Richard Koo Says If Banks Marked Commercial Real Estate To Market,It Would "Trigger A Chain Of Bankruptcies"

Tyler Durden's picture

Richard Koo's latest observations on the US economy are as always, a must read. The critical observation from the Nomura economist explains why the realists and the naive idealists are at greater odds than ever before: the government continues to perpetuate, endorse and legalize accounting fraud in the hope that covering everything up under the rug will rekindle animal spirits. The truth, as Koo points out, is that were the FASB to show the real sad state of affairs, the two core industries in the US - finance and real estate, would be bankrupt. "If US authorities were to require banks to mark their commercial real estate loans to market today, lending to this sector would be extinguished, triggering a chain of bankruptcies as borrowers became unable to roll over their debt." In other news Citi, Bank of America, and Wells just reported fantastic earnings beats on the heels of reduced credit loss provisions. Nothing on the conference call mentioned the fact that all would be bankrupt if there was an ounce of integrity left in financial reporting, and that every firm is committing FASB-complicit 10(b)-5 fraud. One day, just like Goldman's mortgage follies, all this will be the subject of epic lawsuits. But not yet. There is some more money to be stolen from the middle class first, by these very firms.

Some other observations on the greatest game of extend and pretend from the well-respected economist:

Fed understands risks of too-rapid bad loan disposals

Mr. Bernanke also emphasized that the Fed is making serious efforts to address credit supply problems—ie, the credit crunch.
The Fed chairman understands that an exclusive focus by bank examiners on uncovering bad loans could leave banks reluctant to lend, thereby sparking a “bank inspector recession” and delaying the recovery. To prevent this scenario, Mr. Bernanke says he has instructed Fed bank inspectors to ensure that banks are lending to creditworthy borrowers. In ordinary times, the Fed would seek to have banks write off their non-performing loans as quickly as possible. This is the correct approach when there are only a handful of distressed lenders. But during a systemic crisis, when many banks face the same problems, forcing lenders to rush ahead with bad loan disposals (ie, sales) can trigger a further decline in asset prices, creating more bad loans and sending the economy into a tailspin.

I think the Fed’s shift in focus from conventional nonperforming loan disposals to credit crunch prevention is an attempt to avoid this scenario.

Fed retraining bank examiners in bad loan management

Perhaps based on an awareness of Japan’s failures in this area, the US has not only made public a list of items bank examiners are to focus on, but is also retraining its examiners in a bid to keep them on the right track. Roughly 1,000 inspectors have already completed the retraining.

Among other things, the retraining program teaches examiners how to modify loans to troubled borrowers and how to manage distressed commercial real estate loans. In that sense, it is a far cry from traditional training, which emphasized the quick discovery and disposal of nonperforming loans.

Full Koo note:

 

h/t Jake

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ZeroPower's picture

Again another example of how US GAAP is lacking.

While IFRS isnt as stringent in some aspects either (inventory, amortizing estimates) i figure if both cooperated and formed a truly international accounting standard, maybe there'd be some accountability here..

Cognitive Dissonance's picture

Accountability in accounting standards? Now that's just crazy talk. Before you know it, you'll be talking about ethical standards that include big as well as small.

B9K9's picture

I don't think anyone is really prepared for what is coming down the pike. There's a reason why basic constitutional provisions and age old legal precedents have been discarded like so many stale, burnt roaches in a desperate attempt at saving both our economic & governance systems.

Neither the well provisioned gold & lead bunker guys, nor the light & swift advocates have any real idea as to how to make it out of this situation intact & alive. It sort of reminds of that quote from Patton "The last great opportunity of a lifetime - an entire world at war, and I'm left out of it?" Only my version asks "An entire global economy based on nothing more than ponzi, and I get to experience it all coming down?"

By the actions of the PTB we can accurately & dispassionately judge the true gravity of our situation. ZH has a great platform, but then so too did fuckedcompany.com during the dot.bomb meltdown. How long should one chronicle the crash before one moves onto productive enterprise & various opportunities resulting from the paradigm shift?

