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

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Mon, 04/05/2010 - 22:59 | 287919 Sam Clemons
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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
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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
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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
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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
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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
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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
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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
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"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
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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
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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
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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
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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
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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
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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
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"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
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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
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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?

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