主题：【讨论】“六个月之后不会再有投行存在了”。 -- 厚积薄发

Massive amount of creative accounting and other forms of balance sheet window dressing is occurring to prevent banks from recognizing their true losses. First, most financial institutions are putting increasing numbers of assets in the illiquid buckets of Level 2 and Level 3 assets. While FASB 157 should prevent manipulation of the valuation of such illiquid assets, forbearance by the SEC, the Fed and other regulators allows a massive amount of fudging. An insider told me that in a major financial institution the approach is as follows now: top management decide in advance what the announced writedowns should be and folks dealing with the toxic/illiquid assets come up with totally ad hoc assumptions to make sure that such illiquid assets are valued consistently with the decided-in-advance amount of writedowns and losses. This is not earnings smoothing; this is active manipulation and falsification of financial results aimed at creating even more obfuscation of the true state of financial institutions. This obfuscation is actively abetted by the SEC, the Fed and all other regulators that are now in forbearance crisis management stage where the objective is to avoid at any cost anything that may trigger a financial meltdown. Thus, most of these earnings reports are not worth the paper they are written off.

Additional earnings manipulation occurs in a variety of ways. First, ad hoc assumptions still used to value and write down level 2 and level 3 assets. Second, banks are leaving aside less reserves for loan losses that are much less than necessary; they do that by using ad hoc assumptions about future losses on mortgages, credit cards, auto loans, student loans, home equity loans and other commercial real estate loans and industrial and commercial loans. Reserves for loan losses have been sharply lagging actual and expected losses, thus padding earnings as decided by the financial institutions' managers. Third, there is disposal of illiquid and toxic assets in ways that misleadingly reduces the amount of actual writedowns. An example is as follows: suppose a bank wants to dump illiquid MBS or leveraged loans that are worth – mark to market – 70 cents on the dollar rather than 100 cents on the dollar. Then, instead of selling these at a price of 70 and showing a 30% writedown these are sold to hedge funds and other investors to a price closer to par – and thus showing in the balance sheet a smaller writedown – by providing a subsidy to the buyer of the security: so a hedge fund will buy such toxic securities at 80 or 90 cents and receive a loan to finance the transaction at an interest well below the borrowing costs for the funds. Thus, writedowns are then shown smaller than the true underlying loss on the asset and the bank finances that fudged transaction with earning less revenues than otherwise on its credit portfolio. This is an accounting scam that auditors and regulators are abetting on a regular basis. An example of such a scam is the recent Merrill Lynch transaction with Lone Start to “sell” its exposure to CDOs.

The bailout plan of Fannie and Freddie implies a direct bailout of financial institutions and helps them to report better than expected earnings in two ways. First, since these financial institutions hold massive amounts of agency debt the government bailout of the holders of such unsecured debt props the market price of the agency debt (reduces its spread relative to Treasuries) and thus allows financial institutions and investors to report less mark to market losses on the values of such assets. Second, after the bust of subprime, near prime and prime mortgage markets the market for private label MBS is dead with absolutely no origination of new MBS. Thus, today – as senior mortgage market participant put it – Fannie and Freddie are “THE mortgage market” as the only institutions that securitize and guarantee mortgages are Fannie and Freddie. Without the government bailout plan that last channel for mortgage securitization and insurance would be frozen and the ability of banks to originate even prime and conforming mortgages would be serious hampered and its cost sharply increased. Thus, the Fannie and Freddie bailout is actually a bailout of the mortgage market and of every institution that holds agency debt or the MBS issued by the two GSES and of every institution that is in the mortgage origination business. On top of this Fannie and Freddie have also been used as tools of public policy in order to further grease the mortgage market and the banks originating mortgages: their portfolio limits were increased; their capital requirement reduced; and the limit for what a conforming loan – the only ones that Fannie and Freddie can securitize – increased from about $420K to over $720K.

The Fed has been actively beefing up the earnings and balance sheet of financial institutions in four major ways. First, a 325bps reduction in the Fed Funds rate sharply reduced the cost of borrowing for banks and allowed them to enjoy a nice intermediation margin (the difference between longer terms interest rates at which they lend and the much lower short term interest rates at which they borrow). This steepening of the yield curve is a major subsidy to financial institutions. Second, the Fed has created a range of new liquidity facilities – the TAF, the TSLF, the PDCF – that allow banks and now non-bank primary dealers to swap their illiquid toxic asset backed securities for liquid Treasuries and that provide access for non-banks – and now also Fannie and Freddie - to the Fed’s discount window liquidity. Third, the bailout of Bear Stearns creditors – JP Morgan and many other counterparties of Bear – not only avoided a systemic meltdown and a certain run on the other broker dealers but it has led the Fed to take on a significant credit risk by taking off the balance sheet of Bear Stearns over $29 billion of toxic securities. So the Fed has directly and indirectly systemically subsidized and propped up the financial system and the earnings of bank and non-bank financial institutions. Fourth, a variety of forbearance regulatory actions – starting with the waiver of Regulation W for some major banks – have been used to beef up the profits and earnings of financial institutions and reduce their reported writedowns.

The entire Federal Home Loan Bank system – another GSE system that is another effective arm of the government - has been used to prop hundreds of mortgage lenders. The insolvent Countrywide alone received more than $51 billion of funds from this semi-public system. This is a system that has increased its lending in the last 18 months by hundreds of billions of dollars: Citigroup, Bank of America and most other US mortgage lenders have also been beneficiaries of this public subsidy to the tune of dozens of billions of dollars each.

The ability of US financial institutions to recapitalize themselves is constrained by financial protectionism: the only large players that have funds to put at work are sovereign wealth funds, especially from countries that are strategic rivals – not allies – of the US or from unstable petro-states. Thus, the backlash against such SWF will seriously limit the ability of banks and other financial institutions to recapitalize themselves.

This will be the most severe U.S. recession in decades with the U.S. consumer being on the ropes and faltering big time as soon as the temporary effect of the tax rebates will fade out by mid-summer (August). This U.S. consumer is shopped out, saving less, debt burdened and being hammered by falling home prices, falling equity prices, falling jobs and incomes, rising inflation and rising oil and energy prices.