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Guest Post: "Extend and Pretend": Where Are We After One Year Of The Suspension Of FASB Rules?

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Submitted by Gonzalo Lira

"Extend and Pretend": Where Are We After One Year Of The Suspension Of FASB Rules?

In 1982, many of the banks hit by the Latin American debt crisis were effectively insolvent. Paul Volcker, as the then-Chairman of the Federal Reserve—charged with overseeing the banking system—effectively cast a blind eye on this banking insolvency.

Volcker’s reasoning seems to have been that the US banks were not broke—they were just getting temporarily squeezed. Volcker seems to have concluded that time would heal the balance sheet wounds caused by the Latin American defaults. Therefore, to hold the banks to the letter of the accounting rules would likely drive one or more of them broke, to no useful purpose—and it could potentially cause a bank panic and general financial crisis. But to pretend (for a while) that all was right with the US banks would avoid a potential panic—so long as the crisis sorted itself out and the banks repaired themselves by writing off and renegotiating their toxic Latin American debt.

Volcker gambled, and won: The US banks indeed took the Latin American debt hit, but grew their way out of their hole. None of the large American banks were pushed to bankruptcy in 1982, and by 1983, the worst had passed. By 1984, the biggest chunks of Latin American debt had either been renegotiated or written off—so far as the American banking system was concerned, the crisis was over, with not a single name bank going broke. And most importantly, stability and calm reigning all the while.

Score for Volcker and what we could say was the Volcker Call.

In 2008, when Lehman went bankrupt because of all the “toxic assets” on its balance sheet, the severe credit crisis that happened as a result was because everyone realized that Lehman was the canary in the coal mine. All of the American banking system was insolvent, for more or less the same reason: Assets on their books simply were not worth anything close to their nominal value. These assets were clustered around CDO’s, mostly in the real estate and commercial real estate markets.

To relieve the credit crunch that peaked in September, 2008, the Federal Reserve Board opened the money spigots—all kinds of lending windows were opened, with a dizzying array of acronyms, all of them doing basically the same thing: Lending out wads of cash at zero interest to the American banking system, all in an effort to keep it from going broke.

Between September, 2008, and March 2009, the Fed backstopped the entire US banking system—but it still wasn’t enough. The losses were too great, the holes in the balance sheets too big.

So on April 2, 2009, a key FASB rule was suspended: Specifically, rule 157 was suspended, related to the marking of assets to market value—the so-called “mark to market” rule.

Essentially, the mark-to-market rule means marking an asset to the value it can fetch in the open market at the date of the accounting period. If I own a share of XYZ stock which I purchased at $100, but today it’s quoted at $60, I mark it on my books at today’s market price—$60—not at the purchase price—$100. The reason is obvious: By marking the asset to market value, I’m giving a realistic picture of the financial shape of my company or bank.

However, ever since April 2, 2009, when the FASB rules were suspended, the American banking system has been floating on nothing by air. By suspending rule 157, none of the banks have had to admit that they’re insolvent. With the suspension of mark-to-market, accounting rules are now basically mark-to-make-believe.

Why was FASB rule 157 suspended?

Geitner, Bernanke and Summers seem to have been trying to duplicate what Volcker did so successfully in 1982. This period since March 15, 2009, when the suspension of the rule went into effect, has been called “extend and pretend”.

Has it worked?

Prima facie, it would seem so. The banks seem to be stable, and have been raking in the big bucks ever since the rule was suspended. The markets—from their March ’09 lows—have rocketed onward and upward. In fact, Citigroup stock has quadrupled, Goldman Sachs has doubled—everything is wonderful! Nothing hurts!

However, the basic problems in the banking system remain: The banks are still broke, because of the same reason—the toxic assets on their books.

The banks have taken “extend and pretend” to heart—they have lobbied to extend the suspension of FASB, while they have pretended to repair their balance sheets, when in fact, they have not.

In fact, compared to the write-off mania of ’08, the banks have not written off any of these non-performing assets. They sit like dead weight on the balance sheets of the banks—we still do not have a clear grasp of even how much of this garbage is still lurking out there, like turds in the Venice canals, because of the obfuscation of the basic accounting rules—an obfuscation which the banks insist on perpetuating.

