Credit Writedowns » accounting

Use of lower-rated debt in repos has returned to pre-crisis levels

Guest Author — Tue, 07 Feb 2012 14:51:57 +0000

Looks like there’s a storm brewing in the U.S. repo markets. It figures: profit-center banks have every motivation to stay one step ahead of the regs and the pols. Since the gamekeepers have now gotten around to looking at proprietary trading and bringing derivatives onto exchanges, you can almost bet your first-born that the next crisis will be in neither one of these areas but someplace else entirely different

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[PREMIUM]: 2012 an inflection point toward S&P500 margin compression

Edward Harrison — Mon, 06 Feb 2012 13:36:04 +0000

What I have been saying throughout 2011 is that margin compression is going to happen no matter what. The cuts have been made and so margins cannot grow any higher from cuts. It has to come from operating leverage that increases as a result of revenue growth

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The Fetish for Liquidity (and Reform of the Financial System)

Randall Wray — Tue, 31 Jan 2012 19:00:03 +0000

So here’s the deal. What happened is that the financial sector taken as a whole moved into extremely short-term finance of positions in assets. This is a huge topic and is related to the transformation of investment banking partnerships that had a long-term interest in the well-being of their clients to publicly-held, pump-and-dump enterprises whose only interest was the well-being of top management. It also is related to the rise of shadow banks that appeared to offer deposit-like liabilities but without the protection of FDIC. And it is related to the Greenspan “put” and the Bernanke “great moderation” that appeared to guarantee that all financial practices—no matter how crazily risky—would be backstopped by Uncle Sam. And it is related to very low overnight interest rate targets by the Fed (through to 2004) that made short-term finance extremely cheap relative to longer-term finance. All of this encouraged financial institutions to rely on insanely short short-term finance

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Guess what truth and “truthiness” in the TARP bailout reveal?

Guest Author — Tue, 10 Jan 2012 16:50:17 +0000

Every 60 days the Government Accountability Office issues a report on the various TARP programs. Each report looks at how the Office of Financial Stability, the body currently overseeing all TARP programs, is performing on a given metric. The latest report looks at the estimated lifetime costs to U.S. taxpayers of the programs still in operation, and also at how the Treasury communicates these costs to the public. As for this latter question the short answer is: very selectively, indeed

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What’s underneath the TARP?

Guest Author — Tue, 22 Nov 2011 16:30:00 +0000

The GAO says that issues with the TARP are not “material” and chooses instead to go with the less damning term of “significant”. A three-year record of getting it wrong would seem to suggest otherwise. We get that the $470 billion TARP was thrown together in a hurry. But to have "significant" issues with this extremely high-profile and unpopular corporate welfare program for three years running speaks of deliberate carelessness. Why on earth should we believe all the trumpeting about how profitable TARP has been when they can’t get the numbers right? In fact this all leaves me wondering: what’s really underneath that

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Bill Black on potential Bank of America derivatives losses

Edward Harrison — Mon, 31 Oct 2011 20:46:40 +0000

In the video below, Bill Black discusses the issues he raised in a recent post about Bank of America’s accounting activities. At issue is the effect of its shift of assets from the holding company to its FDIC-insured subsidiary. In total, Bank of America owns derivatives with a notional value of $75 trillion. The Federal Reserve authorised this accounting manoeuvre despite FDIC objections

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Bank of America’s Death Rattle: Not with a Bang, but a Whimper

William Black — Wed, 19 Oct 2011 17:45:51 +0000

Bob Ivry, Hugh Son and Christine Harper have written an article that needs to be read by everyone interested in the financial crisis. The article (available here) is entitled: BofA Said to Split Regulators Over Moving Merrill Derivatives to Bank Unit. The thrust of their story is that Bank of America’s holding company, BAC, has directed the transfer of a large number of troubled financial derivatives from its Merrill Lynch subsidiary to the federally insured bank Bank of America (BofA). The story reports that the Federal Reserve supported the transfer and the Federal Deposit Insurance Corporation (FDIC) opposed it. Yves Smith of Naked Capitalism has written an appropriately blistering attack on this outrageous action, which puts the public at substantially increased risk of loss. I write to add some context, point out additional areas of inappropriate actions, and add a regulatory perspective gained from dealing with analogous efforts by holding companies to foist dangerous affiliate transactions on insured depositories. I’ll begin by adding some historical context to explain how B of A got into this maze of affiliate conflicts

