posted on Jan, 20 2009 @ 07:05 PM
Many of the losses currently being reported by banks are not real.
Take for example todays Bank of New York earnings report:
Bank of New York earnings report
Results reflected a charge of 65 cents per share from $1.24 billion in writedowns largely for securities tied to "Alt-A" mortgages, which often go
to people who can't document income or assets. Chief Executive Robert Kelly said the writedowns reflected "enormous liquidity discounts for
mortgage-backed securities. We believe that the actual incurred loss will ultimately be materially lower. "We should have the opportunity to earn
back a substantial portion of the write-downs over the remaining lives of the securities."
Much of what is happening is just financial accounting sleight of hand. Banks are being required to value assets based on what on what the current
illiquid market will pay for them, not what they are worth if held until maturity. That means in most cases, mortgages and other loans which are
current in both principal and interest have to be written down dramatically to match what the market is willing to pay for them. As a result banks
are being forced to dramatically understate their true values.
Mark to market accounting replaced fair value accounting in the last couple of years. Before the change banks and other companies would value their
loans based with a formula based on underlying collateral value and cash flows from principal and interest. A much more reasonable of valuing these
loans. This change alone put many banks in danger and helped to accelerate the destruction of several national banking and brokerage firms.
Obama's administration has already pretty much decided to change accounting rules away from mark to market, This will bring immediate balance sheet
relief to virtually all financials. Had they done this before it would have prevented many of the recent failures. Since they didn't it is obvious to
me that it was all a well-planned take down. Change the rules, crash the system, pump your favorite banks full of money, let then take over your
competitors on the cheap,and then reverse the rules leaving them in better shape then they have ever been and they all make ridiculous money in the
I guess the main reason for this post is to not let them be the only ones to benefit from this. Accounting rules will change and they will turn many a
toad into a prince. I would be buying those princes in anticipation of this accounting change and the earnings that will result from them.