The Dangers of Accounting Changes, Part 2

A week ago Thursday, I wrote about the dangers of removing the Enron enacted accounting rules called mark-to-market.  How removing those rules would enable banks to puff up their books, even though the value of the assets (loans) had not changed, and in fact, may be declining on a daily basis.

Yesterday I read an interesting article linking the changes in the mark-to-market rules and the Latin American "debt crisis" of the 1980s.  While there were some incorrect statements in the article (the author believed the accounting rules were "regulations" which they are not, they are rules promulgated by a private organization, however that does not mean Congress and the Obama Administration do not pressure the Financial Accounting Standards Board (FASB) into changing it's standards) linking the recent changes to how the Reagan Administration handled the Latin American debt crisis is interesting and enlightening.

Compressing a lot of history, large multi-national banks, primarily led by Citibank, loaned billions and billions of dollars to countries like Chile, Argentina, Brazil.  The mound of debt finally succeeded in crushing the countries' ability to pay and Citibank found itself close to insolvent, holding onto "toxic" assets on its books without cash payments coming in the door.  Sound familiar?

But if Citibank declared those assets worthless, the bank itself would be bankrupt.  Instead, it continued to value the assets at the face amount of the loan plus interest owing, and instead of realistically negotiating with the countries for a reasonable debt repayment, the banks, International Monetary Fund, and the US Government hammered for interest payments, more interest payments, and yes, even more interest payments.  

The result was crushing to Latin America, which took years to get back on it's feet, meanwhile Citibank turned around and used the same business plan here in the United States with homeowners and businesses.  Not to pick on Citibank, but remember, it is the owner of Household Finance, a rather well known predatory lender who has been fined a number of times for violating many different states' consumer protection laws.  

The changes in the mark-to-market rules are an inducement for banks to NOT re-negotiate with homeowners on their loans, rather to hold firm, hammering for more and more payments.  And the results will more than likely be similar to what happened in Latin America, the housing market will take longer to stabilize, people's lives will be hobbled and crushed, and our economy will continue in this tailspin.

But hey, the banks' ledgers will look good to stockholders and isn't that what it is all about?

It's All Toxic Now

The Obama Administration's plan to help stabilize American financial institutions was announced just a few moments ago.  It calls for lending money to private investors who will purchase the so-called "toxic assets" from banks.  The idea is having those assets off the bank ledgers will free up cash and prime the bank lending pump.

The stock market, as I write this, is up over 300 points.  Wall Street goes wild, thinking, finally, the cavalry has come to the rescue.

But really, according to this fascinating article in Rolling Stone, it seems all we have done is rescue the very companies that continue to tell us they are too big to fail, that we are too naive to understand their products, and what is good for them is good for us.  All of these lines we have heard before.  I continue to believe that anything that is too big to fail is too big to succeed, and question the value of propping these behemoths up when really their foundations seem rotten.

What we are doing, by lending money to hedge funds and other private investors is continuing the desperate efforts to make money off of money off of leveraged money.  If these same financial institutions warn about the "moral hazard" of helping individual borrowers by lowering interest charged on credit cards or cram down provisions to modify mortgages in bankruptcy, how can they be so arrogant to not see the moral hazard they are asking us to endorse?  

I keep wondering where is the outrage?  Why are we not banging on the doors of this Administration, of Congress, telling them to forget focusing on the easy targets, the bonuses, and rather it's time to re-do the whole corrupt system.  We can not be held hostage, like the Americans in the Iranian embassy, by these corrupt and unethical corporations.  But oh, that's right, we don't have expensive lobbyists paid to make sure our interests are protected.