Bank profits are accounting vapor

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http://www.moneyandmarkets.com/big-bank-profits-are-bogus-massive-public-deception-33228
 Quote:
How can our trusted authorities be so blatantly deceptive and still keep their jobs? Perhaps you should ask Fed Chairman Ben Bernanke. Not long ago, for example, he declared that the total losses from the debt crisis would not exceed $100 billion, while conveying the hope that most of those losses could be soon written off. Also around that time, the International Monetary Fund (IMF) estimated the losses would be $1 trillion, with only a small percentage written off. The IMF’s latest estimate: $4 trillion in losses, with only one-third of those written off so far. Bernanke’s error factor: He was 4,000 percent off the mark, in a world where 50 percent errors can be lethal.
They actually break down the numbers and techniques used by some of the banks. Perhaps Drew or one of the other accountants here can take a look.
 
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It is not really bogus but ambiguous. Especially when you factor in the investors who purchased CDS when they don't have the assets as a GAMBLE. You cannot really figure out the exposure until it pop. My folks have been apartment hunting (as a hobby, not really in the market until the deals get better), and they were telling me that there are a lot of home foreclosed but not put out on the market. Conspiracy theory says that the banks do not want to write down the asset prices on the book, and they rather take a beating on the loss in interest payment instead. That's the main location where the bailout has gone, to keep these banks afloat as they are in "unemployment".
 
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 Originally Posted By: PandaBear
My folks have been apartment hunting (as a hobby, not really in the market until the deals get better), and they were telling me that there are a lot of home foreclosed but not put out on the market. Conspiracy theory says that the banks do not want to write down the asset prices on the book, and they rather take a beating on the loss in interest payment instead. That's the main location where the bailout has gone, to keep these banks afloat as they are in "unemployment".
Same thing with homes here. Nearby development less than half completed has several bank-owned homes, move in ready. The bank will not sell the homes at a discounted rate eventhough they have already written off the loss. They'd rather have the asset on their books at X price than sell the house and realize the actual loss. The interest payment loss is probably offset by the tax write off anyway. Seems a silly strategy but I'm no accountant so I guess it works.
 
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 Originally Posted By: bretfraz
Seems a silly strategy but I'm no accountant so I guess it works.
It is actually a brilliant strategy when you have to shore up capital in short notice if you sell it at a huge loss rather than keeping it on the book. Remember, we are not in a market with equilibrium supply and demand.
 
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I was reading in the WSJ last night where some bank in TX (IIRC) demolished the remaining homes in a new subdivision. They were uncompleted homes with little chance of selling upon completion, and the lowest cost option was to bulldoze them, rather than sink any more money into completion. They were being vandalized, used for teen drinking and drugs, so the bank was being fined for their condition, so they cut their losses, spent about $100k (estimated) to have them torn down. I think it was 16 homes in various states of construction.
 
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 Originally Posted By: Tempest
http://www.moneyandmarkets.com/big-bank-profits-are-bogus-massive-public-deception-33228
 Quote:
How can our trusted authorities be so blatantly deceptive and still keep their jobs? Perhaps you should ask Fed Chairman Ben Bernanke. Not long ago, for example, he declared that the total losses from the debt crisis would not exceed $100 billion, while conveying the hope that most of those losses could be soon written off. Also around that time, the International Monetary Fund (IMF) estimated the losses would be $1 trillion, with only a small percentage written off. The IMF’s latest estimate: $4 trillion in losses, with only one-third of those written off so far. Bernanke’s error factor: He was 4,000 percent off the mark, in a world where 50 percent errors can be lethal.
They actually break down the numbers and techniques used by some of the banks. Perhaps Drew or one of the other accountants here can take a look.
Looks like "the boys" are strong-arming the Financial Accounting Standards Board, along with everyone else. FASB, a private, and once fairly independent organization of accounting professionals, is the major instrument in creating generally accepted accounting principles. http://guywong.blogspot.com/2009/04/fasb-compromises-on-fair-value.html I am 100% supportive of mark to market accounting. It's been the golden rule for 2 decades, and if you think about it, it makes sense. If you're a financial institution in the business of buying and selling financial assets, if those assets drop in value by 50%, don't you think it would be wise to mark them down on the books and expense them when they do? (and as an investor, you'd kinda want to know these things) And likewise, if they go up in value by 50%, don't you think you should mark them up and include them in income? But this same principle shouldn't apply to debt owed by a financial institution. That's asinine. It's yet another symptom of the securitization of debt in which debts can be manipulated and tucked away to others.
 
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 Originally Posted By: Tempest
They have already relaxed it.
I'm aware of that, but now you seem to be for it. Back when all the talking head righties were whining about mark to market, you thought it was a terrible thing!
 

Tempest

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It comes down to consistency, and I'm not an accountant. I understand the advantage of mark to market in that it shows current value, but I also realize that long term holdings can increase in value. So it is very possible to show massive losses in a down turn under MtM, to the point of insolvency, but that it's all "paper" losses. Kinda' like buying stocks and having them tank, only to have them go up again. You haven't really lost any money unless you sell them for less than you paid. What is the best way to resolve all of this? I don't know and it appears that high level CPA's and our gov. doesn't either...
 
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 Originally Posted By: Tempest
It comes down to consistency, and I'm not an accountant. I understand the advantage of mark to market in that it shows current value, but I also realize that long term holdings can increase in value.
This is not suppose to be hidden, it is up to the potential investor to determine in the market. Honesty is what counts.
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So it is very possible to show massive losses in a down turn under MtM, to the point of insolvency, but that it's all "paper" losses. Kinda' like buying stocks and having them tank, only to have them go up again. You haven't really lost any money unless you sell them for less than you paid.
It's not paper loss when you are buying those investment with borrowed money (i.e. deposits) and if there is a run on the bank.
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What is the best way to resolve all of this? I don't know and it appears that high level CPA's and our gov. doesn't either...
The best way is not to get into it in the first place, we need to resolve it first by mark it down and unload it at a loss to shore up cash, until it hits an equilibrium point. Then recover the loss overtime. But we don't have the strength to do it without bankrupting a majority of the banks and insurance companies out there, along with the healthy companies that do businesses with them. What the market seems to do at the moment is holding up until the CDS expire first, so that the gambler wouldn't get the bailout, then gradually unwind the assets as an expense from the profits, until the market reach equilibrium. Of course, with all the inflation along the way.
 
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