Imaginary Numbers

In March of 2009, I warned of changes likely to occur in Mark to Market accounting. Well they did. The result? Bonuses at the big financial institutions skyrocketed.

Mark to Market was replaced by Mark to Model which means: build an interesting mathematical equation that calculates that your crappy toxic assets are worth more than the market value and put that concocted value on your books.

WARNING: Don't try this home. It is illegal (fraud) for anyone else to do this but a financial institution.

SECOND WARNING: I need to get a little technical for credibility...

In first quarter 2010, FASB FAS 166/167 regulations were suppose to take affect because there are more crappy, toxic assets out there owned by the banks but they are kept "off balance" sheet. Again, don't try this home.

Simply put, 166/167 says off balance sheet stuff needs to start being put "on balance sheet". No more hiding the junk. But wait! We really didn't fix the old toxic asset problem, we only changed the accounting to make it appear we are adequately capitalized! We can't take on more toxic assets into our balance sheet - DO YOU WANT ANOTHER LEHMAN WEEKEND?

Fortunately, the U S Government, took the following action in December, thus delaying any type of true up. http://www.fdic.gov/news/news/press/2009/pr09230.html

So let me make it "dirt simple":

1. If a bank is under-capitalized it must use its profits to re-capitalize the bank and secure its health. If it does not have to use its profits for re-capitalization, it gives them to the bankers in the form of bonuses.
2. Mark to Model accounting ensures that re-capitalization can be avoided thus leading to higher bonuses.
3. Delay of FASB FAS 166/167 ensures that re-capitalization can be avoided thus leading to higher bonuses.
4. The banks continue to borrow money from the Federal Reserve at 0% interest and invest the money in assets that yield greater than 0% thus ensuring risk less returns, higher profits, and higher bonuses.
5. The bankers then save these bonuses because when all of this unwinds (and it will) the US Government isn't taking any of the blame and the bankers may suddenly find themselves facing legal problems. At which time, the bonuses will signed over to the lawyers who will represent the bankers.