The losses reported by banks are not real

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 aftermath.

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.

You can't really expect Bank's ballance sheets to be accurate when they create money out of thin air for loans do you?

I mean come on, our whole economic system is based on debt, it's NEVER going to be any better if we keep using this system. Pumping more money into it only creates more debt.

The system REQUIRES debt, in order the have money.

This depression will occur, because the system is ready to collapse from years of mis-management and the Fed's ridiculous idea of what an economic system should be.

alas its far more correct to say the profits of the banks were lies, the loss is just the realization that they never really had this money -however they spent it, this now means we're much more indebt than we thought.

These might be pretend numbers but the effect will be real.

There will be no doubt about their balance sheets in the very near future....every major US and European bank is utterly insolvent, and no amount of imaginary capital can fix the problem now....a wonderful opportunity for a fresh start.....after the public lynchings of course...