The banks still have the holes in their balance sheets which caused the crisis in 2008.

But then, how have the banks made such staggering profits during the last year?

By trading. Instead of being banks, since March of ’09, the Big Six US banks have effectively become hedge funds. They have been trading themselves into profitability. Worst of all, these banks qua hedge funds have been making money by trading with each other. Price-to-earnings ratios bear this out—their general upward trend, across sectors and industries, even as the economy has been severely weakened, is indicative of a speculative bubble. A massive bubble—the kind that makes the Hindenburg look puny.

All of the markets have risen from their March ’09 lows because of what I would term musical chair trading—everyone makes money so long as the music doesn’t stop. The “music” of this metaphor is a combination of Uncle Ben’s easy money, relative calm in the world, and good ol’ “extend and pretend”, courtesy of FASB.

But when the music does stop, the banks are going to realize that it’s not that there’s one less chair in the circle. There are no chairs left.

That when the next crisis will hit—when the music stops, and everyone rushes to get out of their musical chair trading positions.

To continue with the analogy, when will the music stop? When will everyone rush to find a seat—and find that there are none left? My guess is, it will be something from left field, something in-and-of itself not particularly earthshattering: A punitive Israeli airstrike against Iran, say, or Somali pirates sinking a big oil tanker. A lousy consumer sentiment number, or a surprise burst of unemployment.

Why hasn’t Team Obama’s version of the Volcker Call worked? Simple—because Paul Volcker made it clear to the banks in ’82 that he would declare them insolvent, if they didn’t repair their balance sheets. Volcker scared the bankers, scared them enough to make then do what was necessary—which was to clean up their balance sheets.

What did Team Obama do 27 years later? Did they twist bankers’ arms, and force them to write off the garbage on their balance sheets?

No they did not. Instead, they bowed and scraped at the banksters, as if they were truly Masters of the Universe, instead of what they really are—scum of the earth dressed up in really nice suits.

In 1982—unlike 2009—the banks had a reason to try to renegotiate and write off the bad Latin American loans: Volcker was breathing down their collective necks, and the banks were scared of him. Volcker had a credibility then that Team Obama today does not have now—Volcker showed himself willing to bring the entire US economy to a halt, in order to purge inflation. What was putting a few big banks out of business, compared to that? Nothing—catnip for Volcker.

But Geitner, Bernanke and Summers have shown themselves willing to do anything for the banks—they’ve become twisted around, and come to think of the banks as ends-in-themselves, rather than means-to-ends, within the economy.

What should have happened starting in March of ’09 was for the banks to take the suspension of mark-to-market and used it to purge their balance sheets of all the crap they are still carrying.

But they did not. Nor will they. Because no one is forcing them to. No one forced them in April of ’09, no one is forcing them now in April of ’10.

Therefore, once the era of Musical Chair Trading ends with some ridiculous non-event that will send everyone panicking, the banking sector will be right back where it was on Septmber 18, 2008—the only difference, of course, being that Bernanke has already shot his wad, and politically, it will be impossible to pass another TARP.

That’s when the world ends—the second crisis will be loads worse than the one in the fall of ’08. Loads worse, even, than ’29.

When will it happen? I don’t know. Then again, I don’t know when the Yankees will next win the Pennant—but I’m pretty sure it’ll happen.

“Extend and pretend” could have been used to do what Volcker did in ’82—the Volcker Call. But Geitner, Bernanke, Summers, and ultimately Obama himself lacked the will or the gumption to force the banks to do what needed to be done—clean up their balance sheets. Write off all that crap.

So get ready: The countdown to oblivion was paused by “extend and pretend”—but it wasn’t suspended, much less averted. I don’t know if the end will be hyper-inflationary or mega-deflationary—all I know is that it’s gonna really suck.


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Mon, 04/05/2010 - 22:59 | 287919 Sam Clemons
Sam Clemons's picture

The S&P is now chock-full of Enron's.  We tried spending our way to prosperity.  Lying will work better.

Mon, 04/05/2010 - 23:09 | 287938 rubearish10
rubearish10's picture

Truth be Told. Lower lows forthcoming soon after this article reaches God's ears!

