Guest Post: Extend And Pretend Is Wall Street's Friend

Tyler Durden's picture

Submitted by Jim Quinn of The Burning Platform

We now have an economy in which five banks control over 50
percent of the entire banking industry, four or five corporations own
most of the mainstream media, and the top one percent of families hold a
greater share of the nation’s wealth than any time since 1930.   This
sort of concentration of wealth and power is a classic setup for the
failure of a democratic republic and the stifling of organic economic
- Jesse –

Source: Barry Ritholtz

“All of the old-timers knew that subprime mortgages were what we
called neutron loans — they killed the people and left the houses.”
 - Louis S. Barnes, 58, a partner at Boulder West, a mortgage banking firm in Lafayette, Colo

The storyline that has been sold to the public by the Federal
government, Wall Street, and the corporate mainstream media over the
last two years is the economy is recovering and the banking system has
recovered from its near death experience in 2008. Wall Street profits in
2009 & 2010 totaled approximately $80 billion. The stock market has
risen almost 100% since the March 2009 lows. Wall Street CEOs were so
impressed by this fantastic performance they dished out $43 billion in
bonuses over the two year period to their thousands of Harvard MBA paper
pushers. It is amazing that an industry that was effectively insolvent
in October 2008 has made such a spectacular miraculous recovery. The
truth is recovery is simple when you control the politicians and
regulators, and own the organization that prints the money.

A systematic plan to create the illusion of stability and provide
no-risk profits to the mega-Wall Street banks was implemented in early
2009 and continues today. The plan was developed by Ben Bernanke, Hank
Paulson, Tim Geithner and the CEOs of the criminal Wall Street banking
syndicate. The plan has been enabled by the FASB, SEC, IRS, FDIC
and corrupt politicians in Washington D.C. This master plan has funneled
hundreds of billions from taxpayers to the banks that created the
greatest financial collapse in world history. The authorities had a
choice. This country has bankruptcy laws. The criminally negligent Wall
Street banks could have been liquidated in an orderly bankruptcy. Their
good assets could have been sold off to banks that did not take their
extreme greed based risks. Bond holders and stockholders would have been
wiped out. Today, we would have a balanced banking system, with no Too
Big To Fail institutions. Instead, the years of placing their cronies
within governmental agencies and buying off politicians paid big
dividends for Wall Street. Their return on investment has been

The plan has been as follows:

  • In April 2009 the FASB caved in to pressure from the Federal
    Reserve, Treasury, and Wall Street to suspend mark to market rules,
    allowing the Wall Street banks to value their loans and derivatives as
    if they were worth 100% of their book value.
  • The Federal Reserve balance sheet consistently totaled about $900
    billion until September 2008. By December 2008, the balance sheet had
    swollen to $2.2 trillion as the Federal Reserve bought $1.3 trillion of
    toxic assets from the Wall Street banks, paying 100 cents on the dollar
    for assets worth 50% of that value.

  • In November 2009 the Federal Reserve and IRS loosened the rules for
    restructuring commercial loans without triggering tax consequences.
    Banks were urged to extend loans on properties that had fallen 40% in
    value as if they were still worth 100% of the loan value.
  • By December 2008 the Federal Reserve had moved their discount rate
    to 0%. For the last two years, the Wall Street banks have been able to
    borrow from the Federal Reserve for free and earn a risk free return of
    2%. The Federal Reserve has essentially handed billions of dollars to
    Wall Street.
  • When it became clear in October 2010 that after almost two years of
    unlimited liquidity being injected into the veins of zombie banks was
    failing, Ben Bernanke announced QE2. He has expanded the Fed balance
    sheet to $2.6 trillion by injecting $3.5 billion per day into the stock
    market by buying US Treasury bonds. Bernanke’s stated goal has been to
    pump up the stock market. While taking credit for driving stock prices
    higher, he denies any responsibility for the energy and food inflation
    that is spurring unrest around the world.
  • The Federal Reserve has increased the monetary base by $500 billion
    in the last three months in a desperate attempt to give the appearance
    of recovery to a floundering economy.

