Woo-ee! Boy, was he pissed off yesterday. Didn't even need a teleprompter to express his rage. The subject of course was AIG and the bonuses about to be paid to the London derivative group that was at the center of the loss-making operation. The President was so outraged that he seen off Our Hero Tim, to reverse the entries. When you send off your Treasury Secretary on a mere $165,000,000 mission, you gotta be mad...or a bit forgetful. Our Hero, Tim deals only in TRILLIONS boss, not millions. Terrible waste of talent.
Now one might ask, "wasn't the info about the bonuses known a year ago." Or, "Wasn't the restructuring of AIG handled jointly by the Fed (Our Hero again) and Treasury?" Or, "Wasn't the fact of the bonuses revealed in the annual report." One would of course get a "yes" to all of these questions, but then again, doesn't the government own about 80% of AIG and isn't Congress exercising oversight in the manner of a board or directors? Well, they are supposed to be. Then why all the fuss? It's a rhetorical question.
But, there may well be a silver lining to this farce if the American people come to realize what an incompetent collection of people is this Congress and Administration. Yesterday, the Financial Accounting Standards Board (a committee thereof) agreed to recommend that a change to the manner in which FASB 157 was applied to financial institutions in light of the extraordinary disruptions of financial markets that have been witnessed. As we have discussed the requirement that financial institutions value their portfolios essentially on the basis of the price received for the last sale of the same or comparative assets has resulted in hugh losses affecting the capital adequacy of some of the largest institutions worldwide resulting in the crisis of confidence we se today and the near collapse of all financial markets. The answer to this crisis has been the shoring up of tier one capital by central banks around the world, especially by the Federal Reserve, in an attempt to maintain the solvency of the system (see AIG above). This proved as effective as trying to fill a bucket with no bottom. As quickly as capital was inserted, it was lost to the constant revaluation of the asset book as a result of FASB 157. Mind you, in many cases this was not a cash loss; as early results have indicated the banks this quarter are profitable on an operating basis...some will be wildly so as market conditions are perfect. But because of the absence of any sort of rational assessment of asset values (marking to a non-existent market isn't a real good idea) the true understanding of systemic or individual institutional risk has remained unknown. Yesterday's suggestion if adopted, may well prove to be a magic bullet in solving this mess.
Here's a little secret: in past years both regulators and bankers have lied like the devil in regard to the true state of the system. Oh, not BIG lies but little one, all pretty much dealing with the valuation of banking assets. As I have said, banking was a wonderful business because it was so subjective. Maintain the trust and we all survive. Here's what I suspect might well happen in the coming weeks.
The Treasury is in the process of conducting a "stress test" on the major players in the system. What this will entail is really not known because Our Hero, while making it plain that the viability of the institution will be 'tested" against various economic scenarios, we are not really sure what those scenarios will be except that one set will probably be akin to the estimates made in the preparation of the recently signed budget (which might mean that we are doomed). But the Standards Board has given all parties a real opening: if, for example, a cash flow test were to substituted for a mark to market test, the health of the banks under any scenario may well be completely different. Regulators and institutions could, probably in a very short period of time, agree to asset valuations at the present lever OR SOMEWHAT HIGHER that would address the capital adequacy issue in a most positive manner. Having witnessed and taken part in such an exercise I can say with great confidence that the banks, having broadly valued their portfolios at considerably less than par at this point in time, are interested in one thing alone: a constant value that, with the acceptance of the regulators will find acceptance in the market place. In other words, "Here's our true value guys, now let's move on." If the valuation requires new capital, the banks should be forced to find it at whatever cost or failing that, it will be provided by the government with harsh conditions attached. Further, revaluation of written down assets could occur in only one manner; through open sale. Book entries would not be allowed.
What does this accomplish. Firstly, it leaves the "toxic" assets (they may not be so toxic) under the management of those who created them negating any need for a government purchase and the corresponding need for the government to hire somebody to manage them or the sale of the same, either of which one can be sure will result in enormous cost to the taxpayer. Secondly, it structured properly, it avoids the congress having to take ownership and demonstrating once again as in the case of AIG how incompetent it really is. Thirdly, it reestablishes a market for the assets. Now there is a real bid and offered: the level of valuation is the floor offered price, now BIG SWINGING VULTURE FUND, what's your bid? This is hardly a blue print but a broad suggestion as to how we can fix this thing. Hopefully, this approach will gain some traction in the weeks ahead and not be run off the road by the ego maniacs who inhabit the hill. Let the pros deal with it. Some have done it before.
Answer to yesterdays question. In 1990, Japanese banks were practically the sole source of credit to Japanese corporates, supplying over 80% of the credit. Last year, American banks provided about 23% of all credit extended. The idea that Zombie banks in this country would affect the economy in the same manner as occurred in Japan is somewhat north of stupid.
I'm off to have a cocktail or six. Happy St. Patrick's Day!!
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