Tue, 04/06/2010 - 10:17 | 288433 asteroids
asteroids's picture

Doesn't FASB apply to every company not just the banks? How can you trust anything coming out of any company?

Mon, 04/05/2010 - 23:09 | 287939 monopoly
monopoly's picture

Excellent post. Will we ever see the truth in the mass media or does Brian Williams just keep smiling as the country disintegrates. When will the sheeples march with their pitch forks. I cannot believe America is lost, but it appears so.

Mon, 04/05/2010 - 23:13 | 287942 BS Inc.
BS Inc.'s picture

I really want to agree with the author's conclusions, but, come on, a Somali pirate sinking an oil tanker or a bad consumer confidence number (which of them hasn't been bad?) is going to do the trick?

I think it's going to take more than that. Something in the interest rate derivatives realm seems most likely at this point, given what I've seen written here. Who's leaning the wrong way on rates and super-levered up?

Tue, 04/06/2010 - 00:47 | 288086 msorense
msorense's picture

I agree.  Only when the Fed is forced to raise interest rates will this sucker go down.  With 4.0% on the ten year we are close but we're not there yet.  I want to see it get up another 20-30 basis points at least. 

Tue, 04/06/2010 - 08:57 | 288363 jschurchin
jschurchin's picture

I think the 10 yr will be the tipping point. When the auctions this week fail, which they will, the 10 yr will rise more then you think.

Sovereign debt will be the catalyst. Greece is buying the farm today, and so will we. The failure of Bernanke and this administration to reign in the fucking financial criminals, will lead to some very hard times for all of us.

Tue, 04/06/2010 - 01:42 | 288134 percolator
percolator's picture

No doubt BS. 

The way the market has been reacting those events would cause stocks to explode higher.  I'm not sure even an interest rate derivative blowup can tank this market it might be good for a loss of say 0.00001% only if its not a Monday then of course stocks will be up!


Tue, 04/06/2010 - 05:42 | 288247 if
if's picture

I would guess the final straw will be when we try to cure the global trade imbalances that support the current scheme of things.  As the imbalances with China and other Asian creditors fade they will no longer be amassing Dollar mountains that must be plowed into Treasuries.  That would lead to a very fast rise in long term rates and a subsequent re-pricing of Dollar denominated assets to reflect the now higher cost of capital.  If the Fed intervenes forcefully on the short end the Dollar craters.  

Mon, 04/05/2010 - 23:22 | 287960 Bear
Bear's picture

Thanks so much for this great, simple, and concise post ... I'm forwarding it to others

Tue, 04/06/2010 - 09:12 | 288380 goldfreak
goldfreak's picture

me too

Mon, 04/05/2010 - 23:25 | 287965 Cookie
Cookie's picture

'scum of the earth dressed up in really nice suits'

The best description yet for the banksters


Tue, 04/06/2010 - 00:00 | 288019 Bear
Bear's picture

Well call them the ... the Ass ... Armani Squid Squad ... Led by the Great Donkey

Mon, 04/05/2010 - 23:26 | 287966 Aeternus
Aeternus's picture

How do we know whether or not the banks have or have not been cleaning up there balance sheets since the rule was suspended?

Havn't they made enough money playing the stock market from the march lows till now to cover all of the toxic assets anyway?

Mon, 04/05/2010 - 23:44 | 287997 rubearish10
rubearish10's picture

Well,they're many mortgage derivatives of which the pools are still mostly foreclosed and late paying. In addition, home prices are still depressed. So, my best guess is that the product is still in the muck!

Tue, 04/06/2010 - 00:58 | 288102 Chito Campo
Chito Campo's picture

It's inaccurate to say housing prices are depressed.  Prices are regressing to the mean after endless liquidity caused such distorted values.

As far as the article goes, I think the conclusion is flawed.  The system has been tweaked to allow all the cleansing of these bad assets from balance sheets.  Time is on their side, the longer they can keep another catastrophic failure from happening, the better the chance for overall success.  Foreclosures, bank owned sales, and short sales are happening as we speak - yes, it will be a long protracted process but there's a good chance it will be orderly.