FRED Graph

  • Beginning on December 31, 2010, through December 31, 2012, all
    noninterest-bearing transaction accounts are fully insured, regardless
    of the balance of the account, at all FDIC-insured institutions.  The
    unlimited insurance coverage is available to all depositors, including
    consumers, businesses, and government entities. This unlimited insurance
    coverage is separate from, and in addition to, the insurance coverage
    provided to a depositor’s other deposit accounts held at an FDIC-insured

When You’re Losing – Change the Rules

Wall Street banks had absolutely no problem with mark to market rules
from 2000 through 2007, as the value of all their investments soared.
These banks created products (subprime, no-doc, Alt-A mortgages) whose
sole purpose was to encourage fraud. Their MBA geniuses created models
that showed that if you packaged enough fraudulent loans together and
paid Moody’s or S&P a big enough bribe, they magically became AAA
products that could be sold to pension plans, municipalities, and
insurance companies. These magnets of high finance were so consumed with
greed they believed their own lies and loaded their balance sheets with
the very toxic derivatives they were peddling to the clueless
Europeans. They didn’t follow a basic rule. Don’t crap where you sleep.
When the world came to its senses and realized that home prices weren’t
really worth twice as much as they were in 2000, investment houses began
to collapse like a house of cards. The AAA paper behind the plunging
real estate wasn’t worth spit. After Lehman Brothers collapsed and AIG’s
bets came up craps for the American people, the financial system
rightly froze up.

After using fear and misinformation to ram through a $700 billion
payoff to Goldman Sachs and their fellow Wall Street co-conspirators
through Congress, it was time begin the game of extend and
pretend. Market prices for the “assets” on the Wall Street banks’ books
were only worth 30% of their original value. Obscuring the truth was now
an absolute necessity for Wall Street. The Financial Accounting
Standards Board already allowed banks to use models to value assets
which did not have market data to base a valuation upon. The Federal
Reserve and Treasury “convinced” the limp wristed accountants at the
FASB to fold like a cheap suit. The FASB changed the rules so that when
the market prices were not orderly, or where the bank was forced to sell
the asset for regulatory purposes, or where the seller was close to
bankruptcy, the bank could ignore the market price and make up one of
its own. Essentially the banking syndicate got to have it both ways. It
drew all the benefits of mark to market pricing when the markets were
heading higher, and it was able to abandon mark to market pricing
when markets went in the toilet. 

“Suspending mark-to-market accounting, in essence, suspends reality.” – Beth Brooke, global vice chair, at Ernst & Young

Wall Street desired all the billions of upside from creating new
markets for new products. Their creativity knew no bounds as they
crafted MBOs, MBSs, CDOs, CDSs, and then chopped them into tranches,
selling them around the world with AAA stamps of approval from the
soulless whore rating agencies. When the net result of a flawed system
of toxic garbage paper was revealed, there was no room at the exits for
the stampede of investment bankers. The toxic paper was on the banks’
books and no one wanted to admit the greed induced decision to purchase
these highly risky, volatile “assets”. The trade had not gone bad, the
ponzi scheme had unraveled. Suspending FASB 157 has been an attempt to
hide this fraudulent business model from investors, regulators and the
public. By hiding the true value of these assets, the financial system
has never cleared. The banks remain in a zombie vegetative state, with
the Federal Reserve providing the IV and the life support system.

Let’s Play Hide the Losses

Part two of the master cover-up plan has been the extending of
commercial real estate loans and pretending that they will eventually be
repaid. In late 2009 it was clear to the Federal Reserve and the
Treasury that the $1.2 trillion in commercial loans maturing between
2010 and 2013 would cause thousands of bank failures if the existing
regulations were enforced. The Treasury stepped to the plate first. New
rules at the IRS weren’t directly related to banking, but allowed
commercial loans that were part of investment pools known as Real Estate
Mortgage Investment Conduits, or REMICs, to be refinanced without
triggering tax penalties for investors.


The Federal Reserve, which is tasked with making sure banks loans are
properly valued, instructed banks throughout the country to “extend and
pretend” or “amend and pretend,” in which the bank gives a borrower
more time to repay a loan. Banks were “encouraged” to modify loans to
help cash strapped borrowers. The hope was that by amending the terms to
enable the borrower to avoid a refinancing that would have been
impossible, the lender would ultimately be able to collect the balance
due on the loan. Ben and his boys also pushed banks to do “troubled debt
restructurings.” Such restructurings involved modifying an existing
loan by changing the terms or breaking the loan into pieces. Bank,
thrift and credit-union regulators very quietly gave lenders flexibility
in how they classified distressed commercial mortgages. Banks were able
to slice distressed loans into performing and non-performing loans, and
institutions were able to magically reduce the total reserves set aside
for non-performing loans.

