Solarbird (solarbird) wrote,

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mark-to-model is back

Good morning.

CNBC admits (or is the right word "claims"?) that they knew all along that AIG was just being used as a money-laundering conduit for a back-door bank bailout, and that this was at least part of the bank "profitability" shown in January and February, but didn't see fit to report it. Neat, huh? If true, they're playing the same games as the US political media. It's a lovely moment of blatancy, even as they attempt to mock the bloggers who did, in fact, note and report this. Awesome.

The Big Picture and The International Risk Analyst argue that CDSes are just a repackaged form of Reinsurance with Side Letter, a longstanding fraud wherein insurance is offered and issued for appearance purposes, along with a non-revealed side letter absolving the insurer of any responsibility for actual payment. This doesn't change anything we already know, materially - we already know that CDSes were issued en masse without any ability to cover them should they be triggered - but Reinsurance with Side Letter is a label typically associated with fraud schemes, and that matters. (Note: Reinsurance is not fraud. It's the side letter that makes it fraud.) They assert that AIG's contracts are, in substance and in fact, substantially fraudulent and should not, accordingly, be backstopped. I'm only glancingly familiar with The Big Picture and The International Risk Analyst is new to me, so I can't vouch for them or their analysis. But it's an interesting argument.

Now, this I do just consider more fraud: mark-to-model is back; under political pressure from banks and Congress, the FASB has more or less thrown mark-to-market - the idea that assets must be valued according to actual market value - under the bus. You might recall that mark-to-model - wherein assets are valued according to whatever theoretical model of value the owner chose to use - created Enron, amongst others; that systematic fraud led to these accounting rules.

You might also read this article by Michael Osinski, who was critical in writing a lot of the software used to create CDOs, MBSes, and so on. In it, he talks a bit about how you can invent math to show essentially anything, which is, of course, what most of these CDOs were built upon.

We've been here before, we were here until just recently, we all know where this led; hands up if you think going back to this approach will help solve the problem. Everybody else, note who has hands up, and consider who is fuelling this spring rally in the equities markets, particularly in the banking sector.

Perhaps not coincidentally, GMAC has just restarted subprime lending. I wonder how these will be modelled. I have some guesses, don't you? This is happening even as news leaks slowly out about plans to "ease" GM into a pre-packaged bankruptcy filing. (The Wall Street Journal doesn't buy it, on the idea that Mr. Obama would never challenge the UAW.)

Meanwhile Chrysler and FIAT seem to be reaching a deal, aided by US$6B in taxpayer money. Owner Cerberus would lose its equity in the auto company, but keep it in Chrysler Financial.

Everyone noticed already that home values in January plummeted at record rates; check out this graph, courtesy cow, to get a graphic comparison across various metro areas, and this table showing California Association of Realtor-reported price declines in California. Monterey County is the leader, down 73.73% from peak, from peak average price of just under $800,000 (August 2007) down to $210,000 (February 2009). (More from Mish, here.)

Canadian GDP fell at an annualised rate of 3.4% in the last three months of 2008, and Mr. Harper pledges to support "extraordinary steps" by the Bank of Canada. Similarly, we're seeing notes to that effect from some others in the G20 today, as Britain announces yet more steps in this direction.

Japan's industrial production fell sharply in February on still-falling exports.

Dr. Roubini has short but pointed commentary on the G20 summit.

Finally, without linking to anything, I just want to note that the "turnaround" and "improvement" being reported in some real-economy numbers recently are all slowings in the rate of fall in a few sectors, not actual improvements in those sectors. I've seen a fair bit of this language used recently in financial reporting in the general media; don't be confused by it. Things haven't stopped getting worse; they're just getting worse a little more slowly than in the last quarter of 2008. That... wouldn't be difficult. Dr. Roubini, again, at RGE Monitor notes again the permabull reporting in the financial media, and reiterates his projections as substantially lower than consensus.

That's all I've time for now. Good luck.
Tags: economics
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