An interesting change happened in the beginning of 2009. Obama and crew changed the accounting rules for banks. Banks no longer had to "mark to market" their assets. What does this mean? It means that if a bank has a bad asset, such as a mortgage that was no longer performing, or was essentially in default because the collateral no longer was sufficient enough to cover the note, that it is no longer required to declare/book the impending loss SO LONG as the bank states that it would keep the asset to term. It is a desparate strategy, but not without some theory behind it. The government hoped that the banks could earn their way out of this mess, and eventually book their losses with huge profits to offset the red ink. That was the hope when it was decided to throw massive money at the banks. Of course, this was reserved only for the largest banking institutions whose failure would have traumatized the economy. Had we allowed those banks to fail, the economic pain would have been unprecedented. On the flip side, had we held these institutions responsible for their mistakes, they would have gone into bankruptcy and would have been purchased for pennies on the dollar by businesses that had avoided the risks that buried these boys. It would have been "bye bye" banks, replaced by the smarter operators that would have been able to "buy buy" the banks. Never happened though.
The masters of the universe proved to be immune from confronting their errors. This is now commonly known as the "too big to fail" theory. It is the modus operandi of the day, and we will
pay for these bailouts doubly and then some when the chickens come to roost. That having been said, let's go back to the premise of this post.
These big banks seem to be making crazy money. Huge performance bonuses are paid to productive employees. As well they should be. If I had a contract working for one of these banks and was bringing in serious money backed by a compensation agreement that called for a draw and a commission, I would expect to be be paid. The fundamental problem with this situation is that these banks should have been allowed to fail. It would have been regretable for these employees that would have lost their bonuses. Perhaps even unfair philosophically. But life is unfair. I would not have worried about these blokes however. Their winnings were also philosophically unfair. When you bet on a losing team, you are supposed to lose. That's the economic contract that we make with an employer: they bet on us, and we bet on them. If we don't perform, we are shown the back exit. If they don't perform, we can choose our exit, but
the end result is the same. As so it should be. I have owned businesses where I could not recruit top employees because my business viablity was uncertain. Alas, it cuts both ways.
As always, I digress from the main point, and it is the following: these huge banks backstopped by the government are broke. That they do not have to "mark to market" their assets continues the charade that we live under. Look at the "little" guys. Last year's bank failures cost the FDIC more than the entire mess that came to be called the S & L disaster of the early 90s. There were 120+ bank failures last year. There are currently OVER 550 banks on the problem list. The FDIC is essentially broke. They are raising funds by increasing their premiums to solvent banks in order to continue their mandate for existence. I have a dear friend that is on the board of a tiny bank whose main task is to figure out a way to pay these additional premiums. He is not optimistic. How ironic. We'll kill the little guys to finance the bigger failures. When is it going to stop? Wish I could give you a bouquet of optimism. It will not stop. Property values continue to decrease......unemployment is brutal (and DO NOT think for ONE moment that it is actually 10%), new jobs pay less, the consumer valiantly tries to deleverage out of necessity but at the expense of our consumer spending driven economy, all the while trying to pay mortagages on properties that are upside down. Soon, strategic default will be viewed as noble and certainly not a failure. Sound like a downward spiral? Damn us all, it is.
Could Obama have done anything about it? Stay tuned.