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The End of the Fake Recovery

Edward Harrison — Wed, 05 Oct 2011 13:25:50 +0000

This is going to be a relatively long post. But I think it’s important. I have been meaning to update my thinking about the “Fake Recovery” which I heralded in early 2009 as the economy in the US began to turn. My view is that without policy support this recovery is now on its last legs. Here, I want to review how we got here in the context of the banking system and what that means about the banking crisis right now

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The Pyramid of Liabilities

Randall Wray — Mon, 12 Sep 2011 18:00:09 +0000

Leverage is the practice of holding a small amount of government currency in reserve against IOUs denominated in the state’s unit of account while promising to convert those IOUs to currency. This can lead to a “run” on private IOUs, demanding conversion. Since the reserves held are not nearly sufficient to meet the demand for conversion, the central bank must enter as lender of last resort to stop the run by lending its own IOUs to allow the conversions to take place. Here, we examine bank clearing and the notion of a “pyramid” of liabilities with the government’s own IOUs at the top of that pyramid

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Get Them to the Greek (Writedowns) – IASB

Global Macro Monitor — Tue, 30 Aug 2011 10:30:07 +0000

Wow! Just came across this piece from the FT about the concerns of the International Accounting Standards Board (IASB) of how European financial institutions have not reserved enough against potential credit losses on their Greece sovereign bond holdings

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Ideology and economics

Edward Harrison — Wed, 06 Jul 2011 20:00:27 +0000

For ideological reasons, one might believe that limiting or reducing government is better. However, it does not follow that doing so is a painless exercise

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Goldilocks, the Crash, and the Perfect Fiscal Storm

Randall Wray — Wed, 22 Jun 2011 12:50:25 +0000

Randall Wray revisits the Clintonian Goldilocks economy to find the seeds of the Global Financial Crisis, using the sectoral balance approach

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The Exponentiality of Municipal Costs (and Some Advice for Endowments and Foundations)

Frederick Sheehan — Mon, 14 Mar 2011 15:00:00 +0000

The pension costs of states and municipalities in years hence are often stated in a calculation of future liabilities. For instance, the future obligations of state and municipal pension funds are calculated (in frequently cited studies) at between $1.5 trillion to $3.5 trillion. Among the reasons for this range are the assumptions used by the actuary who produces the pension valuation, an annual exercise that shows a pension plan's current state of affairs. The liabilities, which, in turn, become pension payments, extend out 50 years or more: until the last member of the plan and all plan dependents have died. The actuary chooses an expected rate-of-return that will apply over the lifetime of the plan. The actuary also makes assumptions about the retention rate of current retirees, since benefits usually increase by years of service; the correct actuarial life table (how long will members and dependents live); and combines these with several other probabilities. Different assumptions are a reason for the $2.0 trillion range of future obligations, shown above. In general, the rate-of-return being assumed by states and municipalities is too high, often 8.0%. Thus, the discount rate for future payments is too high. (The discount rate is the same as the rate-of-return assumption in municipal plans. This is not true in corporate plans.) Projections of future payments by plans using such assumptions are unrealistic

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An informal history of the Savings and Loan Crisis

Edward Harrison — Fri, 11 Feb 2011 16:00:25 +0000

Here is a good video from Bill Black on the origins of the Savings & Loan crisis in the U.S. The roots of the crisis go back to the stagflation of the 1970s when interest rates spiked under Paul Volcker. As S&L’s borrowed short and lent long, it meant a mismatch between their long-lived and

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How to Regulate Mortgage Lending, Part 3

William Black — Tue, 25 Jan 2011 16:00:00 +0000

By William K. Black (cross-posted with Benzinga.com) Honest accounting is essential for effective regulation – and for integrity. It is also very helpful to prosecuting accounting fraud. The banking industry lobbyists, including the Chamber of Commerce, with Bernanke’s support, induced the House to extort successfully the Financial Accounting Standards Board (FASB) to gimmick the accounting

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Can the Fed Go Bankrupt?

