Tuesday, December 22, 2009


Imagine you have a family member who has a gambling problem. But they don't call it a gambling problem. Instead they talk about "a system" that they have. It's guaranteed to break Las Vegas. In their minds they are not gambling. In their mind they are "investing" time and money (in their minds, they're not sociopaths either. But that's another story).

Their investments gambles, as we all know, require money. But the family doesn't have any money to spare. So the investor gambler has to find cash. If this is done legally they will go to a bank. Or they will draw money from a retirement account, or some similar pot of cash. Eventually their debt loads become unbearable and financial institutions either stop lending or require more collateral. Pretty simple, right?

Now imagine if your gambling family member is able to convince banks to lend money, no questions asked. A permanent line of credit. They can go to Las Vegas and stay until their bets pay off. Sweet.

So, which route would you follow if you were our gambling family member? (A) Put up more collateral, and go to Las Vegas, (B) Secure a permanent line of credit (no questions asked), and go to Las Vegas, or (C) Stop borrowing and actually work for your money?

I know. Tough call.

Our bailed out financial institutions chose Option "B." This is how they did it.

To gamble with a continuous stream of other people's money - with virtually no questions asked - our nation's financial institutions created a nice accounting gimick called Structured Investment Vehicles (SIVs). These SIVs were, in essence, legal shelters where financial institutions could dump all the toxic investments bets they made with borrowed money. In a few words, SIVs are no better than legal financial toilets.

These financial toilets were made possible because our nation's financial institutions convinced the experts at the Financial Accounting Standards Board (which the Securities and Exchange Commission oversees) that moving financial crap off of their books was a good thing.

Over time the financial sector was even able to convince naive market players and gullible media sycophants to refer to their debt-laden SIVs as "capital arbitrage." Creating and moving so much bad debt and toxic crap never sounded so sexy (though, it still looks like - fair warning, don't click if you're stomach's not up to it - this).

I bring all of this up because alot of the crap our nation's financial institutions created in their financial toilets (SIVs) is still not worth much. Much of it, if you will, still stinks. Think about it this way. If you bought a house for $300,000 in 2007 it might only be worth $150,000 today. You and I have to eat this kind of financial loss. The banks don't want to eat what they have in their SIV toilets. Part of the reason for this is that it amounts to hundreds of billions of dollars in losses, which means their balance sheets won't look as good as they're telling the world.

This is where it gets really fun.

Banks now want regulators to allow them to revalue the bad bets they made - which they shoved into their SIV industry toilets (or "trust preferred securities") - at the price they originally paid. This way, the fees and bonuses that are tied to these bets get paid off at full value. Banks win big (again). Incredibly enough, the regulators are actually considering the proposal.

Hey, I have an idea. Since the regulators are caving in on things like this, let's do the following.

I say let the banks revalue their SIV financial crap. But on one condition. You and I get to revalue our homes at the market value we saw between 2004 and 2007. And just like the financial clowns who are getting bonuses and fees from revaluing the toxic crap they created, you and I get to sell our homes back to the banks at 2004-07 prices.

What's good for the goose is good for the gander, right?

I know, I know. It will never happen. I just wanted to share with you how our market system has very little to do with accountability and competition, and more to do with favorable legislation, manipulated regulations, and bailed out financial toilets.

- Mark

P.S. As a point of reference, the revaluation of depressed assets that I've described above is referred to as "mark-to-market" accounting. Responsible industry insiders refer to the method as "market-to-make-believe." I discuss market-to-market in previous posts, and in my book. Click on the labels and themes below for more information.

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