Tue, 04/06/2010 - 02:45 | 288168 docj
docj's picture

The system has been tweaked to allow all the cleansing of these bad assets from balance sheets.

That has to be the most polite description of the massive, blatant and bold-faced government-sanctioned fraud we've witnessed over the last 2-years or so I've yet seen.

Extend and pretend, forever.  Swell.

Tue, 04/06/2010 - 08:30 | 288331 nedwardkelly
nedwardkelly's picture

"The system has been tweaked to allow all the cleansing of these bad assets from balance sheets"

Or the government has just outright bought them.

All the 'toxic' assets that have been bought by the federal reserve are no longer on these banks balance sheets. So without a doubt they're in a better position than they were... So they're only still up the creek if the toxic assets that have been taken off their hands are a small proportion of what is out there.

Tue, 04/06/2010 - 11:18 | 288514 Chito Campo
Chito Campo's picture

Yeah, you're right, the government has bought them.  But remember 'toxic' means non-performing or underwater - the government buying them is a temporary measure in order provide some time for liquidation.  Go try to buy a short sale - they'll tell you it takes forever because the seller needs to sign off (they always do on a short sale), then the bank has to process your offer and decide if they want to realize the loss, and then they have to run it by the investor (i.e. the holder of the MBS or other security).  It's a long painful process, they can take months.

I'm not saying it's necessarily going to work, but the toxic assets won't sit on the bank or Fed balance sheet forever.

Tue, 04/06/2010 - 11:38 | 288548 Attitude_Check
Attitude_Check's picture

And when they sell them at a 50% haircut, then what?

Tue, 04/06/2010 - 14:41 | 288828 Chito Campo
Chito Campo's picture

Then they lose.  But FASB suspending mark-to-market allows that to happen in a more controlled, predictible way.  They can sort out all their assets and get what they are actually worth.

Tue, 04/06/2010 - 11:37 | 288545 Attitude_Check
Attitude_Check's picture

If the banks had been using their "profits" to deleverage you may be right -- except they aren't!  if the delever they make less money, so they have been paying out big bonuses to the "geniuses" that run them, and buying each other's junk.


They are all completely busted.

Tue, 04/06/2010 - 14:47 | 288838 Chito Campo
Chito Campo's picture

I'm not sure that's totally accurate.  I'm not defending the egregious use of bailout funds for bonuses - it's a deplorable breach of taxpayer's good faith.  But foreclosures are happening, banks are taking ownership of properties, and they are trying to sell short.  That's orderly.

If your argument is that banking should be re-regulated, I concur.  They should not be able to avoid deleveraging by other shenanigans.  Shadow banking is what created the whole mess.  I think that is a separate idea though from dealing with the toxic assets that are currently on the books.

Tue, 04/06/2010 - 01:11 | 288112 delacroix
delacroix's picture

we know they haven't sold the crap, because no one wants to buy it. ( except the fed )

Tue, 04/06/2010 - 00:21 | 288053 PierreLegrand
PierreLegrand's picture

Why would they? Uncle Sugar using our hard-earned labor keeps bailing them out. Why would they spend money clearing up all this bad debt. These clowns will be long gone when the shit hits the fan. Even if they aren't they can talk their way out of any shit.

Tue, 04/06/2010 - 07:21 | 288291 Keyser Soze
Keyser Soze's picture

And what about the government spending a trillion on MBS? Isn't that aimed at cleaning up the banks' nappies?

Mon, 04/05/2010 - 23:43 | 287994 Matto
Matto's picture

While i dont disagree with the author, im wondering who he is?? im planning to pass this along to a few friends and family members and i know they'll be asking...

Mon, 04/05/2010 - 23:49 | 288001 mikash99
mikash99's picture

Now, if even one of the three monkeys (see no, hear no and especially speak no evil), could read and comprehend there might be a faint glimmer of hope.  But then again PIGS may fly.

Mon, 04/05/2010 - 23:50 | 288004 George Washington
George Washington's picture

This is a great essay.

Mon, 04/05/2010 - 23:57 | 288016 junkyard dog
junkyard dog's picture

The music will end when we verify that the US has only 800 tons of gold. The dollar will sink out of sight, the stock market will collapse and a loaf of bread will be $ 15.00.

