This Friday we saw traders hold Wall Street ransom for their bailout out from Congress. When it looked like no deal was going to be done, the Market was down over 200 points. In the afternoon when it was announced that a deal was probably forthcoming, the Market closed up 120 points. Bankers basically told Washington…my way or the highway.
This week we saw Republican Congress men and women stop the heads of their own party, Bush and Paulson. We saw the GOP implode, arguing and bickering among themselves. The GOP normally always presents an undivided front. It is generally the Democrats that seem undivided. But not this week. GOP members were sneering at each other, all saying me me me me.
On Thursday, a new twist to the bailout took shape…the GOP blamed “Mark-to-Market” accounting on the credit meltdown. Critics of Mark-to-Market, the FAS 157 rule, proclaim that banks are being hurt from this obsure accounting rule because they are forced to recognize losses immediately instead of holding assets until the assets recover (if ever).
These accounting rules went into effect last November. Why? Because of the accounting scandals at Enron and WorldCom. These rules are, dare we use the word, “earmarked” at requiring transparency in corporate finances. FAS 157 mandates that banks recognize the “fair value” of their assets immediately instead of permitting them to wait for a recovery. That also means they must book their losses immediately as well. In many cases, that would require the banks to price their troubled mortgage assets as worthless.
FAS 157 critics claim that Mark-to-Market accounting weakens banks and brokerages, requiring them to raise more capital now in order to offset any anticipated losses. If capital is limited, what happens to the bank or brokerage? Merrill Lynch, they say, is an example of the problems with Mark-to-Market accounting.
Critics claim that Merrill Lynch wrote down $24 billion, taking 22 cents on a dollar for illiquid subprime mortgages because FAS 157 required valuations at the Current Market Price. If there were no FAS 157, then perhaps the write down would not have been necessary and Merrill would not have had to settle for a $29/share buyout from Bank of America. Woulda – Coulda – Shoulda. If Merrill had not created phony investments in the first place, such as complicated mortgage backed CDO swaps with artificial AAA ratings, or dumping billions of worthless auction rate securities on their unsuspecting clients, then maybe they would not have had to sell at a discount.
And what does the GOP wants to do, once again? “Deregulation” Enough is enough. What they are asking for is to allow banks and brokerages to hide their bad loans from novice investors. Here we go again. What investor would be willing to buy shares in a company if they could not be sure that the quarterly reports accurately reflected the company’s financial condition. Can you say “Sucker?” Remove Mark-to-Market Accounting and 6 months from now Congress will be having new hearings, just like they did with Enron and Worldcom…but this time it will be Bank A or Bank B.
What really is the problem facing America today. What really needs to be done to fix the credit crisis. It is not bailing out disreputable bankers with multi-million dollar golden parachutes. It is not changing the accounting practices so uneducated investors get taken 6 months from now. The answer is simple…make new jobs.
With $200 billion, we could offer 300,000 Americans a $25,000 salary for 2 years. If this was proposed, taxpayers would be thrilled. It is jobs that has destroyed our economy. When Bush ran for office in 2000 he stated that he would run the country like a company. And he has done just that…he outsourced the entire country. Federal, state, local, and private jobs — outsourced. Manufacturing — outsourced. Customer service — outsourced. Name the industry — outsourced. How does this Administration expect anyone to pay for their mortgage when their job has been outsourced?
Some states have been badly beaten by outsourcing and job loss. In August, Michigan’s unemployment rate hit 8.9% and in some towns, as much as 12%. Rhode Island, 8.5%. California 7.7% Mississippi 7.7% South Carolina, 7.6% Ohio 7.4%. And these figures are what the Government is willing to admit. Imagine what the unemployment rate really is.
Until jobs are created, no bailout, no matter how big, will resolve this mess. Marc Faber, managing director of Marc Faber Ltd. and author of the gloomboomdoom report said the system may require as much as $5trillion to rescue America. “The $700 billion is really nothing,the treasury is just giving out this figure when the end figure may be $5 trillion. The decline in home prices of 20 percent is a relatively minor decline so far and it has created so many problems. The US is in much worse shape than Japan was when its stock market crash ushered in a decade-long slump in 1990.”
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