RockyRacoon's picture

There you go again, CD.   Now it's ethics?  That's the proverbial monkey wrench for economics.  Oh, ye seeker of knowledge:

Check this out: Why Economics Is Crucial for Ethics --  Mises Daily:  Wednesday, April 21, 2010 by Art Carden    http://mises.org/daily/4252

"When you identify a source of social tension, realize that the source of the tension might not be the ignorance, idiocy, or venality of the people you want to control but your desire to control them."

One of the most interesting reads I've had all week.

 

DaveyJones's picture

Mark to Market?

More like   Mark David Chapman to Market

svendthrift's picture

See IAS 39 & IFRS 7. IFRS is just as bad.

In fact, Lehman shopped their Repo 105 game to the principles-based UK applied it there. The rules based American system was less hospitable.

Let us not be naive. Who ever writes the rules (the elite) will do so for themselves. Break the fuckers up before trying anything else.

syvanen's picture

testing. Can I post here?

 

buzzsaw99's picture

bernanke is a pig.

JohnKing's picture

We need to keep the fraud going to save the economy. This doesn't sound right.

faustian bargain's picture

Kill the host to save the parasite.

Orly's picture

Wasn't that a Star Trek episode?

sushi's picture

I thought it was keep the economy going to save the fraud.

 

I'm so mixed up.

Handle with care's picture

Ahh crap! So even those whose very job is to protect us from banks running wild and issuing bad loans and lying about it are being "retrained" to help the banks extend and pretend?

Is there nothing and no-one left who can insist on the truth being told?

Cursive's picture

LOL. I read that and thought of Orwellian re-education.  Whatever is in store for us, it won't be good.

anynonmous's picture

Just one short year ago the suspension of FASB 157 altered the perceived financial position of the banks - We are living in a disney economy and the markets are reflecting that.

Today on Bloomberg radio the host asked Byron (Blackrock) Wein how he reconciles his bullishness on the economy with his bullishness on gold. Byron responded he is concerned about the debasement of paper currencies.

 

Rainman's picture

In many ways, the situation is far worse today than '08. A 42% dump in CRE value wasn't on anybody's radar back then.

The compounding issue now is that the banksters are bonus looting the balance sheet while Ben keeps the morphine drip going. At this rate, the market won't clear for another 10 years.

Even the wife can't get away with faking orgasms that long.

sushi's picture

They seemed pretty genuine to me.

SilverIsKing's picture

That's interesting because I kinda knew she was faking but I didn't really care.

Cammy Le Flage's picture

Ok.  Tyler Durden is the best prosecutor I ever met.  MR. DURDEN - you are now in the Court of World Opinion which holds more sway than money - continue on.

 

This is my favorite day of zerohedge ever.  Your site is going to continue to crash on overload. 

 

Dear Mr. Paulson:

 

IF you could send me a 100 cases of Jamaican rum, 100 lbs. of kind bud - sticky and very green - and buy me a little cottage on the side of the Ocean in Eleuthera.  I will forgive you.

You can afford it.  Please.

Thank you.

Cammy Le Flage

Cognitive Dissonance's picture

"This is my favorite day of zerohedge ever."

Considering you've only been here 15 days, that's a pretty small sample, don't you think?

Cammy Le Flage's picture

You are allowed to read it and not sign up - are you not smarty pants?

Cammy Le Flage's picture

Ok.  Tyler Durden is the best prosecutor I ever met.  MR. DURDEN - you are now in the Court of World Opinion which holds more sway than money - continue on.

 

This is my favorite day of zerohedge ever.  Your site is going to continue to crash on overload. 

 

Dear Mr. Paulson:

 

IF you could send me a 100 cases of Jamaican rum, 100 lbs. of kind bud - sticky and very green - and buy me a little cottage on the side of the Ocean in Eleuthera.  I will forgive you.