Tue, 04/06/2010 - 00:03 | 288025 Bear
Bear's picture

A multigrain gourmet loaf or Wonder bread?

Tue, 04/06/2010 - 00:44 | 288078 msorense
msorense's picture

"What should have happened starting in March of ’09 was for the banks to take the suspension of mark-to-market and used it to purge their balance sheets of all the crap they are still carrying. "

Not true - they are dumping the shit onto the Fed's Balance Sheet and refinancing crap mortgages (ie. getting full value) through Fannie/Freddie.  They are cleaning up their balance sheets and dumping it all on the government/taxpayer.  The dollar in your pocket is now backed by their garbage.

Tue, 04/06/2010 - 00:50 | 288088 Bear
Bear's picture

This is true; but, the Black Hole may be so large that the dumping of a few trillion does not put a dent into the 15 trillion (major portion of the reduction of American home values) insolvency problem.

Tue, 04/06/2010 - 01:04 | 288106 williambanzai7
williambanzai7's picture

We are going to learn first hand what it is like to experience what we warned the Indonesians, Koreans, Thais etc to avoid at all costs. A banking system filled with methane gas.

Tue, 04/06/2010 - 01:08 | 288109 SofaPapa
SofaPapa's picture

Nothing has changed in the past six months.  This was the argument then, and it is still the argument now.  I have agreed with it all along, but the miraculous bubble (at least in equities) just will not be popped.  The author doesn't add that the Fed may very well have a direct hand in inflating equity prices in addition to the private banks trading with each other.  This no-volume melt-up is quite a site to behold.  Terrifying, really.  And now back to our regularly scheduled "waiting for the trigger that brings this charade down".  Carry on.

Tue, 04/06/2010 - 01:23 | 288120 excellent
excellent's picture

15000 more like it.

Tue, 04/06/2010 - 01:49 | 288138 sweet ebony diamond
sweet ebony diamond's picture

it makes me sick.

someone has to force the banks to value their assets using common-law metrics.

Tue, 04/06/2010 - 01:59 | 288150 Bear
Bear's picture

I agree ... every bank with which I deal forces me to state my assets at market value when I submit a balance sheet to them. Yes even the real estate holdings.

The FASB is so corrupt and weak ... Frank and Co cajoled and threatened them with annihilation if they did not cave ... they did 

Tue, 04/06/2010 - 02:13 | 288154 Squid-puppets a...
Squid-puppets a-go-go's picture

Awesome article. But as for when the music stops, it still comes back to the $US as fiat global currency and without an alternative (sure aint gonna be the euro as we thought 2 years ago) the bubble's 'pop' is more likely going to be a slower tyre-puncture

Tue, 04/06/2010 - 02:50 | 288171 CookieMonster
CookieMonster's picture

The Resurrected markets are a hologram of Fiction, while Truth is crucified on a cross of Arrogance.

Hope your Easter (if you were one to celebrate it) was meaningful.

Tue, 04/06/2010 - 02:57 | 288174 jmc8888
jmc8888's picture

Yep this author gets most of it. 

Tue, 04/06/2010 - 04:32 | 288215 chindit13
chindit13's picture

Not too much new here for ZH habituates, but reminders never hurt.

Two points to add: toxic asset levels, even if what existed back in late 2007 has been covered by gifts/trading profits (redundant?), the levels are not static. Things in both domestic and commercial RE, plus seconds related to both, have further deteriorated. Even the supposed stability in home prices as of late is an illusion based on the fact that banks are dragging their feet on foreclosures. Every single non-mortgage paying Free Renter is holding another bit of supply off the housing market. This is a second Shadow Inventory, joining those already foreclosed properties banks are holding back. Housing has a lot more to fall.

The second point is that the next step for banks will be trading toxic paper with each other at some above market price, taking whatever hit they have to take to qualify for the new mortgage assistance program, then writing a new mortgage with FHA backing. Thus, what's left rotting on banks' balance sheets will soon be rotting in the pockets of US taxpayers, as if we don't have enough already.

