The credit rating agencies finally acted with some sense of integrity and lowered the U.S. credit rating. It should have happened three years ago, but now that we’ve swept that under the rug, we need to turn our attention to the U.S. banking system. About two years ago, at the urging of Senator John McCain and Steven Forbes, banking regulations regarding the valuation of assets got stupid and ugly. The same smoke and mirror, rhetoric, bullshit that Wall Street investment firms used to sell derivative, hedge-funds, got used with regard to how banks valued their security, namely their real-estate-backed security. Bankers used to have to write-down the value of the security of their underlying loans if the security (real estate) went down in value. They had to do this because banks are supposed to be a safe haven, honest, stable and secure. If they made a loan on a piece of property that was worth $200,000 and the property dropped in value to $100,000 doesn’t it make sense that they would have to adjust their balance sheets accordingly to reflect that their security wasn’t as secure as it once was?
Kindergarten Accounting 101
If banks had to adjust their balance sheets by the decline in real estate security, they’d probably crumble and even collapse. Then LET THEM COLLAPSE! Better to have them go out of business and start-over, than perpetuate their lie of false security. Banks are literally teetering on the edge, but now, on paper, they appear to be solid. They’re not! Here’s a good example of why the current accounting system isn’t working. Since banks now don’t have to write down the value of their collapsed real estate security, they’ve halted foreclosures. Why, because if they actually foreclose on property they MUST show the upside down property as a huge write-down on their books. As it now stands, they’re letting thousands of properties simply languish, most notably higher end properties, because by foreclosing, their balance sheets would start showing more holes than my pasta strainer.
Value are Not Coming Back
Another reason why banks need to return to Mark to Market accounting is the simple reason that property values continue to slide and at the very least will not rebound “even close” to the highs of pre-depression 2006-2007 values. The demographics, employment and general world depression will not permit it. If you think real estate is coming back, I’ve got ocean view property at the tip of Florida I’d love to sell you. Bank assumptions that values will somehow miraculously return, are misguided and self-serving. It’s time banks take their medicine and reflect the true instability they’re representing, if for nothing else, than to stop enticing the average Joe on the street to deposit money into their shaky, falsely represented security.
The next time someone on CNBC tells you bank stocks are solid, look him straight in the TV and yell Bullshit!