If a mall developer has 40% of their mall vacant and the cash flow
from the mall is insufficient to service the loan, the bank would
normally need to set aside reserves for the entire loan. Under the new
guidelines they could carve the loan into two pieces, with 60% that is
covered by cash flow as a good loan and the 40% without sufficient cash
flow would be classified as non-performing. The truth is
that billions in commercial loans are in distress right now because
tenants are dropping like flies. Rather than writing down the loans,
banks are extending the terms of the debt with more interest reserves
included so they can continue to classify the loans as “performing.” The
reality is that the values of the property behind these loans have
fallen 43%. Banks are extending loans that they would never make now,
because borrowers are already grossly upside-down.

Extending the length of a loan, changing the terms, and pretending
that it will be repaid won’t generate real cash flow or keep the value
of the property from declining. U.S. banks hold an estimated $156
billion of souring commercial real-estate loans, according to research
firm Trepp LLC. About two-thirds of commercial real-estate loans
maturing at banks from now through 2015 are underwater. Media shills
proclaiming that the market is improving, doesn’t make it so. The chart
below details the delinquency rates from 2007 through 2010 as reported
by the Federal Reserve:

  Real estate loans Consumer loans
All Booked in domestic offices All Credit cards Other
Residential Commercial
2010 4th Qtr 9.01  9.94  7.97  3.71  4.17  3.10 
2010 3rd Qtr 9.77  10.90  8.69  4.03  4.60  3.39 
2010 2nd Qtr 10.02  11.32  8.74  4.25  5.07  3.37 
2010 1st Qtr 9.78  10.97  8.66  4.63  5.76  3.48 
2009 4th Qtr 9.48  10.29  8.74  4.64  6.36  3.48 
2009 3d Qtr 9.00  9.67  8.57  4.72  6.51  3.61 
2009 2nd Qtr 8.19  8.69  7.84  4.85  6.75  3.69 
2009 1st Qtr 7.19  7.89  6.55  4.62  6.50  3.52 
2008 4th Qtr 5.99  6.57  5.49  4.29  5.65  3.37 
2008 3rd Qtr 4.88  5.26  4.66  3.73  4.80  3.05 
2008 2nd Qtr 4.21  4.39  4.15  3.55  4.89  2.80 
2008 1st Qtr 3.56  3.70  3.50  3.48  4.76  2.76 
2007 4th Qtr 2.89  3.06  2.75  3.41  4.60  2.66 
2007 3rd Qtr 2.40  2.78  1.98  3.20  4.41  2.48 
2007 2nd Qtr 2.01  2.30  1.63  2.99  4.02  2.37 
2007 1st Qtr 1.77  2.03  1.43  2.93  3.97  2.29 


Delinquency rates on residential and commercial loans in early 2007
were in the range of 1.5% to 2.0%. Now the MSM pundits get excited over a
decline from 8.7% to 8.0%. These figures show that even after trillions
of Federal Reserve and Federal Government intervention, delinquencies
remain four times higher than normal. In the real world, cash flow
matters. Payment of interest and principal on a loan matters. Actual
market values matter. According to Trepp, LLC, a data firm specializing
in commercial data, non-performing commercial real estate loans makes up
72% of the $320 million in non-performing loans reported by banks in
February. These figures are after the “extremely” relaxed definition of
non-performing allowed by the Federal Reserve. The game is ongoing.
Misinformation abounds. The SEC now issues press releases saying they
are worried that banks are covering up losses, when they were involved
in encouraging the banks to cover-up their losses. Last week the SEC
announced they have become concerned that extend and pretend, along with
another practice known as “troubled debt restructuring” that allows
banks to break loans into pieces, may have been abused in order to
diminish the volume of reserves banks are holding. What a shocking
revelation. Who could have known?

Are You Smarter than a Wall Street CEO?

The Federal Reserve paid shills and Wall Street front men are out in
droves declaring that TARP was a success and the banking system is
recovering strongly. Columnists like Robert Samuelson declare  TARP was a
great investment and will profit the taxpayer. Samuelson says that the
Treasury has recouped $244 billion of the $245 billion it invested in
banks and that, when it winds down its last investments, it likely will
show a $20 billion profit from the banks. This type of propaganda is
ludicrous, as Barry Ritholtz succinctly points out:

“No, we are not profitable on the bailouts. TARP has $123B to go
before breakeven, and the GSEs are $133B in the hole. All told, the
Taxpayers have a long way to go before we are breakeven. That’s before
we count lost income from savings, bonds, etc., the increased costs of
food stuff and energy due to inflation (the Fed’s has done this on
purpose as part of their rescue plan), the higher fees the reduced
competition of megabanks has created, and the future costs our Moral
Hazard will have wrought in increased risks and disasters.”
Barry Ritholtz