Tue, 04/06/2010 - 08:13 | 288318 HEHEHE
HEHEHE's picture

Perfect summary.  The new government "housing aid" is just a way to get the gubmint to swallow more bad bank loans.  The sheeple don't understand this because it's "too complicated".  Maybe if somebody responsible bought some ad space in the middle of Dancing With The Stars or American Idol and told the true story they'd WTF up.

Tue, 04/06/2010 - 13:15 | 288694 Grifter
Grifter's picture

Not too much new here for ZH habituates, but reminders never hurt.

Actually, I've been waiting for something concise & relatively easy to comprehend to come around so that I could use it as an intro to ZH for family & friends.  Much of what is discussed on this site is admittedly over my head, but I voraciously consume the content in an effort to promote a little dendrite growth.

Truth be told, I glean more from folks like yourself, Miles Kendig, Apocalypse Now, Cheeky, Cognitive D, Howard Beale, DeadHead, Cougar_W...I have a "Gang of 50" or so in the comments section that I usually scan for to get your take on the topic at hand, and as I'm at work and shouldn't even be typing this, apologies to the remaining 40 or so commenters that I can't immediately recall.

Anyway, I'll return to lurking now.  Thank you all, contributors and commentors alike, and of course TD(s)/Marla(s).

Tue, 04/06/2010 - 06:34 | 288267 billwilson
billwilson's picture

Yo...for Volker substitute Bernake! Why is Bernanke not down their throats. (I certainly don't remember Reagan being down the bankers' throats).

Tue, 04/06/2010 - 06:53 | 288277 feeb
feeb's picture

I'm attending a lecture tomorrow night at GWU with FASB Chairman Robert Herz and IASB Chair Sir David Tweedie...any questions that the ZH community wants me to ask of either of them? Post them here, I'll check in tonight to see if there are any burning questions that just need to be asked. Right now the one question I plan to jump in with has to do with the coercion/influence posed by Congress (see Herz testimony on 3/12 I believe) along with the blatant conflict of virtually every single ITAC member.

Tue, 04/06/2010 - 07:43 | 288306 sweet ebony diamond
sweet ebony diamond's picture

ask them what it is like to be complicit in the biggest theft in the history of mankind.

Tue, 04/06/2010 - 08:22 | 288324 SofaPapa
SofaPapa's picture

Phrase this as diplomatically as you like, but the question to me is whether they now intend for mark-to-myth to be permanent policy.  Was this suspension meant to be a temporary measure? If it was meant to be temporary, what's the timeframe?  Spitting in the wind, I suppose, but I'd be curious to hear their answer.

Tue, 04/06/2010 - 07:04 | 288282 Alethiometer
Alethiometer's picture

Of course the Obama administration didn't attach any bite to the bark of suspending MtoM, Wall St. and major corportate banks were some of his largest contributors!

I agree with the premise that the U.S. should have collapsed a few years back.  It should be collapsing now, but it isn't.  The U.S. isn't a country.  It's an empire.  A more proper designation for the United States would be Imperial America.  By virtue of our global reserve currency, our influence stretches across the earth in a manner only dreamed of by the Roman emperors.

What harkened the fall of Rome was a growing inability to finance empire.  We have no such problem.  Need more money, create more debt.  Sell the debt to your enemies.  Every decade our sprawl grows larger, and seemingly, no one is the wiser.  By 2030, trends continuing, we'll have conquered the Middle East.  Puppet regimes will slowly erode hundreds of years of culture and tradition.  Chai and hookahs will be replaced by Coca-Cola and Malboros.  Donkeys will be replaced by F150s.  Isreal will act like the eye of Saromon, it's gaze ensuring obedience and smooth transition.

Tue, 04/06/2010 - 08:28 | 288329 aint no fortuna...
aint no fortunate son's picture

Right before the fall of the Roman Empire there was the Colosseum and the gladiators. Today we have cage fighting. I have often gotten a good laugh out of that... and who says history doesn't repeat?

Tue, 04/06/2010 - 08:55 | 288360 mikla
mikla's picture

Some of the dumbest statements uttered by Mankind begin with the phrase, "If current trends continue ..."


