through a depression, then the SEC needs to force them to cough up their losses. The Paulson "rescue" plan will do nothing but mark to market at a level in which the banks make out and Main St loses.

Prices will remain too high, and eventually, the same assets will need to be marked to market a second time in order to be priced where they needed to be in the first place. This will probably cost us another $700 billion.

Lets do this right the first time! We need to create a market for these securities based on what buyers are willing to pay versus the "marking to myth" Voodoo style plan Paulson proposes. I have no desire to give the government my tax dollars and then watch them overpay for assets that have no price.

Transparency is needed before we will be able to start to recover.


Jeff said...

Oh my God!

The truth is out. The rescue plan was a bailout of foreigners.

The bill was set up to allow China to send back all of their bad mortgage paper to the USA. The Treasury then agreed to buy it up with this $700 billion.

God this gets more disgusting by the minute.

Watch this video. This bailout is for China not the USA! This is insane!!!

Please watch:


ZMonet said...

Won't the banks need to be recapitalized if they mark everything to market honestly? I would add one thing to your initial post. After their was a full mark to market such that their was transparency, I think taxpayers would be willing to recapitalize those banks that were still solvent as long as tax payers got preferred shares in the bank in exchange for the capitalization.

Art said...

Hey Jeff, here is an article that looks at history of Depression in Germany in 1931 and has some non mainstream facts on current financial arrangements:


Jeff said...


I would agree to that as long as I was paid back in warrants or preferred stock like you proposed. They need to learn a lesson after putting our economy on the brink of collapse.

They do need capital badly, and I don't want the banking system to fail. I think many of the small players could simply be absorbed by the BofA's and JP Morgan's.

Some of the big economists that I have read support injecting capital directly into the banks as you proposed versus buying bad debt.

Of course after watching the Kudlow segment I posted above, I now realize this was never about saving our financial system.

This bailout is all about taking care of the foreigners who fund this country by gobbling up our treasuries.

This bailout story gets more disgusting by the minute!

Jeff said...



Thats a good read. Lets hope we avoid a German style collapse. That one ended with hyperinflation and some guy named Hitler rose to power.

John Maynes said...

"America has Spoken: No Bail-Out for WallSt."

Lasted for a day. Bail-out will come. Are you that blind, Jeff? Oopen your eyes and welcome reality. Only a few votes are missing. Senate will put more pressure on the House today. And after these idiots have seen what they caused in the stock market the bill will pass easily.

Jeff said...


Watch the Kudlow video and you will understand whats really going on.

The bailout is for foreigners not the USA. The public is being lied to and if you think this is going to help the stock market you are lost.

Watch the video posted above. The bailout has a provision that allows countries like China and the Euorozone countries to dump all of this toxic paper back to us.

Paulson has agreed to buy it all back up with the $700 billion. Senators have tried to pull this provision from the bill and Paulson and Bush have said they will veto it if they do.

America is being suckered into allowing our government to take back all of the worlds toxax subprime garbage back onto our own balance sheet.

In return, they will continue to buy our treasuries.

Oh and uhhh the market was down 350 pts. before the bill was shot down. We were going to bleed Monday bailout or no bailout.

This is the con iof the cetury if this bill passes.