Monday, September 21, 2009

The Financial Crisis…What happened?

IMPORTANT: Financial Accounting Standards Board changes mark-to-market rules

Hey All,

Please take a peek when you get a break in your day. For those of you lacking a natural affinity for accounting rules (I’m right there with you), I’d suggest you get some chocolate or coffee, or a stimulant of your choice, before reading this.

Get jacked up on something and tear through this because it is very important to understand…they flipped the board and changed the rules of the game.


Here are viewpoints from the New York Times and the Wharton School of Business from the University of Pennsylvania…


The change seems likely to allow banks to report higher profits by assuming that the securities are worth more than anyone is now willing to pay for them. But critics objected that the change could further damage the credibility of financial institutions by enabling them to avoid recognizing losses from bad loans they have made.

Critics also said that since the rules were changed under heavy political pressure, the move compromised the independence of the organization that did it, the Financial Accounting Standards Board.

During the financial crisis, the market prices of many securities, particularly those backed by subprime home mortgages, have plunged to fractions of their original prices. That has forced banks to report hundreds of billions of dollars in losses over the last year, because some of those securities must be reported at market value each three months, with the bank showing a profit or loss based on the change.


But not everyone agrees that mark-to-market rules have been as damaging as the banks claim.

“I’ve never bought the idea that market-value accounting caused this crisis,” says Wharton accounting professor Brian J. Bushee. Changing accounting rules to accommodate the banks would be like changing the scoring system for tennis, he suggests. “It wouldn’t make you a better tennis player. Changing how we keep score — what these assets are worth — won’t change the problem…. In a sense, that’s what [the banks] are asking investors to do — to say, ‘Let’s use these four-year-old values, not what things are currently worth’”….

Bankers bitterly complained that the current market prices were the result of distressed sales and that they should be allowed to ignore those prices and value the securities instead at their value in a normal market. At first FASB, pronounced FAS-bee, resisted making changes, but that changed within a few days of a Congressional hearing at which legislators from both parties demanded the board act.

If the FASB, which sets accounting rules in collaboration with the Securities and Exchange Commission, approves the rule change tomorrow [which they did], banks would be free to carry troubled assets on their books at higher prices, avoiding requirements to shore up balance sheets with new capital they cannot get now.

But potential buyers of toxic assets will make their own valuation assessments regardless of what the accounting rules allow the banks to claim, says Wharton finance professor Itay Goldstein. “After all, if assets are not marked down, investors would still fear that they are worth less” than they once were.

Mark-to-market defenders say that using market prices is the best way to derive honest values. Allowing banks too much latitude would paper over the problem, making banks look healthier than they are, they say. “It’s an issue because … the year before the crisis was the first in which firms were required to follow a new set of fair-value measurement tools,” according to Wharton accounting professor Catherine M. Schrand….

On the other hand, if the government’s toxic-asset purchase program does generate significant trading, the whole issue of how to value the assets remaining on banks’ books will become moot, since there will then be enough fresh data to justify mark-to-market accounting, says Wharton finance professor Franklin Allen.

Skimpy Trading

Many experts acknowledge that the skimpy trading in toxic assets creates difficulties. “If there is no trading then you can’t really mark to market,” argues Wharton finance professor Jeremy J. Siegel. “I think there’s been trading that is at too low a price…. I wouldn’t mind suspending mark-to-market for those assets right now.”

But Susan M. Wachter, professor of real estate at Wharton, thinks that for the financial and economic crises to begin to ease, the “murky” condition of banks must be clarified. That cannot be done with accounting changes that simply make the assets look more valuable, she says, arguing that the banks must instead be encouraged to get rid of those holdings. “In order for capital to come to banks, they must disgorge their non-performing assets. That mark-to-market component is necessary.”

Banks’ in-house systems cannot give accurate valuations because too many factors are unknown, such as whether the economy will deteriorate further and whether there will be additional government stimulus spending, according to Wachter.For the banks, a chief benefit of flexible accounting is that it will make them less likely to run afoul of capital-reserve requirements, since their balance sheets will look stronger.Siegel notes that if capital requirements are the issue, regulators could help the banks by easing those instead of changing accounting rules. Wharton finance professor Marshall E. Blume, agrees. “The regulators are in a difficult position, because these companies clearly are not as viable as they were. Having said that, you don’t change the accounting to make it look like they are viable.”

Wachter insists that capital requirements should be based on market-to-market rules, because investors who could pump capital into the banks will be reluctant to do so if they think accounting tricks make banks look healthier than they are. Easing the mark-to-market requirement, she says, “is a road to a long and sustained recession.”

The Stock Market had the same value on 9/11/01 & 9/11/09


“This has been circulating Wall Street trading desks via UBS’ Art Cashin: On both 9/11/01 and 9/11/09, the Dow industrials were at 9605 (it was the close of the 9/10 in 2001, since markets never opened on 9/11 2001).”