Tue, 04/06/2010 - 07:16 | 288287 BoeingSpaceliner797
BoeingSpaceliner797's picture

Something missing from this article.  Not only did the large banks NOT use suspension of FASB rule 157 to write off the toxic garbage.  While this music has been playing, new iterations of the same types of crappy loans have been being originated (backed by the FHA).  So, not only has this opportunity to take chargeoffs been ignored but MORE of the toxic shit has been layered onto our glorious system.  I realize just about everybody knows this and it wasn't the thrust of the article but it brings into bolder relief just how long-term bad for us the policy of extend and pretend has been.

Tue, 04/06/2010 - 08:30 | 288325 aint no fortuna...
aint no fortunate son's picture

Great posting Gonzalo. You have managed to very succinctly and accurately spell out for even the less sophisticated reader what happened, why it happened, and what the probable results will be.

Let's face it - Bernanke, Geithner, Summers and Obama are simply cowardly lapdogs doing the TBTF banks' bidding. I hope to never forget the Monday in mid December '09 when Obama "invited" (I'm not sure when a President "invites" you to the WH that its really just an invitation) the top ten bank CEO's to the WH for talks on where things stood. Three of his masters, including Blankfein and Pandit, didn't even bother to show up, blaming the fog for not making it... as if they couldn't have come down the day before (Sunday), had dinner with their D.C. senior staff, taken in a play or SOMETHING or taken the train down.

Obama sat there in the WH with a few of his other bankster bosses and stated forlornly into the teleconference video how sorry he was they couldn't make it... snubbed by the well dressed scum of the Earth as you put it. To me that will mark one of the defining moments in his Presidency, for it spoke so eloquently to who the new boss is... same as the old one.

Tue, 04/06/2010 - 08:34 | 288336 nedwardkelly
nedwardkelly's picture

I just figured that Mark to market would be reimplemented once the majority of the toxic assets had been offloaded to the Fed. The author says nothing has changed, but what about the fed taking on all these assets? Are they just a drop in the bucket compared to what's out there?


Tue, 04/06/2010 - 09:27 | 288386 Jason T
Jason T's picture

I'm guessing the event that will trigger the next crisis will be food and energy inflation or state insolvency.

Tue, 04/06/2010 - 09:43 | 288400 WineSorbet
WineSorbet's picture

According to David Brooks at the NYTimes, everything is "gonna be alright..."

Tue, 04/06/2010 - 10:41 | 288460 docj
docj's picture

Which is just about all the proof you need that The Angel of Freaking Death is just around the corner.

Tue, 04/06/2010 - 23:49 | 289372 Pike Bishop
Pike Bishop's picture

Wasn't this guy supposed to go away if Hillary didn't win the nomination? WTF has he been so right about since then that people listen to him or print his ambitions of mere and simpleminded words?

If the intellectual and moral standards of a People are judged by the quality of their punditry, we're a bunch of knuckle-dragging morons, pouring champagne in our asses, while our heads are stuck in the sand in front of our summer home in the Hamptons

And David Brooks is the poster boy.


Tue, 04/06/2010 - 09:55 | 288410 bullandbearwise
bullandbearwise's picture

Let's call a spade a spade. They aren't toxic assets; they're loans in various stages of non-performance and/or default. To whom does the Fed purpose to sell these?

Tue, 04/06/2010 - 09:55 | 288411 Waterfallsparkles
Waterfallsparkles's picture

Who will be there to Bail Out the FED?

Tue, 04/06/2010 - 10:31 | 288450 huckman
huckman's picture

Talk about having your dates off.  Your not even close.  My division of BAC was shut down in 1987 because of the unpurged Latin debt.  Citi was in the same boat.  The stock price hit single digits before finally going in reverse.  Clausen took the helm and all it took was the sale of few monster assets like Charles Schwab, Seafirst and the ARCO Towers in Los Angeles to turn things around.  It was all about maintaining a minimum loan loss capital reserve ratio back then. 

Tue, 04/06/2010 - 10:44 | 288463 jplotinus
jplotinus's picture

The Fed's $1.2+trillion “agency MBS” buying program ended on March 31, if memory serves.  That bit of “quantitative easing” was specifically said to involve purchases from Fannie and Freddie; but, did it also serve the purpose of allowing banks to transfer their toxic mortgage assests to Fannie and Freddie, thus ridding themselves of the toxic assets they had?  Frankly, I am unclear on that issue as the financial press reporting on it has been a bit vague.