You can afford it.  Please.

Thank you.

Cammy Le Flage

kohoutek's picture

When historians write the history of the period in which we live, they will surely have difficulty understanding the logic behind the actions of some of the key players.

"They thought they could create a recovery by printing tonnes of money and accounting fraud? Were these people fucking nuts?"

cougar_w's picture

Chapter 3: "They Were Fucking Nuts"

That from the 2031 release of "Fourty Years of Global Economy, 1970-2010"

Shameful's picture

Who is going to write this, the cockroaches :)

The sad thing is I expect lies to be the order of the day.  The system will do it's damnedest to force blame elsewhere.  Prepare for scapegoating.  If I had to bet, I think the scapegoating will be the free market capitalists.  That has already started.  Great racket, blame free market capitalism for the evils of crony capitalism to further damage capitalism image.

See the book more like "How Free Market Capitalism Killed the Economy, and why only Crony Capitalism Will Save Us".  Probably will have a picture of Ron Paul, Mises, or Rothbard with Satan horns on it.

LeBalance's picture

Or Possibly: "We Lured the Irresponsible Masses with Sugary Sweets into the Valley of Death"

 

Squid-puppets a-go-go's picture

lol. reminds me of that dougles adams bit

A copy of a far-future edition of the Hitchhikers Guide to the Galaxy fell back in time thru a wormhole and described them as 'a bunch of mindless idiots who were the 1st against the wall when the revolution came'

Itsalie's picture

history is written by those who win the war, far from clear the empire is losing at this time, they got the death star almost complete and the jedis all kaput; left TD, sorry "master" TD.

cougar_w's picture

We exported food production to Mexico, factories to China and electronics to Japan and gave everyone who lost their jobs credit cards and home equity loans, and funded the economy on just financial services and house-flipping.

Then, we blew them both up.

Not the smartest bunch of monkeys.

TheGoodDoctor's picture

I think that might be the most clear and concise description I have read. Kudos. +1000

On another note, I mean why is he talking about only CRE when I thought there was another bunch of loan resets coming for homes in 2011? I guess I didn't read the article maybe he talks about it.

Jason T's picture

Concur. Comments just as brillant as TD's commentaries. 

MrPalladium's picture

+1000 Touche!! Too-frigging-shay!!

Kina's picture

The policy makers should have known this, it is the logical and obvious outcome. Submit to a global labour pool then business will go to where costs are cheapest. The only way to combat this is for everyone to lower costs until a global equilibrium is reached, in about a hundred years.

The corporations didn't mind this, they can manufuacture in the cheapest places and sell in the most expensive. Except the logical conclusion to the above is for purchasing power to decline in the original markets (relying on credit instead).

Tariffs had a purpose I guess.

The remaining business of the developed world, financial services they then went and f*cked up, leaving nothing but a jobless 'recovery'.

 

I guess the US still has a massive defence force. The next business should be selling 'protection'. Gun for hire.

 

 

Recovery3000's picture

The non-clearing of the CRE market is the part of the clog in the economy'sintestines that desperately needs to be flush out.  My bretheren in the business spend a lot of free time waiting for the capitulation in the CRE investment market that seems to never come.

Not only are banks lying about the values of their loans, but the Fed incentivize the banks to hold onto the assets due to the loss-sharing arrangements that lets the bigger banks take-over the weaker ones with a 80% loss protection plus the capital to float the bad loans for years.  What a sweet deal!

TheGoodDoctor's picture

Waiting for the colon cleanse; unfortunately there is a Treserve butt plug keeping things backed up.

Recovery3000's picture

The non-clearing of the CRE market is the part of the clog in the economy'sintestines that desperately needs to be flush out.  My bretheren in the business spend a lot of free time waiting for the capitulation in the CRE investment market that seems to never come.

Not only are banks lying about the values of their loans, but the Fed incentivize the banks to hold onto the assets due to the loss-sharing arrangements that lets the bigger banks take-over the weaker ones with a 80% loss protection plus the capital to float the bad loans for years.  What a sweet deal!

