[Winstonm]

Recovering from a Balance-Sheet Recession

Combatting Tea Party mentality (rather than coddling to it) in order to prevent a repeat of 1937 should be high on the U.S. priority list, but I fear the subject matter is too esoteric to make it into an MSM 30-second sound byte and too complex to be reduced to a bumper sticker slogan.

Maybe, "It's the Jobs, Stupid!" has some sort of shot at a bumper sticker/sound byte that would wake people up to this pressing need.

Recovering From a Balance-Sheet Recession
By LAURA D'ANDREA TYSON
Author Laura D’Andrea Tyson is a professor at the Haas School of Business at the University of California, Berkeley

Quote

Despite misleading claims by Republican members of Congress and by Republican candidates on the presidential campaign trail that the size of government, regulation and excessive taxation have caused the jobs problem, business surveys repeatedly have identified weak demand as the primary constraint on job creation.

As one small-business owner told The Los Angeles Times, “If you don’t have the demand, you don’t hire the people.”

[gordontd]

I came to this thread expecting it to be about Apple's recent reorganisation.

[kenberg]

From the article:

[Quote]
In the United States, where mortgages account for most of the private debt overhang, the federal government should enact stronger measures to reduce principal balances on troubled mortgages and to make refinancing easier. These measures would help stabilize the housing market, would prevent future defaults and would free money for borrowers to use to pay down their debt or increase their spending.
[\Quote]

"should enact stronger measures to reduce principal balances on troubled mortgages": For example?

"make refinancing easier": How?

"debt overhang": Is debt overhang different from debt?

Perhaps one way to "reduce principal balance" is for the government to make it absolutely clear that there will be no intervention. Banks are having trouble unloading the properties that they have already foreclosed on, and they might see it to be a good thing to renegotiate so that they get some steady income rather than a property that is empty and not selling. Once they are clear that there are no other options.

During the thirties, before I existed, my parents had a mortgage. My father had a prolonged illness and they missed some payments. There was no foreclosure. My mother always explained this as being due to their excellent payment history before the illness. I suppose that is part of it and indeed my father recovered and the missed payments were made up. But as I grew older I came to believe that another part of the explanation was that this was the depression and the banks needed another house in their inventory like they needed a visit from Willie Sutton.

We need to consider all our options. The fundamental problem is that home buyers were idiots, mortgage lenders were unscrupulous, and regulators were out to lunch. They have left us in a mess.

[Winstonm]

Quote

"should enact stronger measures to reduce principal balances on troubled mortgages": For example?

A part of the problem being described is underwater housing. During the bubbly years, it is quite possible to have bought a house for $300K that is only valued now at $200K, so that there is negative equity and no banks will refinance that note.

It is possible that the government could step in and become the bank and refinance the underwater mortgages or guarantee the difference to banks who did so themselves. Although this would free income for consumption, this is a small part of the consumption problem but a HUGE part of bankings' problems.

What really needs to happen is a rightdown of real losses to real risk holders.

What really needs to happen IMO is for the FASB 157 modification to be rescinded. This more than anything else allowed zombie banks to lumber along as if alive.

FASB 157 modification cancelled mark-to-market accounting rules and allowed mark-to-who-knows-what accounting. This allowed the strain on bank capitalization to moderate because all the crap CDOs and MBSs on the banks' books could be accounted at 100% of value instead of the 10-30% values they are really worth on the open markets. If you were wondering about the Bank of America/Warren Buffet deal, this is why. Buffet is betting that the U.S. will always bail out Band of America.

The Swedish restructuring model would have eliminated the need for all these shenanigans and placed the banks on solid footing - and wiped out shareholders and given the bondholders their rightful haircut. Instead, risk was passed on to the taxpayer, and the banks are still in the same basic positions there were in before the bailout.

[phil_20686]

Winstonm, on 2011-August-30, 17:22, said:

FASB 157 modification cancelled mark-to-market accounting rules and allowed mark-to-who-knows-what accounting.

This is wrong. Mark to market accounting is very dangerous for banks, as the markets for pricing things may not exist. That is happening at the moment, where there are insufficient trades to establish a true market price for CDO's.

Mark to market accounting is just as arbitrary as any other type of accounting. Moreover, any attempt to enforce it literally would render every major bank and most countries insolvent. And would have done in any major downturn. This is because the total price for a banks assets is not the sum of its parts if you mark to market literally, as the market could not swallow the balance sheet of a major bank.

I mean, western banks are sufficiently profitable that they can recover from virtually any loss provided the market still thinks they are solvent. The current accounting rules allowing losses to be deferred reflect that reality.

[Winstonm]

phil_20686, on 2011-August-31, 06:29, said:

This is wrong. Mark to market accounting is very dangerous for banks, as the markets for pricing things may not exist. That is happening at the moment, where there are insufficient trades to establish a true market price for CDO's.

Mark to market accounting is just as arbitrary as any other type of accounting. Moreover, any attempt to enforce it literally would render every major bank and most countries insolvent. And would have done in any major downturn. This is because the total price for a banks assets is not the sum of its parts if you mark to market literally, as the market could not swallow the balance sheet of a major bank.

I mean, western banks are sufficiently profitable that they can recover from virtually any loss provided the market still thinks they are solvent. The current accounting rules allowing losses to be deferred reflect that reality.