If the banks have, in fact, rid themselves of their toxic assets then it is possible the present situation might have more resemblance to the Volcker call than is realized. 

Query:  Have the big banks rid themselves of their toxic mortgages; and, if so, to what extent?

Tue, 04/06/2010 - 11:47 | 288562 Missing_Link
Missing_Link's picture

I don't see how rule 157 can ever be re-implemented without destroying the banks.

Therefore, rule 157 will never be re-implemented -- at least, not for years if not decades.

Therefore, we're stuck in permanent extend-and-pretend mode.

Tue, 04/06/2010 - 12:02 | 288584 apberusdisvet
apberusdisvet's picture

The statistics are all rigged; gold and silver markets too; empty housing is being "saved" for Amnesty recipients (Oh, you didn't know?); the puppeteers are pulling the strings toward one-world gov't (see....he DOESN'T need a teleprompter).

"bye, bye, Miss American Pie; drove my Yugo to the big hole......."

Tue, 04/06/2010 - 12:31 | 288624 JT Marlin
JT Marlin's picture

The Mark-to-Market rule is wrong, and its suspension should be applauded. 

Mark-to-Market is highly pro-cyclical, allowing companies to write-up the value of assets in peaks and write them down in the troughs.  Accounting standards should just stick with the old adage of recording Historical Cost, then depreciating assets as time progresses.  Additionally, certain investments should be subject to the lower-of-cost-or-market rule, which provides stability in the system.

MBS should be recorded LCM, and in this case, since there is no Market for them, they should be recorded at cost.  The suspension of the mark-to-market rule is a stepping stone to providing stability in balance sheets.  There is a LOT of manipulation potential with the mark-to-market rule.  Companies could record gains on asset write ups!  These aren't cash gains, they're book gains and book losses.  By providing stability in the market's and company balance sheets, we can look forward to stabilizing our turbulent economic system.  

Besides, FASB's multiple rules and proclamations provide the necessary loopholes to cheat the system and "cook the books".  Under more open systems, like IFRS, the chance of such accounting shenanigans occurring drops greatly.  Because IFRS is more based on managerial discretion, there is more room for enforcement, because instead of sticking to rules, you hold management more accountable for their decisions. 


Just my 2 cents.  

Tue, 04/06/2010 - 15:06 | 288874 Chito Campo
Chito Campo's picture

I don't really see the alternative to the "extend and pretend" solution.  Obviously given the tone of some of the comments on this article the concept does not have a strong following on ZH.  What is a realistic alternative?  I simply do not accept that letting the banking system collapse, the economy to collapse, and for America to be pitched into some post-apocalyptic Mad Max world is the best solution.  The system was in danger of crumbling, decisions were made to take and action and quickly prop it up.

Yes, there are manipulators and opportunists who take advantage of their position, their inside knowledge, and the levity they are given.  It seems like a huge logical leap to go from that observation to declaring the system is fatally flawed, we should stand aside, let it crumble, and then figure out some other way to organized our productive capacity.

Wed, 04/07/2010 - 03:26 | 289478 mikjall
mikjall's picture

The alternative is to seize these insolvent banks and keep them operating in receivership, stock- and bondholders lose out, off-balance-sheet "assets" put back on the balance sheets, banks broken up and business sold to regional and local banks that have been run on sound principles, egregious "bonuses" and stolen assets clawed back, fraud prosecuted (as in savings and loan debacle), junk assets absorbed into sovereign fund and administered by experts for public benefit (extend, as necessary, but without pretend). Basically, this is called "bankruptcy" and law enforcement; these are the orderly procedures that we have in place. Why we are supposed to believe that the only alternatives are fraud and plunder, on the one hand, or economic collapse, on the other, I'm not sure, but it seems to be in the interest of the criminals that we do. Just what is the "system" that was "in danger of crumbling"? Goldman Sachs? J.P. Morgan? AIG?

Fri, 04/09/2010 - 04:04 | 292800 mark456
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