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Wednesday, March 25, 2009

Yet another bank rant

I draw the S&P to DJ to about 8020 to get to the larger downtrend that earnestly began in early October.

As highlighted in this piece by Zero Hedge, banks have toxic assets marked on their books at inflated prices.  There are still significant unrealized losses on their books.  Despite efforts by politicians and bank executives to try to manipulate reality by freezing foreclosures, altering accounting standards and moving these assets to the balance sheets of the Fed and Treasury, the piper will be paid – or not, as the case may be.  The underlying assets on these loans have declined in value and many of them are zeros – it is very likely even if these private/public institutions to be named later buy them at inflated prices that those prices are still going to be below the marks, which will lead to more write downs and more pain for the financials.

The problem here is banks aren’t lending to good borrowers; it’s that most of the demand is from overleveraged borrowers with near-term cash flow needs.  Many potential buyers are skeptical of current market prices of both stocks and real estate.  I know how to fix this.  Let sellers find buyers.

These efforts to soften the blow of the downturn distort prices and impede the market’s attempts to find equilibrium at realistic prices.  Risk is a prime component of markets – it is the other side of reward.  The government is trying desperately to create a risk-free bubble for private market buyers of toxic assets.  By doing so, they will suck the reward side of the equation for all of us.  Take a report, taxpayers, you just bought a trillion dollars worth of overpriced real estate loans at inflated prices with massive leverage.  Enjoy.

1 comment:

drfinn said...

I don't pretend to understand enough of this to say who is right or wrong, but I read this a while ago and it made me think that maybe the banks aren't being 100% dishonest when they try to say the assets are worth more than market prices.

http://www.investorsinsight.com/blogs/thoughts_from_the_frontline/archive/2009/03/06/the-law-of-unintended-consequences.aspx

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