Edward Harrison — Fri, 14 Jan 2011 18:30:32 +0000

Former Atlanta Fed President William Ford says, technically, yes, the Fed can go bankrupt. He argues that the Fed’s balance sheet is highly leveraged as a result of quantitative easing expanding its balance sheet. The result is that the Federal Reserve is thinly capitalized despite its having just transferred a record $80 billion in profit

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John Hussman on the Fake Recovery

Edward Harrison — Mon, 18 Oct 2010 21:41:06 +0000

John Hussman has a piece out today that dissects the current economic environment in two parts. In part one, Hussman puts a spotlight on quantitative easing (QE) and why it is unlikely to have the intentioned effect on the U.S. economy. And in part two, Hussman explains how the current technical recovery has been what

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A Trio of Bank Ratios

Annaly Salvos — Wed, 15 Sep 2010 15:30:12 +0000

by Annaly Capital Management Lest anyone think we missed it, on August 31st the FDIC put out its Quarterly Banking Profile for the second quarter of 2010. The headline was glowing: “Quarterly Earnings Are Highest in Almost Three Years.” The insured institutions reported aggregate net income of $21.6 billion in the quarter, impressive when compared

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Does History Repeat, Rhyme or Just Have Coincidences?

John Lounsbury — Fri, 20 Aug 2010 20:00:52 +0000

This week the following graph from http://www.chartoftheday.com http://www.chartoftheday.com/ has been annotated by the author to highlight similarities of the current era for stocks to a corporate earnings pattern traced out nearly a century ago. Annotation by John B. Lounsbury August 20, 2010 The time scale of the current era (right hand oval) is compressed relative

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Hiding Bank Losses

Edward Harrison — Fri, 13 Aug 2010 12:32:52 +0000

In a recent post on the money multiplier, a reader Luis Enrique asked about bank lending and capital constraints. Anecdotally, much of the reduction in credit is supply-constrained as well as demand-constrained. That means it’s a matter of banks not lending; it’s not just about firms and individuals not borrowing. Banks are capital-constrained even if

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Tepid Top Lines

Annaly Salvos — Tue, 03 Aug 2010 23:30:35 +0000

The market is engaged in a discussion over what the Federal Reserve will do next. St. Louis Fed president James Bullard published a provocative paper about ratcheting up quantitative easing to avoid the Japanese dilemma. Conversely, Philly Fed president Charles Plosser has said that any more stimulus at this juncture would be premature. Chairman Bernanke

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The Shadow Knows

Annaly Salvos — Wed, 21 Jul 2010 01:00:18 +0000

From Annaly Capital Management For those who missed it (and we had, until we were tipped by James Aitken, thank you very much), a vital paper was posted to the New York Fed’s website in the beginning of the month. “Shadow Banking,” a staff report authored by Zoltan Pozsar, Tobias Adrian, Adam Ashcraft and Hayley

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Davidowitz: Credit Crisis ‘A Gigantic Ponzi Scheme, Lies And Fraud’

Edward Harrison — Thu, 01 Jul 2010 18:30:00 +0000

Below is a very entertaining interview with Howard Davidowitz on financial reform and the credit crisis with Aaron Task and Henry Blodget of Tech Ticker (hat tip Scott). Davidowitz says don’t expect any substantive changes, especially when the underlying problem from the credit crisis was "a massive fraud" and nothing is being done about it.

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Free money: JPM paid to borrow on $271 billion worth of repos

Edward Harrison — Fri, 16 Apr 2010 14:14:45 +0000

We know that JPMorgan is not substantially increasing lending anytime soon. And we also know that banks are recapitalizing courtesy of a steep yield curve and near zero rates, what I would call free money. What I didn’t know is how free these funds truly were. An investor friend pointed out something curious buried deep

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Vicky Ward: On Lehman "we really do need prosecutors to get people into a courtroom"

Edward Harrison — Thu, 15 Apr 2010 17:16:05 +0000

Vicky Ward, author of "The Devil’s Casino: Friendship, Betrayal, and the High Stakes Games Played Inside Lehman Brothers," told Bloomberg that prosecutors need to get going if we are going to get any answers regarding why Lehman Brothers collapsed in a heap in the largest bankruptcy in US history and revealing a massive $150 billion

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Links: 2010-04-01 – American Zaitech, Ireland’s banks and more

Edward Harrison — Thu, 01 Apr 2010 11:41:40 +0000

China’s Debt Bubble: When Will the Ponzi Unravel? « naked capitalism FT Alphaville – Tracy Alloway – The IMF on Germany’s Bank-Asset-Berg Los Angeles, Toledo, Other Cities and States Press Municipal Labor Unions to Cut Pension and Health-Care Costs – WSJ.com Bloomberg on the CDO Shuffle That Helped Break AIG : Ryan Chittun – CJR

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Lehman Scandal: Where’s the Follow Up?

