Wednesday, August 17, 2011

Dispelling Popular Delusions: TARP And Balance Sheets

If I hear one more time about how TARP "worked" I'm going to throw up.
Let's look at it in pure chart form, because that puts into stark relief the lie often told:

TARP passed on 10/3/2008.  The XLF (Financial Sector exchange-traded fund)) at the open of that day stood at $20.19.  It never rose above that number from that day forward until the market finally bottomed in March on the 10th.
What's the importance of that date?  It was two days later that Paul Kanjorski (D-PA) stated that:
“We can, however, no longer deny the reality of the pro-cyclical nature of mark-to-market accounting.  It has produced numerous unintended consequences, and it has exacerbated the ongoing economic crisis.  If the regulators [SEC] and standards setters [FASB] do not act now to improve the standards, then the Congress will have no other option than to act itself.”
That was a clear threat.  You could call it extortion if you like; FASB (the accounting standards board) was told to either allow financial firms to lie about the market prices of their alleged assets or Congress would legislate into effect that which FASB refused to.
TARP, objectively, failed.  The financial sector's market cap was decimated to the tune of more than 60% after the passage of TARP.
It was only the legalization of accounting fraud that stopped the slide in the market and destruction of the financial sector.  Injecting hundreds of billions of dollars of new loans into them (via TARP) did nothing; the money was simply sucked into the black hole of insolvency revealed by factual and honest accountingHad fictional accounting not been forced upon FASB and foisted on the market TARP would have been a 100% loss.
TARP was neither necessary nor did it do anything whatsoever in furtherance of stability.
The market's pricing mechanism does not lie; it is not my opinion nor any other person's - rather, it is the collective opinion of everyone in the market.  You simply cannot argue with it.
The problem with the FASB change is that while it temporarily "rescued" the financial sector it was insanely corrosive to long-term stability.  In point of fact it was specifically this change that has led us to where we are now.  Instead of true asset valuations and transparent balance sheets that support the claimed market values and are behind the liabilities on bank balance sheets we are back to having only "confidence" in our financial system.
But "confidence" is easily lost when it is based on nothing more than a con.  And a con it is - derivatives have not been forced into the open and marked to the market on a nightly basis, chained risk has not been removed, fantasy valuations are being maintained on mortgages and other instruments where the claimed balance-sheet value bears no relationship to the open market liquidation price of the asset in question and more.  The market is once again calling "BS!" on these claims as Citibank is trading at half of it's book value and Bank of America is trading at roughly one third of book value!  Morgan Stanley, JPMorgan and Goldman are trading under book value as well.
These are clear statements by the market that the alleged "asset values" on these bank balance sheets are lies.
The problem becomes apparent if you substitute the market value for book value.  In that case, due to the leverage and tiny reserves (in the form of capital ratios) in these institutions every one of them is instantaneously insolvent, with most of them so far underwater that without helium at that depth you'd be narced to the point of offering your diving regulator to a fish!
Of course the argument will be made that the market is often wrong about valuation and this may, in the current case, be true.  The problem is that there is no way to judge the validity of this argument in the present tense nor on a forward basis since these allegedly-unobservable marks remain claimed but not proved up - since they don't have to be.
Banking does not have to be a con job; the creation of systemic risk in this fashion is an intentional act made possible and furthered by governments.
We have run a scam for 30 years that operated on the premise that lying about asset valuations and ever-increasing debt loads were in some form or fashion "prosperity."  This was not true 30 years ago and it is not true today.  These policies and their promulgation are not only worthless they're dangerous, as they are flat denials of irrefutable mathematical facts - specifically, the fact that two exponential (compound) functions, where one has a larger exponent than the other by any amount, will inevitably run away from each other and thus cannot result in stability.
This nonsense must end.

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