Bank Fiction

Submitted by Bill Lucas on Sun, 01/04/2009 - 20:42

Last week the Financial Times ran an excellent article called "Chronicle of a Decline Foretold" by Niall Ferguson in their FTWeekend section.  It was a work of fiction, an imaginary year-end summary of the economic events of 2009.  You should have a look.

In it, he notes:

In 2008, the Bank of England had estimated total losses on toxic assets at about $2.8 trillion. Yet total bank writedowns by the end of 2008 were little more than $583bn, while total capital raised was just $435bn. Losses, in other words, were either being massively understated, or they had been incurred outside the banking system.

He later invents a quote from an "indignant Michigan lawmaker":
"Nobody wants to face the fact that these institutions [the banks] are bust. Not only have they lost all of their capital ... If we genuinely marked their assets to market, they would have lost it twice over."

As I noted in an earlier post, banks are lying about the amounts of unmarketable mortgage securities on their books.  Existing law requires banks to mark them to market prices at each quarterly or annual earnings filing.  While there is expanded wiggle room covering securities for which there is no efficient market to trade them, the banks still must make a good faith effort to value them and offer an explanation of the valuation methodology.  They are simply not valuing hard-to-sell securities at what they're truly worth and they're not facing any pressure from financial regulators to do so.

You can see my earlier post for what I think ought to be done about it.

Mr. Ferguson's story also contains an amusing and accurate title for the economic event of which we are in the midst:  The Great Repression, because no one wants to believe it is going to be as bad as it really will be.