Edward Harrison — Tue, 23 Mar 2010 15:26:04 +0000

This is a post which originally appeared at New Deal 2.0 by Eliot Spitzer and Joshua Rosner. Eliot Spitzer is former governor of New York. He blogs for Slate.com. Joshua Rosner is managing director of an independent financial services research firm. It doesn’t take a rocket scientist — and certainly not an accountant — to

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A quick video primer on Repo 105

Edward Harrison — Fri, 19 Mar 2010 13:00:00 +0000

Here is a good video from Marketplace Senior Editor Paddy Hirsch explaining the mechanics of the now infamous Lehman Brothers 105 transactions. One or two tidbits, first. Even though Hirsch mentions Lehman undertook these transactions to pretty itself up during the credit crisis, evidence shows they had been doing these sale Repo agreements since 2001.

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Links: 2010-03-16 – More on Lehman’s accounting fraud

Edward Harrison — Tue, 16 Mar 2010 12:00:00 +0000

Lehman Lehman Whistle-Blower’s Fate: Fired – WSJ.com Blogs Beat the Press on the Lehman Brothers Scandal : CJR ABN Amro hielp Lehman bij manipulatie – Het Financieele Dagblad Dealbook Column – At Lehman, Watchdogs Saw It All – NYTimes.com Lehman’s Repo 105: More Than You Ever Wanted to Know – MarketBeat – WSJ Financial News

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Just what is the real level of government debt in Europe?

Edward Hugh — Mon, 15 Feb 2010 04:00:00 +0000

This is a post by Edward Hugh, who also blogs at Global Economy Matters. “If you don’t fully understand an instrument, don’t buy it.” To the above advice from Emilio Botín, Executive Chairman of Spain’s Grupo Santander, I would simply add one small rider: Don’t sell it either, especially if you are a national government

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Pension disaster makes states and cities into financial basket cases

Edward Harrison — Tue, 05 Jan 2010 02:31:56 +0000

Employees of US states and cities have much better pension plans than do Average Americans and this is creating some serious budgetary problems, one reason to be very careful in assessing municipal bonds, particularly general revenue ones. A recent FT article puts some numbers on this problem: The US public pension system faces a higher-than-expected

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Pension execs connect pension problems to hiring

Edward Harrison — Wed, 30 Dec 2009 01:07:28 +0000

While many companies can use the huge increase in market returns to mask a looming pension crisis, the problem is still acute. Because of actuarial accounting, pension funding problems are pro-cyclical. Companies look flush with cash during upswings to the point where the pensions can actually goose earnings. During downswings, this process works in reverse.

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On releasing Citi from TARP and banking by accounting subterfuge

Edward Harrison — Thu, 17 Dec 2009 16:54:41 +0000

Credit Writedowns has made it clear how little will there is in Washington for substantive reform in financial services. But, let’s be more explicit in this post about what policy makers are doing. I will use the recent Citigroup TARP brouhaha and changes to the implementation timetable of accounting rules as the vehicle for this

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U.S. forfeiting billions in future taxes to let Citi repay TARP

Edward Harrison — Wed, 16 Dec 2009 05:50:39 +0000

The Washington Post is reporting that the federal government has quietly decided to exempt Citigroup from a large future tax bill in allowing it to exit the TARP program. This is a backdoor bailout worth billions and is an outrage that demonstrates the lengths to which government will go to gift these organizations taxpayer money.

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Reaching for yield in the post-TARP era

Edward Harrison — Fri, 04 Dec 2009 14:28:17 +0000

When I read Yves Smith’s recent comments on Bank of America’s repayment of its TARP funds, I couldn’t help but think of a post I wrote six months ago called "Asymmetric information and corporate governance in bank bailouts." The gist is of the post is about the same as Yves’ and it was inspired by

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