The savings and loan’s decision not to settle the lawsuit made no economic sense for a solvent institution, but it made perfect sense if their principle objective was to maintain the false appearance of solvency for as long as possible. The savings and loan was undoubtedly inflating all of their assets, including my homely little lawsuit, to postpone the inevitable.Brad Miller, US Congressman for the Thirteenth District of North Carolina advances a possible motivation for the apparently illogical behavior of US banks.
What reminded me of that incident from my late, unlamented law practice was the persistent failure of financial institutions to modify mortgages voluntarily. It makes perfect economic sense for a safe and sound institution to avoid the ruinous costs of foreclosure by agreeing to reduce the principal and monthly payment for homeowners who can pay a mortgage, but not the one they’ve got. But according to the National Association of Consumer Bankruptcy Attorneys, fewer than ten percent of mortgage modifications in November reduced the principal. About half added late payments and penalties to the principal, and either increased monthly payments or added payments at the back end of the mortgage. If a borrower was in default already, what’s the chance the borrower can make a higher monthly payment?
There is still massive implicit accounting fraud going on. Senior management of all of these firms are completely aware that they are carrying bad assets on their books at inflated marks. It's happening virtually everywhere, including in hedge fund and private equity land.for me, as long as that suspicion obtains, there is no cure for the banking system; how do you diagnose what isn't revealed? whatever scheme is proposed, if it doesn't include full scale audits, strict asset assessment and transparency, no one is going to trust the banks -- as buffett sez: "Confidence in markets and institutions is like oxygen... when you have it you don't think about it... but you can't go 5 minutes without it."
The bad marks pervade everything. Nobody believes anyone's numbers -- because each person knows HE is lying, and so therefore he knows that everyone else is lying.
I remain absolutely convinced that one of the key reasons that liquidity has utterly vanished for a lot of these assets is that the people who own them don't actually WANT them to trade. If they trade, you see what they're really worth, and you have to mark them accurately or you really are committing fraud, and then it's clear that you're insolvent and you go kablooey. So best just to sit on the cancer and not talk about it.
There is another accession to the cause of peace and concord, which is also of great weight: I mean, that no citizen can have immovable property.—Spinoza, Political Treatise 7,8.posted by No Robots at 12:57 PM on February 5, 2009 [2 favorites]
The evolving discussions reflect the difficulties facing the Obama administration as it endeavors to come up with a new look for the maligned financial bailout. It wants to create a comprehensive plan that appears different from the one crafted by the Bush Treasury, but is running into many of the same thorny questions encountered by former Treasury Secretary Henry Paulson, such as how to value the bad assets owned by banks.emphasis added; it's not the appearance of change that we can believe in -- obama promised an open, transparent and accountable gov't... i mean i feel like if 'we're the change' then we might as well start our own banks -- yay mefi credit union! -- and, perhaps not before too long, our own currencies :P
The administration has also been wrestling with how to help resolve the financial crisis while not appearing to bail out banks at the expense of taxpayers. The administration has been trying to find the balance by crafting programs that use taxpayer dollars but on terms that don't make it seem like a giveaway, including the executive-pay curbs announced this week. At the same time, in order to revive the financial system, the administration needs to create a program that encourages banks to participate.
That tension has been one of the complicating factors in creating a so-called bad bank to buy up toxic assets from financial institutions. To help banks the U.S. needs to pay a high enough price for the assets. But lawmakers are already angry about accusations that Treasury overpaid for assets and the Obama administration wants to avoid being seen as bailing out banks at the expense of taxpayers. If the government pay too little, banks would have to take further losses.
The discussions have shifted several times. As recently as last week, the apparent centerpiece of the revamped plan was a "bad bank" and an insurance program to protect losses on the remainder. Both ideas may still be included.
Fed and Treasury officials have said since announcing the TALF program in November that it could be expanded to include other asset classes. But the program is untested and hasn't yet been launched.
Finalizing the details of the plan have proved challenging. Under the program, investors, including many hedge funds, would get cheap, nonrecourse financing from the Fed which they would use to buy asset-backed securities tied to auto loans, credit card debt student loans and small business loans. Officials are still sorting through the terms they would offer.
A report issued by the Treasury Department's inspector general Thursday warned the TALF program was potentially vulnerable to private-sector fraud unless it included tough safeguards.
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posted by empath at 11:40 AM on February 5, 2009 [3 favorites]