Sunday 21, December 2008. Posted at 22:32
GaveKal about "fair value accounting" - "strange, convoluted logic..." (Dec 16)
So far, we have seen nearly US$1trn of capital losses and write-downs from banks over the past year or so, much of it related to US consumer debt, and yet, as a reader pointed out in a question sent to our offices yesterday, US household debt is basically flat over the past year. If banks are writing down debt, should there not be at least some decrease in liabilities on consumer balance sheets? Why is there a vast gulf between where banks have marked their toxic assets (X cents on the dollar), and where it is marked on consumer balance sheets?
This is an interesting question, and one that underlines the strange, convoluted logic that is part and parcel of “fair-value accounting”. If a $100,000 subprime mortgage is written down to $30,000 on the asset side of a bank’s balance sheet, then in principle the corresponding consumer liability should also be written down—and in this way a large amount of consumer deleveraging can and will be achieved. And indeed, this is what happens in the case of a write-off. If an asset is written off via a foreclosure, bankruptcy or loan restructuring, the corresponding liability is reduced by the exact amount. However, a write-down is merely an accounting item, which only estimates the ultimate write-off. It does not transfer any actual value from the bank to the consumer.
If consumers practiced mark-to-market accounting, then they would get “richer” when banks wrote down their mortgages, etc, in the same way that companies can “improve” their balance sheet when their debt is downgraded and falls in mark-to-market value. This is one of the many absurdities of modern accounting. In the accountants’ mark-to-market fairyland, banks suffer huge reductions in their assets by taking write-downs, but there is no corresponding reduction in the borrowers’ liabilities. As a result, the whole nation’s financial structure looks much weaker than it is. Ironically, it is only after debts are written off through foreclosures, bankruptcies or government-mandated loan forgiveness that the reduction in bank assets will be offset by reductions in consumer or corporate debt burdens. The nation’s finances then would suddenly start to look stronger.
Of course, if the consumer is still sending in his monthly checks, that is a different story… One example would be the Bear Stearns $30bn portfolio in toxic mortgage assets, which the government took over when it orchestrated the sale of BSC to JPMorgan. In October, the Fed wrote down $2bn of this portfolio—yet according to BlackRock, which was hired to manage the portfolio, the checks are still coming. “The cashflows are coming in very close to what we had anticipated,” said BlackRock’s president Robert Kapito, adding that there are many such situations in the marketplace, “where the cashflow is coming in very close to predicted values, but the current market to market, because of illiquidity… has been a big pressure on companies’ capital”.
The SEC is currently producing a study on the effects of mark-to-market accounting rules—as it was ordered to do under the TARP bill—and its deadline to publish this review is Jan. 2. The SEC has shown some flexibility on the issue (including the issuance of a guidance letter last spring that recommended broader interpretation of valuations on “distressed” (i.e., illiquid) assets. However, according to the latest reports, the SEC is not ready to sanction a complete dismantling of the system. Instead, early reports say the SEC will look at ways to refine the system. In light of the role mark-to-market accounting played in both exacerbating the bubble on the upside, and exacerbating the panic on the downside, many market players are undoubtedly still holding out for something bolder than a “refinement”…
Sunday 21, December 2008. Posted at 22:19
Dagens Industri den 22 december: Krisens bortglömda botemedel
Den brittiska regeringen har gått in med statligt ägarkapital i Royal Bank of Scotland. Men den tillåter samtidigt banken att avvika från att redovisa en del krympande tillgångar enligt ”fair value”. Det senare beslutet tycks innebära ungefär lika mycket för utlåningskapaciteten som ägartillskottet. Banken kan alltså överleva och behålla osäkra fordringar en längre tid, i hopp om att dessa ska öka i värde.
Ja, denna formulering fick inte plats i Dagens Industri den 22 december. Men den återfinns under Articles December 2008.
I gengäld har tidningen tagit fram ett foto på mig som gör att jag känner mig yngre än på länge.
Friday 19, December 2008. Posted at 20:40
Min artikel om finanskrisen i Liberal Debatts nya nummer
När Greenspan var ny som chef Federal Reserve, kom jag att gå på en promenad i Canada med en av Tysklands främsta ekonomer, Herbert Giersch, och en av dem som vartannat år satt bredvid Greenspan och bestämde den amerikanska penningpolitiken.
Den senare berättade bland annat att Greenspan sagt hur lätt det var att veta vilka åtgärder som skulle vidtas i olika situationer. Det var bara att dra i rätt spakar och trycka på rätt knappar. Men instrumentbrädan!
Här fanns problemet - vilken situation befann sig ekonomin i? Det var inte lätt att veta. Därtill var intrumenten för att mäta penningmängd alltför oprecisa.
Jag lade detta på minnet, och har dessutom inte glömt vad jag hörde.
Det inspirerade omkring 20 år senare mig till denna artikel (se Articles December 2008).
Fick f ö ett mail häromdagen som berättade att en annan ekonom som mätte penningmängden i USA fått andra siffror än de officiella, nämligen minus 10 procent - alltså samma som vid depressionen på 30-talet.
Sunday 14, December 2008. Posted at 20:19
Fiscal stimulus - like blood transfusion to a dead body
Seldom mentioned as one factor behind the financial crisis:the unhappy covariation of the capital ratio requirements for banks and the fair value accounting for equities (a new rule only a few years old).
This is an aspect, neither left or right in politics, but just pure simple (very simple) mathematics – which gave the bullish market a turbo effect – and the bearish market a panic effect.
This seems to be a main reason why the capital market now is so frightened to death. People and companies have great impediments to borrow – instead governments do it, and become heroes.
But fiscal stimulus in this state of affairs is more like blood transfusion to a dead body.
Wednesday 10, December 2008. Posted at 06:53
Nobeldagen. Skrivelse idag till regeringen om patentägarnas rättigheter
Hela skrivelsen, som tas upp på DN Debatt, kan läsas på Articles. Den är undertecknad av drygt 20-talet personer.
Monday 08, December 2008. Posted at 15:50
Saab och Volvo - fel fokus
I månadens krönika (Articles December) tar jag upp frågan om framtiden för Volvo och Saab.
Ett litet stycke som jag strök handlade om Sabena - det belgiska flygbolaget som gick i konkurs för ett par år sedan. Under sin 60-åriga levnad hade det aldrig något år gått med vinst.
Monday 08, December 2008. Posted at 15:41
Broad band break
Due to difficult and increasing troubles with my internet connections, there has been a pause in this blog.
People waiting for response on private emails may resend them, to be sure that I have received them.
Telia at last found the root at a bad functioning part of its system 3 kilometers from my computer.