Great piece yesterday from David Reilly over at Bloomberg News Barney Frank, Chris Dodd Do Banking Back Flip
Congress can’t make up its mind. First, legislators pushed to let banks take a rosy view of the value of some hard-hit holdings. Now, two key committee chairmen claim banks aren’t being realistic enough about the values of some loans.
The allegation by House Financial Services Chairman Barney Frank and Senate Banking Chairman Christopher Dodd that banks are holding some loans at “potentially inflated values” should trouble investors, since it came just days before institutions like JPMorgan Chase & Co., Bank of America Corp. and Citigroup Inc. are due to report second-quarter results. If some loan values are “inflated,” that again calls into question the quality of banks’ results.
Why, after arguing for banks to have more leeway, is Congress now pushing back? Because many government responses to the financial crisis are more about manipulating prices -- and behavior -- than truly getting markets back on their feet.
Forgive them David, they know not what they do......or do they? Let's think about what has gone on here with regard to how the health of our major banks was presented to the world and investors. In the first half of 2009 the industry, Congress and the Obama Administration;
Relax Fair Value Accounting Standards, thus allowing certain "legacy assets" to either be written up or not written down.
Roll out a "Legacy Asset Removal Plan" that promises, as dim-witted as it was, to solve the "toxic-assets-clogging-the-bank-balance-sheet-issue.
Allow some of our sickest and biggest banks, Citi and BofA to convert billions of preferred equity capital to common.
Allow or make AIG write down their CDS books to nuclear winter levels and unwind their positions with some of our biggest banks, resulting in monster trading gains. Can I prove this? With my limited resources, no. However, the circumstantial evidence is there. AIG took a fourth quarter 2008 loss of $61 billion. That earnings announcement came out in early March 2009. I have a very strong feeling that the mark down of AIG's positions went from unrealized to realized in Q1 2009 as AIG unwound the trades with their bank counterparties, thus giving those bank counterparties huge Q1 gains. On the same day that AIG announced their $61 billion loss, they got an additional $30 billion from Uncle Sam. Uncle Sam, in my opinion, used AIG as a conduit to pump nice trading gains into AIG's bank counterparties.
Create and hype up the vaunted Federal Reserve bank "Stress Tests", that proved to be anything but stressful and showed that 14 of the 19 major financial institutions were well capitalized.
Utilizing all of these smoke and mirrors, our banks were able to raise $ billions of capital in the second quarter from institutional investors under the guise that the banks were in good shape and the situation was improving. This capital raising threw huge investment banking fees to our friends at "Goldie Mac. It helped greatly that equities went on a rapturous rally in Q2, mostly based on the belief that the banks were coming back.Sounds like the old "pump and dump" to me, on a MASSIVE scale. The kind of scale America's favorite new prisoner Bernie Madoff would be proud of.
Now however, the government has a problem. President Obama wants to know why the big banks aren't helping him with his loan modification program. Enter "Ass" (Dodd) and "Hole" (Frank). They write to senior bank regulators that the big banks aren't modifying loans because get this;
"We are concerned that the loss allowances associated with these subordinated liens may be insufficient to realistically and accurately reflect their value.”
Well duh? You let these guys keep $billions and $billions of first and second lien mortgages marked near par. If they go to modify a large percentage of "at risk" loans they are going to have to;
As Bloomberg's Reilly reports (with regard to the second liens), "Many banks have marked down these loans only by 3 percent to 4 percent, said Paul Miller, bank analyst at Friedman Billings Ramsey & Co. These loans in many cases would likely fetch about 40 cents on the dollar if sold in today’s market. The losses are “a big part of the toxic asset issues facing banks,” Miller added.
Woops. Clean up in aisle two! Just FYI, when all the lawsuits start from investors who helped recapitalize the banks based on the rosy picture the government painted, Richie and I are available as expert witnesses!