Worth 14 Minutes of your time.

Meet the new bank

Same as the old bank

Won’t Get Fooled Again

Mark to Market

The next great mistake in American Accounting History may occur next week.

It’s all about Mark-to-Market which, while as boring as a cow and some gold, also has as much societal importance as the first moment when some genius traded his gold for some cow.

Mark to Market (MTM) is a term used with investments where an owner assigns a daily value to a particular asset or investment. An easy example would be looking at the final price today for say, IBM, and then using that number to value your 1000 shares.

So today, March 20^th , with IBM closing at $92.51 , the MTM value of your 1000 shares would be $92,510. Marking IBM to market is easy because it trades a lot every day. Imagine trying to MTM an item like a baseball card.

Now today we are hearing calls to suspend the requirement that banks MTM their investments in things like mortgage securities and credit default swaps (CDS). We all know what a mortgage is, but valuing the securities can be difficult, especially on a daily basis, and a CDS is even less frequently traded, if at all.

We don’t even need to know what a CDS, all we need to know is that the market is now saying many of them are virtually worthless. Of course the banks, and CNBC, insist that they’ll be more valuable once this storm passes.

Imagine the market today had priced IBM at $5 per share. We can disagree about the appropriateness of that price, but if we mark your 1000 shares to market, accounting rules force you to use this price. Your $92,510 just became $5,000. Add the caveat that you borrowed $90,000 to make the initial purchase and we quickly see how important the term Mark-to-Market really is.

Hence the whole debate about the MTM requirement.

Initially, I opposed suspending MTM because I believed that, similar to a fire sale; the securities these banks hold are indeed permanently damaged, even in some cases actually burned. I had other qualms as well. These same banks demanding accounting relief used these MTM rules to force their own customers and other counter-parties to sell at these supposed fire-sale price, using the ubiquitous margin calls of the last two years.

Then I had an epiphany.

We should suspend MTM, just not for the banks and billionaires.

Is your $600,000 house now supposedly worth $350,000? Do you have loans of $400,000? Don’t worry your little taxpayer head off.

We will suspend MTM for you. Just walk right into your bank and tell them: “I’m not interested in selling my house and my government told me you have to lend me money based on the value I assign.”

Who is a long term investor if not the homeowner? Suspending MTM and assigning “true” values to these assets will not only solve the underwater borrowing, but the tax shortfalls of local governments as well. Hey, homeowners can’t have it all; if you tell the bank your House is worth $600,000, you gotta pay the taxes.

Now, if you are of the not so rare breed that isn’t underwater, at least 80% of the population, then you can tell the bank whatever you want. No mortgage, just tell them your house a piece of s$#t and your taxes might be zero.

Maybe those crazy bankers are right after all about suspending MTM.

Trusting Wall Street Much

http://www.thedailyshow.com/video/index.jhtml?videoId=220252&title=cnbc-gives-financial-advice

(sorry for the Ad, not in my control)

When a Penny is Overpayment?

At the request of a friend a video and some truth:

When paying is Penny is still getting Ripped off.

Picture ten houses all with $100,000, 30yr mortgages on $200,000 houses. They each pay $1000 per month into a pool of payments equaling $10,000 per month.

Now in the olden days, the bank received all these payments. If one homeowner completely defaults through bankruptcy, the bank would only receive $9,000 per month going forward and one house. Pretty Simple

Today it’s all different.

Instead of the bank owning all the future payments or the house after a default, individual investors own either a portion of the future payments or the right to a house after foreclosure.

Someone might own the right to the first two checks mailed in by homeowners each month. Another investor gets monthly payments two through five mailed in by homeowners each month.

Now who would want to own the last payment each month after just one homeowner defaults, sends jingle mail, walks away, etc.?

Goldman Knows Nothing !!

Goldman Oil Forcast was $200 a barrel, now $45

Like a monkey throwing darts

UPDATE: Mar 2, 2009 – With oil right around $45 Goldman’s analysts are statistically closer to flipping a coin than throwing darts.  The latter requiring skill.

Madoff

Madoff

This may be the biggest Ponzi scheme already, but the impact disclosed so far may be the tip of the iceberg.

It seems that outside of Mr. Madoff’s specific firm, a large number of other managers, much like remoras on sharks, attached both their client’s fortunes and their personal livelihood to this fraud.

Because of another aspect of so-called hedge funds that hasn’t been getting much media time, the fraud seems to be mushrooming. The practice is known as Fund of Funds, which is one hedge fund investing in another with each taking their asset based fee.  This deferring of actual investment decision making to another entity not only acts as a multiplier of commission fees but also absolves most supposed advisers of possessing any actual knowledge about investing.

I’ll lay out a simple example:

Unemployment

High unemployment is not only bad for the newly unemployed. It also forces down salaries for those still working by increasing competition for jobs. Simple supply and demand.

So all those “demanders”, owners and consumers, will now get to pay less for the labor portion of the production equation.

It is important to remember that a large portion of the populace thought the economy leading to the Great Depression era was just great, the gap between rich and poor, like today was approaching a good monarchy. Excepting the anarchy that punctuated the end to their laissez-faire policies, we might have already completely regressed to a serf type employment arrangement.

Mother’s Milk and the Moochers

When the economy needs milk you feed the cow and not the bull.  The manufactors and consumers need cash to mitigate the upcoming economic depression and we should ingnore all the bullshit coming from Wall Street.  They are just loading up their suitcases before they move to Canada.

Watching the Auto hearings in Congress, I was struck by how thorough the questions where and thoughtful the debate.    After all they only asked for a business plan from the three auto makers.  But imagine if the same thoroughness was applied to Citibank.  How are they going to insure profitability?  How are they confident that the American people will every trust and buy their product?  How can we be sure they won’t ask for more billions in three months or three days?

All these questions must be answered by the automakers for a mere $48 billion ($25 granted and $23 currently requested).  But we don’t require the same for trillions already pledged to the financial industry.

The more that logic is applied to our current Economic problems, the more I realize the same people who couldn’t forsee the problems also have no idea how to solve them.

For all you Ayn Rand fans:

The Moocher’s are in charge so how can we expect them to get anything right?

Informal Survey

Make a list of ten close friends.  No particular order and don’t worry about leaving anyone out.  Take that list and answer the following questions.  Is the friend currently underwater on anything; house, CCs, heathcare costs, student loans, car/boat, or are they or their spouse recently unemployed?  Or have they escaped all those pitfalls but now see less money for retirement or outright postponement?

If this survey had been taken in 2006, most of our lists would contain zero in those situations.

I made my own list and it shows little unemployement but includes a distressed home, mutliple negative overall equity households and a few (but increasing) number of postponed/reduced reterments.

Feel free to post anonymous results below