Thursday, March 12, 2009

Misdirection and Sleight of Hand

A bit short on time tonight. I have birthday festivities for my 33rd year on the planet. As Indian Jones says "It ain't the years, its the mileage."

Read Today's Headlines Yesterday
Last night I mused:
"I am sure that the bank CEO's of Wells Fargo and Bank of America are chomping at the bit to tell the world how great January and February went for them as well."

Well of course Kenny Lewis of Bank of America was out today upping the rally ante with his call of tons of cash flowing through the door and no need for any more government cash. Can we get that in writing?

Again these brazen words are going to cause an issue in the next 2-3 months when even more taxpayer money is needed to bailout banks. I think the next earnings announcements for Citi and Bank of America are right around April 17th or so. Better get that "mark to market" stuff fixed soon boys! Think the entire rally is not predicated on this factor? Think again. From today's Yahoo Finance:
"How all this turned around in a week, I don't know," said Scott Bleier, president of CreateCapital Advisors. "But it's certainly a better outlook than how it looked two weeks ago."
Don't worry Mr. Bleier, I have your answer:
The rally got an extra dose of adrenaline Thursday after an accounting board told Congress it may recommend an easing in financial reporting rules of tough-to-sell assets -- a change that banks say would help their bottom lines. Upheaval in the banking industry has been dogging the market since 2007, and hope that banks might finally get relief in how they value their bad assets spurred a flurry of buying on Wall Street.

"We might find that the banks are not as bad, or not bad at all, if these assets are marked differently," said Doreen Mogavero, president of the New York floor brokerage Mogavero, Lee & Co.

The suspension of mark to market is baked in the rally cake. I would even go further as to speculate that some new "Level IV" type of accounting trick has been readied by the Treasury to hide bad asset values. You read it here first!

Misdirection and Sleight of Hand
A little short on time, but I wanted to share an observation I had today while market watching with a co-blogger.

Cast your mind back to 2001. The stock markets were reeling. The attacks of 9/11 has a ton to do with that, but the total lack of trust and transparency in the financial system due to the collapsed Nasdaq and all the funny money accounting tricks that helped it along were major culprits. Pressure was mounting to do something to "restore confidence" in our "free markets". And boy something was done.

Enter Enron and Worldcom. While certainly deserving of their notorious place in history, the investigations and criminal charges stopped at their (closed) doors. We were treated to two sacrificial lambs to placate the masses. We even got "mark to market" accounting to make sure this kind of thing did not happen again. Oh the good old days.

In reality, Enron and Worldcom were busted for doing what was the new rage: balance sheet trickery and stock option pricing games. The entire financial industry sighed a huge breathe of relief as those two took the hit and the others went about their business. Business as usual.

Fast forward to today. Fannie Mae and Freddie Mac could not even issue an earnings statement for two years before their eventual government takeover due to accounting irregularities. We have seen Level III accounting, SIV off balance sheet schemes (Enron was just ahead of their time really), Liar loan with no documentation, and CDS insurance written with full knowledge they could never be made good on. There are so many more, but I am pressed for time and do not have 3 days to list all the fraud rampant in the financial system.

Enter Bernie Madoff. I have not written much on Mr. Madoff because it is a non-story. People invested with a guy they did not know who promised monster returns. The story ends the same every time. I would have you put aside his very real crimes and instead focus on the repeat of the cycle seen before.

Madoff is the sacrificial lamb. Madoff's jail cell is supposed to say to you "Look, fraud will not be tolerated! See what happens!". It makes for great TV, but right now as Mr. Madoff sits in his cell:
-Mark to market accounting is about to be suspended; I argue a new accounting trick with full endorsement of the FED/Treasury/SEC will also be unveiled
-The investigations stop now. No more going after the fraudsters that brought you mortgage backed securities based on zero value loans, no checking on Merrill book cooking, no more asking why AIG thought writing CDS insurance nobody could ever cover was done

All the players are coordinated on this big "confidence" push. Now in hindsight the "we made money" statements made by the bank CEO's fit into context. Mr. Madoff walks to jail, banks are making money hand over fist, and all is well if you would just watch American Idol and stop asking questions.

Markets are up 12% plus in a few days. One guy is going to jail. Balance sheets are about to improve through mere smoke and mirrors. Will the sleight of hand work out? Probably, for a while. The first show bought about 8 years of inattention and sequels usually do not do as well as the original. The curtain goes up on Monday. Paying attention?

Have a good night.


Lisa said...

Heard in public schools: "We want every child to have high self-esteem, so everyone gets a gold star. How they feel about themselves will translate into better grades."
Heard everywhere right now: "We must restore confidence by taking some kind of action, then everyone will feel better and the economy/stock market will improve."

I feel great about myself. Why am I not a billionaire?

Happy 33rd birthday! You wear the face of a young man and write with the wisdom of an elder.

getyourselfconnected said...

Thanks for the very kind words. I had my "observation" today and you saw it happen in real time!

You might very well be a billionaire. Have you considered:
-All your earnings over your life, less taxes and everything you spent?
-Everything you own if it was valued at what you think is a "fair price"?

Do that and you may find you are pretty close. I come in at a mere $300 million, but I used conservative estimates.

Anonymous said...


Happy birthday young fella, just think by the time your 60 you'll still be paying for this mess, the stock market won't be any higher judging by the looks of Japan, and my old butt will have been cremated in a puff of smoke. Pooff


getyourselfconnected said...

Ever hear the song "Highwayman" by the Highwaymen?
"And I may come back as a simple drop of rain. But I will remain, and I'll be back again, again, and again..."

Take care.

Lisa said...

GYSC, it was an honor to see genius at work today! :) And it was a great observation.

As for the billionaire're right, I am one. I forgot to place the proper value on those near priceless works of art on my shelf: the macaroni necklace and paper turkey made from a handprint! There you go! Those two items put me just over the $1B mark :)

watchtower said...

Happy birthday GYSC, you might as well relax and enjoy yourself.
I'd suggest steak and lobster tail at a good restaurant : )

Anonymous said...

Happy birthday old man.... lol

I am only two years behind you so we might be soylent green at some point.


PS: I am going to start a counter. Tminus-19 Days +/- 7days.