Bailout Bonanza

[Kidlicious]

Originally posted by GePap
Why wouldn't people try to borrow money when they have none of their own?

You don't borrow money to save it. You borrow money to spend it, and people are not going to be spending much money.

[GePap]

Originally posted by Kidicious


You don't borrow money to save it. You borrow money to spend it, and people are not going to be spending much money.

Ah, you borrow money when you don;t have it. People spend money on such luxuries as rent, food, medical care, and education for their children. Unless you are now going to claim that people no longer have needs during depressions, I think it is an untenable arguement to claim that people don't borrow money during hard times.

[Kidlicious]

Originally posted by GePap


Ah, you borrow money when you don;t have it. People spend money on such luxuries as rent, food, medical care, and education for their children. Unless you are now going to claim that people no longer have needs during depressions, I think it is an untenable arguement to claim that people don't borrow money during hard times.

Sorry. I didn't mean for anyone to believe that there would be no borrowing whatsoever. I should have been clearer and said that they won't be buying new cars and things like that.

[Kidlicious]

Here's an easy to understand article about the accounting rules issue.

The accounting rule you should care about

[Aeson]

I think that article is wrong. Level 3 assets have been allowed for a long time now, and they are not mark to market. Firms have been moving MBS and related paper into Level 3 since (at least) before BSC failed last year.

In fact that's a big portion of the problem, since investors start questioning firms which are moving all their assets into Level 3, since it denotes a problem with liquidity and capital. This breeds fear on the market, "what do they have, and what is it really worth when it comes down to it?". This drives down stock prices, further reducing the firm's capital.

The SEC and FASB did come out and re-iterate that this was how it worked, but I don't know of any real change that doing so is supposed to have made. It doesn't get rid of the mark-to-market "problem" (which if it really existed, may have avoided this mess altogether), because these assets are stuck level 3 and can't be sold to raise capital (except to the US Gov) since no one is going to pay for them, which is why they're level 3 in the first place.

In any case, it's not the actual securities that are the real problem. The US economy can take a $1 trillion dollar hit. It would hurt sure, but we'd be over it in a relatively short amount of time. It's the $50-$60 trillion in leveraged derivatives based on that $1 trillion that's going to hurt.

[Kidlicious]

I think what happened is that the accountants at the investment firms that sold these investments to the banks said they were level 2, and according to accounting rules they are to be the ones to make that decision. What the SEC and FASB did was say that the bank managers should be the decision makers and that they could cal these level 3.

edit: I think it's the accounting firms that did the valuations actually, not investment firms.

[Kidlicious]

Sure there's bigger problems than this, but I think this is important. The SEC and FASB are becoming a part of the problem by not following proper accounting principles.

Accounting firms urge SEC to keep fair value rules

WASHINGTON, Oct 3 (Reuters) - The chief executives of the Big Four accounting firms met with the head of the U.S. Securities and Exchange Commission on Friday to discuss their opposition to suspending fair value accounting rules, according to sources briefed on the meeting.

The meeting with SEC Chairman Christopher Cox occurred just after the U.S. House of Representatives approved a $700 billion financial industry bailout plan that included a provision giving the SEC explicit power to suspend fair value accounting. President George W. Bush quickly signed the bill into law.

The Big Four executives told Cox that dropping the accounting rule would negatively impact their businesses, one source told Reuters, speaking on condition of anonymity.

Fair value, or mark-to-market, accounting has been maligned by the financial industry for forcing banks and others to post stunning write-downs as markets for their mortgage-related securities dried up.

The SEC declined comment.

Earlier this week, the agency issued a clarification of the fair value accounting rules, telling banks they do not have to use fire sale prices when evaluating their hard-to-price assets.

Some members of Congress have pushed the SEC to go further. A bipartisan group of more than 60 lawmakers asked the SEC to help the ailing financial sector by suspending the fair value accounting rule.

The bailout package signed into law on Friday is designed to help banks shed soured assets, many of them related to home loans. It also instructs the SEC to study the fair value accounting standard's effects on the balance sheets of financial institutions and the role it may have played in bank failures this year.

Fair value requires financial firms to value assets based on what they could fetch in a market transaction -- a requirement favored by most investors and accountants to give a true picture of companies' financial statements.

When there is no market, the hardest-to-value assets are often based entirely on management's best estimate derived from mathematical models. (Reporting by Karey Wutkowski, John Poirier and Rachelle Younglai; Editing by Andre Grenon)

[Aeson]

I know they already were calling (many of) them level 3.

Here's an article from April:

LONDON (MarketWatch) -- Goldman Sachs (GS 124.00, -4.00, -3.1%) and Morgan Stanley (
MS 23.50, -0.42, -1.8%) both disclosed in 10-K filings that Level 3 assets, or hard-to-value corporate loans, residential and commercial mortgage-related securities and other instruments, rose from the last quarter. Goldman Sachs said Level 3 assets rose to $82.3 billion, or 13% of total assets at fair value, at the end of February from $54.7 billion, or 10% of total assets at fair value, at the end of November. Morgan Stanley said Level 3 assets rose to $78.2 billion at the end of February from $73.7 billion at the end of November, in both cases representing about 15% of total assets measured at fair value.

[Aeson]

Originally posted by Kidicious
Sure there's bigger problems than this, but I think this is important. The SEC and FASB are becoming a part of the problem by not following proper accounting principles.

I agree changing the rules (this way) could end up being a huge problem. It will make the market even less sure about what things are worth, and who holds what. Which isn't good for investor confidence.

[DanS]

The Fed's decision this morning to purchase commercial paper seems to be having an impact. The market seems to be unfreezing somewhat this morning -- 3-month Treasuries are yielding 0.75% compared to 0.35% yesterday.

[Kidlicious]

It's not going to do much in the way of getting us out of this mess though. They're trying to boost confidence by keeping busy and in the news, but it's not going to work.

[DanS]

The WSJ is reporting that the settlement of about $400 billion in CDS obligations on Lehman will be happening Friday. The Fed/Treasury are meeting today with the major counterparties on those contracts.

Could continue to be interesting this week.

[Guynemer]

Bernanke has been speaking for the past 15 minutes or so.

In that time, the Dow has dropped about 120 points.

I'm reminded of the Futurama episode where Fry befriends the recently defrosted high-powered 80s dude. "My only regret is that I have bonitis."

[Jon Miller]

Goldman Sachs has considerable investment/business interest in Lehman, right?

Just wanting to keep track.

JM

[Kidlicious]

Looks like 10,000 isn't going to be a barrier.