With the stroke of a pen this past week, the Financial Accounting Standards Board (FASB) may well have helped save the banking system. In fact, with the changes in the rule concerning a bank's asset being subject to a "marked to market" (MTM) rule, the bank can more accurately value the asset subject to more relevant factors. For example, if a lender has mortgages that it intends to hold to maturity, and that mortgage is performing (the homeowner is making payments), it no longer has to be valued subject to distressed sales in the community. Foreclosures or defaulted mortgages heretofore, sometimes as few as one default in a community, could force the bank to mark down the value of their mortgages to that distressed price. This created a huge write-down of assets that otherwise were truly worth much more. That in turn created a dynamic downward pressure on the balance sheet, producing a crises in the bank's capital requirements.
Take the case of the Federal Home Loan Bank of Atlanta. In the third quarter of last year, according to a Bloomberg report, the bank had to write down its mortgage-backed securities by $87 million based on MTM rules, when in fact, their actual projected losses were only $44 thousand. In fact, by projecting the cash flow, says the Bloomberg report, along with an adequate discount, the true loss of assets intended to be held to maturity is insignificant. The same bank wrote down $98.7 million in the fourth quarter under the previous rules.
There are intelligent voices that would dismiss the significance of this due to accelerating losses in the mortgage market, but the immediate impact should be felt in such demonstrable ways as removing the attractiveness of bank stock "short sales" from the stock market, as well as freeing up more capital reserves on bank's balance sheets. Also in the Bloomberg report, William Isaac, former chairman of the FDIC, states that the MTM rules have removed $500 billion of capital from the financial system. He further states that due to capital leverage in lending being around 10 times, 'the rules "have destroyed over $5 trillion of lending capacity"'. Based on this, it can be safely assumed that liquidity of the credit markets was severely affected, if not frozen.
Even more compelling, the EU ministers are insisting that the International Accounting Standards Board (IASB), which administers these standards for Europe, adopt the FASB rules for the IASB. This standard would have immediate impact on European banks that are currently under water.
According to Reuter's, the true impact on the underlying securities may be small, from a trading perspective, but the fact is, it will have a huge impact on a bank's lending ability. Time will certainly tell, though it seems that this simple change could do more for the credit crisis than our pouring hundreds of billions of dollars into the system.
Nothing in life is easy. And trouble comes in bunches. Adages abound when one is faced with more chores than time. It's the unexpected disasters that flavor life. Or, sour it.
Take the case of our home last night when my lovely wife, Steffi, went to take a bath in the jacuzzi. She mentioned that the hot water wouldn't stop running. So, when she left the tub to jump in the shower, I got the handle off with the allen wrench, started looking at the faucet valve and soon had managed, in all of my mechanical aptitude, to remove the wrong part and that's when the geyser erupted.
Scalding water shot into the air, I couldn't get the valve to seat again and the panic set in. "Steffi, I said almost calmly, I need some help here." With a head full of shampoo, she stuck her head out of the shower and said, "What?" I repeated my plea somewhat more loudly. "Help me!" I stuffed a towel down on the geyser which was just about useless, as it quickly became saturated with piping hot water. I told Steffi to go shut off the water and after a couple of minutes, she came back, not knowing where the shutoff was. I then had her hold the towels (now several) on the geyser and ran across the house to shut off the main water supply.
Towel after towel flew onto the floor, in a vain attempt to sop up the tidal wave, which had now migrated into the master closet. Master closets, as we know, always have carpet for our footsie comfort in the morning. There was, I suppose, some humor to this as our friend, Judy, came in to see my naked wife with foamy hair running around in panic and me, with my soaked clothes looking like I had just taken a few rounds in the stomach.
Next, I discovered that there was no shutoffs for the jacuzzi itself. In the style of far too many remodelers, the one who had installed this tub, in clear violation of building codes, had never installed shutoffs for the hot and cold feeds. I had to discover this by taking a hammer and pounding the tile apron off of the side of the jacuzzi. As I stood in the pile of debris, up to my ankles in water, I heard a still small voice say to me, "It's not what happens to you in life, it's how you handle it". I can firmly state that I have not evolved. Every curseword I learned in the Navy came pouring back into memory and I can only guess that our friend Judy sees me now as a filthy, stinking, foul-mouthed heathen. I did manage to get the valve back into the hole, after pushing the piece that controls the flow to the spout down into the water pipe, lost forever. Now, the hot water just runs relentlessly down the drain.
After calling the professionals, Steffi poured me a tall glass of wine and I settled in to a night of turning the water on and off, running back and forth to the kitchen preparing dinner. And flushing. Our next door neighbors came over and soon I forgot about the debacle, though it took a bottle and a half of wine to accomplish this. I can safely say, one must know their limitations. I certainly was reminded of mine. And I can further state that Steffi is the most patient woman in the world.....
In all of civilization's history, there has always been a fundamental cry for defense of that civilization against its enemies. This calls for those within the society to offer to sacrifice their comfort and safety in that cause. Some decry the need for any organized efforts within a culture that require the possible death of even one of its citizenry. Some believe that there is never a good reason to send men and women into harm's way. In fact, war is a failure of diplomacy and reasonable men. But in all of history, despite the right or wrong of war, it has been waged. Then, there are a few who volunteer to take the place of another, to swear allegiance to a principle greater than themselves.
