From Karl Denninger at Market Ticker via Freedom’s Phoenix comes this reasonable question:
How about a little honesty from commentators in the mainstream media?
"Liquidity conflagrations" happen when people discover they have been lied to.
Anyone remember Bear Stearns? "We’re well capitalized" on CNBC? "Everything is fine"? Cramer’s pumping of them on his show as "safe"?
Market participants in fact knew everything was not fine. There were statements flying around (that turned out to be true) that some counter-parties had begun refusing to novate deals with Bear.
It was the discovery of the lie that caused the run on Bear Stearns and its ultimate collapse.
Likewise with Lehman. Remember Dick Fuld’s "I’m gonna burn the shorts" comment, again, on CNBC and elsewhere in the National Media?
The truth got out: they were having liquidity problems. Once again, as soon as people discerned that they were being lied to, Lehman’s fate was sealed.
The problem The Fed has is that as the supposed "risk regulator" for the American Banking System it has absolutely refused to do its job of prudential regulation and still is. Instead of demanding that its member banks hold capital against all unsecured lending it has "blessed" models rather than markets. But at the same time it has declared "haircuts" against collateral that make clear that so-called "face value", or "par", is a farce.
The Fed is supporting institutionalized lying – that is, the intentional mis-marking of assets. If The Fed was an honest regulator and monitor of market risk it would insist that no bank carry an asset at a value materially higher than its "haircut" off par at the window. After all, the penalty rate for discount window use already discourages banks from coming there; the "haircuts" must (and I argue do) reflect what The Fed actually believes about the quality of these alleged "baskets" of asset classifications.
If The Fed believes that these asset classes have this sort of haircut from face value in the market how does it justify allowing any bank under its jurisdiction holding such "assets" at a higher value on their balance sheet?
The claim that people shouldn’t worry about a bank that needs an emergency loan at a penalty rate and with a haircut that in some cases is 30% or more below declared "balance sheet value" is criminal idiocy, and any argument that such emergency facilities should be kept secret so that the public does not know when such an extreme emergency exists is, I would argue, an act in furtherance of racketeering.
After all The Fed isn’t lending with its own money – those are our dollars that are being lent out and their actions confer obligation on the taxpayer. The Fed’s legitimacy and backstop are predicated on the back of the American Taxpayer – a privilege, not a right. That privilege comes with the responsibility to justify in each and every case, in a transparent, fully-disclosed fashion, their actions.
Now the banks have had to set aside more capital:
Banks, of course, need to set aside cash to cover these bad loans. And that’s just what they did last quarter, earmarking nearly $67 billion—or 33 percent more than a year earlier—for loan losses. This large provision hammered the industry’s bottom line, creating a net loss of $3.7 billion for the period, compared with a $4.8 billion profit a year earlier. "Deteriorating loan quality is having the greatest impact on industry earnings as insured institutions continue to set aside reserves to cover loan losses," FDIC Chairman Sheila Bair said in a statement. "Of all the major earnings components, the amount that insured institutions added to their reserves for loan losses was, by far, the largest drag on industry earnings compared to a year ago."
Even still, banks continue to "mark-to-fantasy" rather than write down loans. One friend of mine has said, "Of course the government is lying to us. There would be panic in the streets if they didn’t." But look at what we are seeing. Here’s one example from Phoenix: [Thanks L!]
The supply of foreclosure homes for sale in the Valley is down, but foreclosures are up. So what are lenders doing? If the home has already been foreclosed on, they aren’t working on loan modifications.
Some market watchers believe lenders are holding onto homes they have foreclosed on so they don’t glut the market with foreclosures, again, because it drives down prices.
"Except for the sense of failure — foreclosures and bankruptcies — the current market is not much different than the 2003-2006 hyper-market for it is driven by similar-minded investors looking for the deal, especially the potential of great appreciation," said Jay Butler, director of Realty Studies in the Morrison School on ASU’s Polytechnic campus.
He said a recovery can’t really "be established until foreclosure activity drops to historical levels, such as 3-5 percent of monthly recordings, and owner-occupants are the primary driving force.”
So what does it do for the banks to hold onto these properties? It gives the appearance of a moderating market:
Phoenix is not leading the nation in home prices declines, according to the S&P/Case-Shiller home-price index released this morning.
Las Vegas is No. 1 with a 32.4 percent drop in housing values between June 2008 and June 2009. Metropolitan Phoenix came in at No. 2 with a 31.6 percent decline for the period. Detroit was No. 3 with a 25 percent price drop.
According to the well-respected index, metro Phoenix has led the nation for home price drops during most of the past six months. However, the Valley’s median home prices started to tick up in late April as the inventory of foreclosures for sale dipped.
The banks are forcing a "false recovery", encouraging investors back into waters they do not know are shark infested. I agree with Denninger:
When your house is on fire it’s too late to argue that we should not let any of your neighbors see the fire trucks. The correct question to ask is why you were playing with both matches and gasoline in your living room an hour ago!
Let’s keep the firebugs accountable.
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Mish's Global Economic Analysis
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UK House Bubble
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twist -
novate? … I had to look that one up. If you remember how “rollover” for debt structures like SIVs and ABCP froze in August ’07, a stopping of counterparties being willing to novate on other sorts of financial contracts is a similar idea. This just means that the contagion from the credit crunch can spread to more general parts of the system.
Actually, these exotic aspects of the financial system are just different sorts of cheque kiting schemes for rich people. It’s little wonder they periodically break down and their good buddies inside the beltway have to bail them out at taxpayers’ expense.
“If The Fed believes that these asset classes have this sort of haircut from face value in the market how does it justify allowing any bank under its jurisdiction holding such ‘assets’ at a higher value on their balance sheet?”
Banks were allowed to defy the “lower of cost or market” accounting standard beginning with the Eisenhower administration.
If a bank had to mark its assets to market, it would cause the balance sheet to show a loss. This would have to be deducted from the capital account, which would cause lending to contract. This would trigger a recession, which would cause politicians to lose their jobs.
This is why politicians allow the banks to lie.
I think that when the 8000 tax credit runs out we will then see further drop in home prices.
I also think bankers wanted this to be a slower decline, keeping new loan business up.
It’s kind of hard to tell if bankers really cared if buyers defaulted or not.
Yeah maybe, but everyone in the U.S. lies “institutionally.” Ever take the home mortgage interest deduction? That’s an institutionalized lie, too.
Now what?