Wednesday, March 25, 2009

Geithner's Plan Shreds the Next Layer of "Mark to Fantasy" - Look for Further Bank Writedowns - or Bankruptcies!

25 March 2009

I'm still busy while travelling.

However, I came across this interesting piece by Henry Blodget, referenced on Jim Sinclair's website.

What Mr. Blodget points out very succinctly is that the next stage of taxpayer-funded government bailouts of the financial industry will be a great boon to the banks - if you are concerned about the real value of their assets, as Mr. Geithner is.

The problem is that the bank's books are shrouded in level upon level of fantasy. While Mr. Geithner's plan may potentially aid the banks - in terms of their real asset value - it removes their next layer of protective camouflage - and that could send them into Chapter 11, as the actual situation of the banks remains more problematic than has even yet been revealed.

What is the next layer of fantasy to be uncovered?

Banks are permitted to declare investments that they do not intend to sell as having asset values equivalent to their face value. Thus, the banks can declare these so-called assets at the prices at which they were originally written until forced to sell them at their maturity dates - at which time it is well known that the market will prove them to be of lesser worth.

Under the new Geithner plan, the banks could now be forced - through stress testing or through regulatory compulsion - to begin marking these "hold to maturity" assets at their real market value - that is - at values much lower than those now on the books.

Uh oh! This is a major tear in the fabric of the years of "mark to fantasy" bookkeeping that have sustained the US banks (and their allied international brethren) in the "pretend game" of being profitable up until the present time. (Note that this game also allowed the banks to play the quite fun game of awarding hundreds of millions of dollars in bonuses to senior staff, etc.)

When the banks tell us that their books are sound, it is this next layer of fantasy on which these seemingly reassuring statements are made.

Legally, the banks have been able to make this claim --- until now, But Mr. Geithner's plan has the potential to explode this loophole.

The implication?

According to Mr. Blodget, there is "one small problem with Geithner's plan - it will bankrupt the banks!"

The following chart (see Mr. Blodget's article below) illustrates clearly the historically unprecedented debt levels of US consumers at present. Why is this important? The chart reaffirms that we are presently dealing with a debt crisis, not a liquidity crisis:

Read all about it here.

For the avid reader - additional links on the PPIP (Public-Private Investment Partnership):



  1. Laurence,

    Thanks for the mention (of the Finance Trends reading list) and for highlighting that Clusterstock article in your post.

    I think your comments and the Blodget piece really help to boil this difficult topic down to one important theme: the difference between a market determined price vs. bank model value for many of these "toxic assets".

  2. I am certainly relying upon the analysis of others more authoritative than I, but it seems that the simple issue is that a facade is being dismantled layer by layer. The mutually agreed pretense was that the banks were earning ever greater profits by loaning money to third parties ever less likely to repay them. The fantasized profits allowed senior staff to award themselves ever more exorbitant bonuses for probably two decades. What a shell game, but how self-defeating! If you like, a Ponzi scheme in which the last players don't have to pay anything! Ever so human and ever so simple....