Temporalist's picture

Bloomberg just showed a clip of Marc Faber saying that 90% of Wall St. is a fraud.  Here is his interview but the comment was either before or after the interview:

http://www.youtube.com/watch?v=mLrFK1bBEm4

 

Recovery3000's picture

Churning is not a fraud, its a God given right!

Buck Johnson's picture

"FASB-complicit 10(b)-5 fraud", thats exactly what all of them with the govt. help are doing.  But it's okay because the govt. said so.  The funny thing about this is the little things, like when GM went bankrupt and the govt. with help from the Federal judges threw out decades of bankruptcy law in order to make sure GM survived (the destroyed the ones that where first in getting money).  Banks being bailed out by the trillions and the Treasury people saying they won't say where the money went, TRILLIONS.  At the drop of a hat they gave out trillions to save banks but they can't find a few billions for this or that.  The trillions they used could have been used to give everybody single payer healthcare.  The banks themselves having the stock and bond markets manipulated in order to make sure they don't go under.  You know, the "war" against short sellers (this became such a bad word or thing to do, UNLESS YOUR GOLDMAN SACHS OR PAULSON OR THE BIG BANKS.), instead of mark to market it's now mark to whatever the F**k you want as long as it keeps you looking solvent, and on and on and on.

This is the definition of a third world economy on the brink of insolvency.  When you make ad hoc law in order to justify what you said was unlawful years or months ago, it shows your desperation.  We are a desperate economy, both the US and Britain.  I just thought of something, what if the new 100 dollar bill is being put out their not only to deter counterfeiters but to make where people have to recycle their greenbacks for these new ones as a precautionary measure.  This will take time and that is what the Fed is wanting time and hope. 

Once all the games are played and all the promises are broken, we will see a western economy that is blighted and destroyed. 

Recovery3000's picture

That is why as Churchill said- "Alcohol has done more for me than I have done for her" (I think)

Rainman's picture

Correctamundo....but I believe he stole the line from W.C. Fields. Another of my favorites from the world of hard drinkers. 

three chord sloth's picture

Why should I listen to this guy?

He seems pretty good at gathering data sets and understanding what they say, but the conclusions he draws from that data are pretty damn bad.

This is the guy who thinks Japan is better served by sloooowly unwinding their bad debt, and "stimulating" their economy to the tune of -200% GDP. Japan is now permanently underwater, they have a zero percent chance of getting their debt under control -- heck, they've got to borrow just to make the interest payments, and will have to eventually default and impoverish their senior citizens (who are the ones that rebuilt the country, saved money like demons, and lent it all to their government... only to see it pissed away on bad loans and zombie banks).

He sees some sort of "success" in the Keynes-on-steroids of the past two decades in Japan. No thanks... don't want what he's selling.

Recovery3000's picture

That is why the novacaine of Govt. money always ends badly-look at Scotland, their people invented most of what's useful and now a generation later they can't even get out of bed without the govt. telling them how to get dressed.

Mad Max's picture

More like 6 generations later, but the point is well made.

Crab Cake's picture

It doesn't matter if CRE is marked to market, though it would be best in the long run, cash flow will kick the banks in the balls regardless sooner or later; fact.  You can run, but you cannot hide. 

Death to the Fed.

Thalamus's picture

That is true.  These loans will show their true colors when more and more bank assets are vacant homes and abandoned CRE and not loans providing cash flow.  With 11 to 1 leverage the pain should start soon.  

dumpster's picture

the banks derivative to death the income , as long as they bet the farm .. income is noted in income statement s

so mark to crap, income flows off derivatives .

bokapita's picture

I used to think this was true, but if in the UK and the USA the government effectively just prints cash and gives it to the banks to offset those banks' losses, the debasement of the currency and economy and savings will occur first. That's the problem, it seems to me.