More Mark To Market Non Sense

Lots of static coming out of Congress, The Treasury, Press, and Ben Bernanke himself about "relaxing" Mark to Market Accounting Rules. Please see my February Post about this. I apologize for not supplying a direct link, I am trying to get the hang of this HTML stuff.

Let me just ask this: After we have seen Adelphia Communications, Worldcom, Tyco, Enron, and others be prosecuted for some sort of Accounting Fraud, are the next likely defendants the entire U.S. Government itself? That is what this is. If the government cow tails to the Bank Lobby, then they are saying to everyone that we not only condone accounting fraud, we encourage it.

Its quite apparent to me that the banks are on a jihad to keep blaming their problems on the scapegoat of mark to market accounting. Banks and other financial companies have repeatedly tried and failed to get regulators to suspend the mark to market rules, (a rule that has been in place for decades, a rule they actually liked and lobbyed for previously), have forced them to record big losses on the basis of a market plunges that's only temporary. They want to go to a Mark to Model format. The same models that screwed everything up from the beginning. The same models that were catastrophically flawed from the onset. These are the type of individuals we are bailing out, yet to take any responsibility what so ever for the carnage they have inflicted.

Banks' books are still stuffed with overvalued assets and potentially harmful risks that they're not owning up to, and investors still aren't getting as much information as they should about them. In effect, the banks aren't fully following mark-to-market even now. In addition, the main banking trade group is pushing for a bill in Congress that seems aimed at overturning mark-to-market altogether. Why do you think Jamie Dimon from JPM was in DC yesterday?

All this shows is the banks, the people running them, and the ones that enable them care little about the shareholders and U.S. Taxpayers need to know and understand the true state of the companies in which they've invested their money. Forget about transparency, when the banks just need relief from their incompetence.

I have discussed before in this blog the reasons not to water down mark-to-market problems at the banks. Besides less information and less-reliable information for investors, it would free the banks to apply any valuation they wanted to their toxic assets, no matter how unrealistic. In turn, that would postpone banks' day of reckoning with the true state of their health and thus delay the broader economy's revival. So lets just try to focus on the fact that banks balance sheets are far worse then previously stated, are disconnected from reality, this is why its a mistake for this rule to be amended in any way.

Most banks are still burdened with lots of Level 3 assets - the illiquid investments valued with models and estimates rather than actual market data, and hence especially susceptible to big write-downs. Citigroup has $146 billion of Level 3 assets on its books - more than its total equity. This is also contributed to Lehman's downfall.

Some banks also have significant potential risks that they keep off their balance sheets. Wells Fargo has $105 billion in maximum exposure to loss from off balance sheet entities, early half of it from residential mortgage securitizations or CDO's, both centers of risk, plus another $112.6 billion from guarantees and contingencies.

The current bill to restrict Mark to Market accounting which has been endorsed by the American Banking Association will strip the SEC of writing accounting rules, the only part of the SEC that is worth a damn. This bill as an attempt to get the issue out of the eyes of the SEC, which has blocked banks attempts to soften mark to market.

If this bill passes, then the financial lobby will have pulled off the biggest Houdini act of all time.

The banks have eye toward ensuring fake asset valuations. Circumventing mark to market will only give banks a freer hand to do what they want, and provide investors with far less accurate information. Does anyone other than the banks, their lobbyists, and certain sycophant Congressional members really think that's a good idea?

Random Thoughts-

The Financials have rallied about 25% the last few trading sessions. Maybe some more upside potential here, But this is just temporary until Stress Test Time. The smart money is looking to re-load on the sell side any day now.

More and more talk about bringing back the Uptick Rule, this has added some upside to the markets the last few days. This is a very good idea even coming from a short seller because, When you get a tidal wave of pessimism, everybody wants to short, and what the uptick rule does is it creates a queue so you have to get in a line to do it. The Uptick Rule was eliminated in 2007 in stable markets, but in unstable markets as we are in currently, unscrupulous short sellers who don't bother to borrow stock, who circumvent margin rules have gotten away with creating a bear raid on many stocks. Taking out the uptick rule during a time of stress exacerbates things. But some of my legit short seller friends have also stated to me the following interesting point: Regulators responded by imposing a temporary ban on shorting financial stocks in late September, but markets continued to dive. That proves that imposing such rules have no effect on prices, my friend says the uptick rule would not calm markets as it would create an "artificial bottom." Let's just say that the short seller is correct and the price should be lower. If you prevent that price from going lower through some artificial means, it will have to go there at some point in the future. Very interesting point. You see I do have smart friends I must say.

Lots of people have asked me about the VIX. Why has it not risen to OCT/NOV levels? Why no fear? The lack of fear in this market is not troubling to me. This recent swoon has been very orderly and smooth. Death by a thousand cuts instead of a total crash like we had in Sept-Oct-Nov period. Also the number of puts being bought is being offset by puts being sold. Most glaring is the failure of the VIX to spike this year has much more to do with reduced volatility on the market decline and a resignation from traders and investors that we are in a bear market, that there is not going to be any resolution to the banking crisis soon, and Obama's budget and tax plan neither of which is particularly conducive to a major market bottom, this probably also a means that a market crash is unlikely, but equally unlikely is a 'V-shaped' market recovery. And the bearish trend may continue but with some rallies in the interim. Basically more of the same.

Freddie Mac continues to hemorrhage cash. Losing $23.9 Billion in the 4Th Qtr alone. For 2008, they posted $50 Billion in total losses. The loss in 2008, completely eclipses all of the profits Freddie Mac accumulated from 1971 to 2006. They have sought $31 Billion in additional funds from the Treasury, they will get it. The treasury has already earmarked $200 Billion of capital to Fannie & Freddie. I have gotten on Republicans for their actions over the last 8 years, but this particular disaster is all on the Democrats.

Like I first wrote a few days ago, GE Long Term Credit Rating has been cut by S&P from Triple A(Ludicrous) to AA+ (Generous)...Should have gone to Single A. The company is no longer considered stable or liquid. GE states that they don't need to raise cash from this downgrade...hmmm why then cut the dividend to save $9 Billion? Immelt is a goner.
GE...We bring Circular Truth To Life!

Retail Sales dropped smaller then expected in February, after a nice surprising gain in January. Retail Sales eased by 0.1 percent in February after rising by a revised 1.8 percent in January, previously reported as a 1.0 percent increase. This is good news if you believe in anything that the government tells you. I do still believe in the American Consumer, as it may look like the consumer has bottomed.

Jobless claims rose 9K last week, and fresh continuing claims hit a record high.

Japan's economy is in much worse shape then ours as its economy posts sharpest contraction since 1974 oil crisis, shrinks 3.2 percent, annualised 12.1 pct in 2008. I don't like the Nikkei here, unless our markets can get its act together.

China output is frozen, but they are lending their way out of deep problems.

Headline from Dow Jones News: "Uncertainty To Weigh On Stocks This Morning" This is eye opening...I would have never thought there was any uncertainty out currently.

Bernie Madoff is expected to plead guilty this morning. He is basically going to say I lied. He is going to take full responsibility for his actions, doesn't matter as the whole Madoff clan is going down. Can we ever trust or take the SEC seriously ever again? There really is nothing to write here except hopefully he goes to a normal prison, not like the one that Ray Liotta and Robert DeNiro went to in Good Fellas.

German output also dropped 7.5% in January...the DAX has agreed with those sentiments.

World Bank President says global economy to shrink 1-2 percent, on track for worst recession since 1930s....Time for another War of civilizations?