Source: Barry Ritholtz

Fannie Mae and Freddie Mac have hundreds of billions in bad loans
sitting on their balance sheets. Their total cost to taxpayers will
reach $400 billion, and never be repaid. The Federal Reserve has over $1
trillion in toxic assets on its balance sheet, off loaded by the TARP
recipient banks in 2009. The taxpayer will never be repaid for this
toxic waste. The government is implementing the Big Lie theory. If you
tell a big lie often and loud enough, the non-thinking masses will
believe it. That leaves us with today’s fantasy world.

The reality on the ground does not match the rhetoric coming from the
government, Wall Street and the corporate mainstream media. The truth
is as follows:

  • The vacancy rate for office space in the U.S. is currently 16.5%.
  • The vacancy rate for industrial space in the U.S. is currently 14.2%.
  • The vacancy rate for retail space in the U.S. is currently 13%.
  • Delinquencies within collateralized debt obligations in commercial
    real estate loans rose to 14.6% in February. The increase signals a
    trend of higher delinquencies in the segment. Signs of pressure surfaced
    as early as January when the delinquency rate on CDOs within commercial
    real estate loans hovered well above 13%.
  • According to Moody’s, CRE prices are down 4.3% from a year ago and down about 43% from the peak in 2007.
  • The delinquency rate on loans packaged and sold in commercial
    mortgage-backed securities rose to a record 9.2% in February, according
    to a March 15 report by Moody’s.
  • Regional and local community banks have as much as 80% of their
    balance sheets tied up in commercial real estate, and very few other
    sources of significant fee income to offset CRE losses.
  • CRE once had an estimated national value of $6.5 trillion.  Today it stands at an optimistic $3.5 trillion.
  • There are 1.8 million homes seriously delinquent, in the foreclosure process or REO that are not currently listed for sale.
  • There are about 2 million current negative equity loans that are more than 50% “upside down”.
  • Home prices are off 31.3% from the peak. The Composite 20 is only
    0.7% above the May 2009 post-bubble bottom and will probably be at a new
    post-bubble low soon.

In the face of this data, mouthpieces for the Federal Reserve go
before Congress and try to paint an optimistic picture. ”While we expect
significant ongoing CRE-related problems, it appears that worst-case
scenarios are becoming increasingly unlikely,” Patrick Parkinson, the
Federal Reserve’s director of banking supervision and regulation, told
Congress. Parkinson said that since the beginning of 2008 through the
third quarter of 2010, commercial banks had incurred almost $80 billion
of losses from commercial real estate exposures. Banks are estimated to
have taken roughly 40% to 50% of losses they will incur over this
business cycle, he said.

The Federal Reserve will be forced by the Federal Courts to reveal
the banks they have saved from failure since 2008 by funneling billions
of practically interest free tax payer dollars into their hands. The Fed
is expected to release this week documents related to discount window
lending from August 2007 to March 2010, including the peak month of
October 2008, when loans hit $111 billion. It will be revealed they kept
alive hundreds of banks that should have died. Shockingly, the
supposedly taxpayer protecting Dodd-Frank law exempts past discount
window lending from an audit by the Government Accountability Office,
that’s examining much of the central bank’s other crisis-era programs.
That champion of the little people, Barney Frank, said such disclosures
might have “a negative market effect. If people saw the data the next
day, they come to the conclusion that the bank must be in trouble.”
Openness and transparency are evidently grey areas for Mr. Frank.
Despite the non-disclosures, free Fed bucks, accounting fraud and
uninterested regulators, over 300 banks managed to go out of business in
the last two years, essentially bankrupting the FDIC. Have no fear. The
Treasury gave the FDIC an unlimited line of credit with your money.


It is fascinating that every Friday afternoon the FDIC announces
approximately three bank failures. Steady as she goes. No panic. Just a
slow trickle of failure. But the reality is much worse than the show.
Despite the gimmicks of extending and pretending, there are 900 banks
essentially insolvent sitting on the FDIC “Problem” list. This is after
closing the 300 banks. There are at least a couple hundred billion of
losses in the pipeline, to be funded by the American people/Chinese
lenders. A critical thinking American might ask, if things are getting
better, why does the number of troubled banks continue to rise week
after week, month after month?