Average American’s wages stagnant for first decade of the new millennium


“Median household fell to $50,303 last year, from $52,163 in 2007. In 1998, median income was $51,295. All these numbers are adjusted for inflation.”

Not all solar-electric systems require transmission lines

Dear Christopher Martin and Mario Parker,

Your misrepresentation occurs because you do not clarify “from remote areas,” meaning that the wind or solar requires transmission lines. Caveat: not all solar systems require transmission lines.

Most solar-electric systems are localized, meaning each home or business powers itself with rooftop panels that feed into the individual building’s meter. Therefore there is no transmission line needed.

On the other hand, solar-thermal electric systems, usually installed in the desert, do need transmission lines. Large-scale solar-electric systems in “remote areas” would also need transmission lines.

All of these statements from your reported story misrepresent the reality of solar electricity:

–”A new solar-power facility costs three times as much as a coal-fired plant of the same size, the Energy Department estimates.”

* A solar-electric system on an individual home or office saves money, especially if leasing the solar system. Grid electricity prices continue to rise, but using a solar-electric system effectively puts a cap on the cost of running one’s home or business. You should have also mentioned that there is an environmental cost to burning coal–rising sea levels, flooding coastal areas, etc.

–”Regulators don’t know when additional wind and solar power would disrupt service.”

* A solar-electric system on an individual home or office does not disrupt electric service to the respective home or office. In California, the meter swings both ways: excess solar electricity spins the meter backward to build up credits on the customer’s account; the credits can be used later as debits. A solar-electric system on an individual home or office does not disrupt electric service to the grid either.

–”The North American Electric Reliability Corp., a nonprofit group based in Princeton, New Jersey that oversees power systems serving 334 million people, said in an April report that grid monitoring must be improved to add wind and solar power without harming reliability.”

* A solar-electric system on an individual home or office does not harm reliability of electric service.

Once again, for accuracy’s sake, all of these statements need clarification that the solar or wind power is coming “from remote areas,” and therefore would require transmission lines.

Your story is about “Transmission lines,” however you do not make that explicit. Your headline especially confuses the issue of solar electricity’s very reliable and economical potential to produce CO2-free power (without any hazardous byproduct, like the kind left behind by nuclear energy).

Nowhere in your reporting do you two denote that there is an economical solar-electric solution that does not require transmission lines. That is a very important distinction for those of us who already use solar electricity and are saving money by doing so.

Thank you very much for your attention to detail and your efforts to get accurate information to the public. The Press performs an essential function in our democratic society; it’s not mentioned in the First Amendment to our Constitution for nothing. Now please take more care from here on out, and exercise your awesome power to report facts and evidence to the public with more diligence and clarity.

Your Fellow American,

Justin Bass

A solar-electric system on every roof and a plug-in electric car in every garage

House bill to increase Pell Grants (college $$$)

* Grants do not have to be paid back, and therefore do not increase the debt of the student like a loan would do.


Putting the government in charge of all federal loans would save taxpayers an estimated $87 billion, according to the Congressional Budget Office. The CBO says the figure could be much lower, $47 billion, when administrative costs and market conditions are considered.

The money would boost Pell Grants for needy students, increasing the maximum grant by $1,400 to $6,900 over the next decade. It also would pay for a new college completion fund, community college reforms and more college aid for veterans.

“No student in this great country of ours should have to mortgage their future to pursue their dreams,” said the bill’s sponsor, California Democratic Rep. George Miller, chairman of the House Education and Labor Committee.

Yet the money also would be spent on things that don’t help pay for college, such as construction at K-12 schools and new preschool programs.

And while the measure would increase Pell Grants, it would do nothing to curb college costs, which rise much faster than Pell Grants do.

As consumers, college students probably wouldn’t notice much difference in their loans, which they would get through their schools. Broadly speaking, the bill doesn’t do much to make loans cheaper or help pay them off.

It does keep interest rates for need-based federal loans from jumping from 3.4 percent currently to 6.8 percent as scheduled in 2012. Rates for most other loans would remain at 6.8 percent.

Still, the bill’s changes to federal college aid programs would be the most sweeping since their creation in the 1960s and would fulfill a campaign promise by President Barack Obama.

The measure would end the subsidized loan program under which private lenders made $56 billion in government-backed loans to more than 6 million students last year, compared with $14 billion in direct loans from the government.

The bill would also shorten the labyrinthine college aid form, which Obama proposed to eliminate altogether when he ran for president.

The Joker-sign-maker didn’t even vote

“To accuse him of being a socialist is really immature. First of all, who said being a socialist is evil?,” said the man who made the image of Obama-as-Joker.

Protest in D.C., September 2009

Seeing what happened in D.C. reminds me of the “fallacies of logic” I learned along the way. #1 The ad hominem attack, like a school yard name-calling incident: “He wears purple shorts, he doesn’t know anything.” In much the same way, a caricature of President Obama as Joker-portrayed-by-Heath-Ledger does not depict the actual man in the White House. There is no logical argument in it; it is Demagoguery.