Phil,

This argument was O.K. in 2009, but not now. The reason for this intervention was to prevent fire sales prices of assets - it didn't make the bad assets any better.

What this action presents is a false balance sheet - but the banks know they do not have the capitalization to sustain losses so they tighten lending standards.

You are right that many of the major banks are insolvent with mark-to-market. Using imaginary values for assets does not make them any less insolvent.

[Winstonm]

On the bright side, manufacturers of downward-pointing arrows should see record profits over the next decade.

[PassedOut]

Corporations are just people, but CEOs are super-people

Quote

This year's Institute for Policy Studies Executive Excess report, our 18th annual, explores the intersection between CEO pay and aggressive corporate tax dodging.

We researched the 100 U.S. corporations that shelled out the most last year in CEO compensation. At 25 of these corporate giants, we found, the bill for chief executive compensation actually ran higher than the company's entire federal corporate income tax bill.

Corporate outlays for CEO compensation — despite the lingering Great Recession — are rising. Employment levels have barely rebounded from their recessionary lows. Top executive pay levels, by contrast, have rebounded nearly all the way back from their pre-recession levels.

This contrast shows up starkly in the 2010 ratio between average worker and average CEO compensation. In 2009, we calculate, major corporate CEOs took home 263 times the pay of America's average workers. Last year, this gap leaped to 325-to-1.

I don't agree that "dodging" is the right way to describe making use of practices that are legal, but I would most certainly like to see the elimination of loopholes in the US tax law. Because the main business of congress is selling tax loopholes, though, I'm not optimistic.

[phil_20686]

PassedOut, on 2011-August-31, 16:09, said:

Corporations are just people, but CEOs are super-people


I don't agree that "dodging" is the right way to describe making use of practices that are legal, but I would most certainly like to see the elimination of loopholes in the US tax law. Because the main business of congress is selling tax loopholes, though, I'm not optimistic.

There is a nice analysis by the excellent felix salmon, you can find it here. The highlight being that the paper uses an idiosyncratic measure of corporate taxes which can easily go negative, especially for companies with large overseas operations. According to their definition, at twenty of those twenty-five companies, the part time janitor is paid more than their entire federal tax bill.

[phil_20686]

Winstonm, on 2011-August-31, 07:34, said:

Phil,

This argument was O.K. in 2009, but not now. The reason for this intervention was to prevent fire sales prices of assets - it didn't make the bad assets any better.

What this action presents is a false balance sheet - but the banks know they do not have the capitalization to sustain losses so they tighten lending standards.

You are right that many of the major banks are insolvent with mark-to-market. Using imaginary values for assets does not make them any less insolvent.

You are missing the point: all values assigned to an asset with a long maturity are imaginary. To even pretend to be able to price them accurately you need a high degree of certainty about future conditions. When such certainty does not exist, the prices have high volatility. If the economy recovers, assets based on mortgages will be much higher priced than if it tanks. Any form of accounting is just taking a random bet on what will happen in the future? Why would it be better to adopt accounting practices which would drive banks under when there is a very strong likelihood they will be fine?

[Winstonm]

phil_20686, on 2011-September-01, 05:45, said:

You are missing the point: all values assigned to an asset with a long maturity are imaginary. To even pretend to be able to price them accurately you need a high degree of certainty about future conditions. When such certainty does not exist, the prices have high volatility. If the economy recovers, assets based on mortgages will be much higher priced than if it tanks. Any form of accounting is just taking a random bet on what will happen in the future? Why would it be better to adopt accounting practices which would drive banks under when there is a very strong likelihood they will be fine?

Phil,

If the economy recovers, the market will increase the bid for ssome assets if the assets are deemed to be more valuable. Even then, the prices of extremely high risk assets won't make it back to full value. Some of these banks are holding on to worthless paper or paper that will never rise above $0.50 on the dollar marked at full value in order to obscure capilization needs until they can recover. Mark-to-market reflects current actual price, which is certainly an artificially surpressed number in forced sale conditions, but under normal business conditions reflects current projected value of accepting the risk - what someone is willing to pay to own the risk.

Although I don't disagree totally with your analysis, the trouble is that without mark-to-market there is an opacity over banking that obscures balance sheets and makes valuation and determination of the banks' capitalization impossible.

[phil_20686]

Winstonm, on 2011-September-01, 07:39, said:

Although I don't disagree totally with your analysis, the trouble is that without mark-to-market there is an opacity over banking that obscures balance sheets and makes valuation and determination of the banks' capitalization impossible.

Determination of a banks capitalisation is impossible. Your changes to not really make any difference to that, they just give on teh illusion that they know what is going on.

Check out this post. from john hempton. His analysis is dead on imo.

[Winstonm]

phil_20686, on 2011-September-01, 08:10, said:

Determination of a banks capitalisation is impossible. Your changes to not really make any difference to that, they just give on teh illusion that they know what is going on.

Check out this post. from john hempton. His analysis is dead on imo.

Hempton's analysis is correct, but it sitll depends on the definition of insolvent, doesn't it? In my view, a bank that must rely on the goverment forcing taxpayers to furnish it capitalization to weather its losses is technically insolvent.

The question is whether or not it is in the nation's best interest to keep a bank like Banf of America a zombie for years with taxpayers eating the losses or force the losses onto the shareholders and bondholders who rightfull own the risk?