One year ago the website
listed the 10 major regional banks with the highest risk from
commercial real estate loans. These 10 banks had $133 billion of
commercial real estate loans on their books. Most, if not all, are still
in business today. The fact is those real estate loans are worth 30% to
50% less than they are being carried on the books. A true valuation of
these loans would put all 10 of these banks out of business. They are
dead banks walking. In a world where transparency, honesty, and true
free markets reigned supreme, these banks would pay for their poor risk
taking choices. They would be liquidated and their assets would be sold
off to banks that did not make horrific lending decisions. Failures
would fail.  

Bank CRE Loans (bil.) % of Tier 1 Capital
NY Community Bank $22.0 915%
Wintrust Financial Corp. $3.4 419%
M&T Bank $20.8 378%
Synovus $11.2 376%
Wilmington Trust $4.0 369%
Marshall & Iisley $13.8 283%
Zions Bancorporation $13.4 253%
Regions Financial $28.3 218%
UMB Bank $1.3 156%
Comerica $14.3 97%


How could anyone deny the world is back on track after examining the following chart?


It should warm your heart to know that Financial Profits have
amazingly reached their pre-crash highs. All it took was the Federal
Reserve taking $1.3 trillion of bad loans off their books, overstating
the value of their remaining loans by 40%, borrowing money from the Fed
at 0%, relying on the Bernanke Put so their trading operations could
gamble without fear of losses, and lastly by pretending their future
losses will be lower and relieving their loan loss reserves. The banking
industry didn’t need to do any of that stodgy old school stuff like
make loans to small businesses. Extending and pretending is much more

The big four of JP Morgan, Citigroup, Bank of America, and Wells
Fargo should have undergone orderly bankruptcy liquidation in 2008. They
took on a vast amount of leverage and a vast amount of risk. Their
greedy bets went bad. In a true capitalist system, they would have
failed. Instead, in our crony capitalist system, they were bailed out by
taxpayers and continue to function as zombie banks pretending to be
healthy. They reported profits of $34.4 billion in 2010. Every dime of
these profits was generated through accounting entries that relieved
their provisions for loan losses. These “brilliant” CEOs who virtually
destroyed the worldwide financial system in 2008, looked into their
crystal balls and decided their loan losses in the future would be
dramatically lower. I’ll take the other side of that bet. I dug into
their SEC filings to get the information in the chart below. Just the
fact that Citicorp and Bank of America have still not filed their 10K
reports after 3 months tells a story.

Bank   Source CRE Mortgages Credit Card Total Loans Loss Reserve % of Loans
JP Morgan 12/31 10K $53,635 $174,211 $137,676 $692,927 $32,266 4.7%
Citicorp 9/30 10Q $79,281 $209,678 $216,759 $654,311 $43,674 6.7%
Bank of America 9/30 10Q $77,062 $394,007 $142,298 $933,910 $43,581 4.7%
Wells Fargo 12/31 10K $129,783 $337,105 $22,375 $757,267 $23,022 3.0%


These four “Too Big To Fail” bastions of crony capitalism have $340
billion of commercial real estate loans on their books. That’s a lot of
extending and pretending. Just properly valuing those loans at their
true market value would wipe out most of their loan loss reserves. I
wonder if Vikrim and his buddies have noticed that home prices have
begun to plunge again. Deciding to not foreclose on home occupiers that
haven’t made a mortgage payment in two years is not a long term
strategy. These four banks have $1.1 billion of outstanding mortgage
debt on their books. I wonder what a 20% further decline in home prices
will do to these loans. Throw in another half a billion of credit card
loans to Americans being hammered by soaring energy and food prices and
you have a toxic mix of future losses. These banks are gonna need a
bigger boat.

The game of extend and pretend at the expense of the American working
middle class is growing old. When this game is over, Wall Street will
be looking for another bailout. The American people will not fall for
the lies again. Wall Street’s oppression reeks of greed and disgrace.
They are liars and thieves. They have pillaged and stolen all that was
left to steal. I will be surprised if they get out alive.

Well you are my accuser, now look in my face
Your opression reeks of your greed and disgrace
So one man has and another has not
How can you love what it is you have got
When you took it all from the weak hands of the poor?
Liars and thieves you know not what is in store

There will come a time I will look in your eye
You will pray to the God that you always denied
The I’ll go out back and I’ll get my gun
I’ll say, “You haven’t met me, I am the only son”

Dust Bowl Dance - Mumford & Sons