It is in this selflessness that honor flourishes. The military mind is one of service. It asks nothing of the citizenry but the resources to accomplish its mission. It swears allegiance to both Democrat and Republican. It contests neither conservative or liberal arguments when suffering the risks and discomfort that this service requires. When asked to leave friends and family and ship off to a foreign land, usually hostile to their native country, they do so sadly, but willingly.
It is not acceptable to question why an order is given. It is assumed that those decisions have been made in good conscience, with the country's best interests in mind. If that sounds unintelligent or foolish, so be it. Any time a person puts the greater good ahead of their own, it can be puzzling to those who have never known it. To the military mind on duty, politics are not important. Opinions ebb and flow over time like the endless sea. What is important to the military mind is that the soldier, the sailor, the airman, has what he needs to succeed in his task, protect himself and those around him and return home safely. There is no opportunity to reflect on the advisability of the strategy or political agendas.
While those among us strive for political advantage, your fellow countrymen, men and women around the world, at times place themselves in danger to protect our country's interests - your interests. If there is passion to be followed, let it be in assuring that our military personnel are recognized for this sacrifice. If there is a cause to be consumed with, let it be in supporting those who are out there every single day promising to give the ultimate sacrifice for a cause as simple as protecting you and me from our enemies.
With the meeting of the G20 in London, much has been said about the loss of American leadership among the world community. What isn't clear is just what place in the world's hierarchy America will actually take as the countries of the G20 work their way out of the current economic crises. Our current solutions for the meltdown are not met universally with dancing in the streets. Suffice it to say that asking more well-heeled allies to participate in printing money to re-invigorate our waning economies is not universally seen as an answer to an absence of private capital.
Germany and France see little profit in bucking their country's populist fevers and many more among the G20 are simply not in a position to do any more than they already have. With a dramatic decrease in oil revenues during the past six months, Russia's economy is teetering on a return to pre-Glasnost centralization. Medvedev, Putin's hand puppet, is asking the country's billionaires to provide employment guarantees and spending schemes that would prop up the failing economy. It should prove challenging enough to repair strained relations between the U. S. and Russia, re-initiate proliferation agreements and soothe Russia's ruffled feathers over a creeping NATO without pushing Medvedev towards adopting a western-style regulatory apparatus.
President Obama and Prime Minister Brown are trying to present a "glass half full" during the summit in which France's President Sarkozy has German Chancellor Merkel's full support in walking out of the summit in the absence of substantive agreements on policy. It is quite apparent that the world blames America for the meltdown and thus has most of the G20 countries pointing fingers and justifying their xenophobic agendas, much to the chagrin of the Anglo-Saxon members. This will be problematic in trying to effect a unified stimulus scheme, much less so, one hopes, in trying to reform the regulatory systems that so clearly allowed the failure in the first place. It is increasingly evident that the rest of the world judges the problem as being America's to solve.
China, a surplus nation, might flex its muscle to insist on certain regulatory revisions before it comes back to the Treasury auctions, which are showing the strain of a lack of foreign interest. The Fed cannot take the place of foreign investors forever. As the deficit being created to finance the current proposed budgets balloons to somewhere north of $8 or $9 trillion, the obvious question is; who will be there to finance the debt? It might well be that the single greatest sales job the Obama administration will ever have is restoring confidence in surplus nations that America is indeed the safest haven for their reserves. Without that, the United States will lose its leadership among world economies and at the very best, be relegated to an equal partnership among developed nations. Also, dare we mention that we will be stuck with a debt that, coupled with burgeoning entitlement programs as the baby boomers step up to the window, could force us to cut back a military that is already as big as the next 13 nations combined. A lack of our projecting American military might around the world will seal the deal. We will be a second-rate power with an economy buried in public debt and no doubt, without the investment capital necessary to fund the technological research that has kept us afloat as our industrial capacity has dwindled.
The most important agenda for President Obama will be to recreate the sense of security in our financial system. It is easy to spend money. It is far more difficult to produce real changes in the way we manage capital that will attract both foreign investment and loose the chains that currently restrain private investment. Any government enters a fool's paradise that believes that public spending can take the place of private investment.
With the stroke of a pen this past week, the Financial Accounting Standards Board (FASB) may well have helped save the banking system. In fact, with the changes in the rule concerning a bank's asset being subject to a "marked to market" (MTM) rule, the bank can more accurately value the asset subject to more relevant factors. For example, if a lender has mortgages that it intends to hold to maturity, and that mortgage is performing (the homeowner is making payments), it no longer has to be valued subject to distressed sales in the community. Foreclosures or defaulted mortgages heretofore, sometimes as few as one default in a community, could force the bank to mark down the value of their mortgages to that distressed price. This created a huge write-down of assets that otherwise were truly worth much more. That in turn created a dynamic downward pressure on the balance sheet, producing a crises in the bank's capital requirements.
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