A Little Random Perspective on the Financial/Market/Credit crisis

On my last posting on Zumiez, I wrote about how they had to classify their various investments under the terms of FASB 157. Basically, companies are required to “mark to market” their various securities. The problem arises when you know your securities are worth something, but you have no idea what because they aren’t trading. Should you carry them at $0.00?

Back in the early 80s, I was an international banker living in Sao Paulo, Brazil and having a hell of a good time. All the South American countries had defaulted on their debt to the American banks. It was a lot of money and if the banks had been required to “mark to market” all those loans, they would have been broke. A bank’s ability to lend depends on its capital ratios. If they have to write off all their loans, they have no capital and can’t lend. The Fed decided that would be bad so they let the banks keep those loans on their book, writing them off bit by bit as they earned profits to cover them. Eventually, they did get some payments. The loans were certainly impaired, but they weren’t worth zero.

 

This mark to market provision needs to be changed. Just because there’s not a market right this minute doesn’t mean the loans are worthless, and we shouldn’t treat them as if they are. And we can’t afford for our banks’ capital to all go away.

 

Which reminds me- as you hear this number of a bailout costing $700 billion being bandied about, remember that these loans do have some value. We’re not quite sure what the number is, but it’s not small and the net cost will eventually be a lot less than the gross number. In fact, because of all the fear out there, some killer investment opportunities in some of these securities exist and anybody who knows how to tell the good from the bad and the ugly should call me.

 

This morning I read that a local Seattle utility had only been able to refinance $28.5 out of the $30 million in debt it wanted to refinance. And it had to do it at 5.5% instead of 1.5%. The possibility that these additional costs would be passed through to utility customers if the credit markets didn’t get unstuck was mentioned, in case anybody out there thinks this might not impact them. If you’ve tried to get a credit card, mortgage, car loan or home equity line of credit lately and your credit isn’t pristine, you’ve probably already figured it out.

 

The discussion about the bailout is not about losing money. The money, however much it turns out to be, has already been lost. The discussion is about who’s going to absorb the loss. I’m afraid it will largely be you and me.

 

My reading of history is that the Great Depression happened largely because of a bubble that was left to correct itself and the paralysis that followed. Chairman Bernanke and Secretary Paulsen, no slouches when it comes to reading history themselves I’m thinking, have followed the drop in commercial paper issued, saw the sudden spike in its cost just in the last ten days, and decided this wasn’t something to fool around with. Hence, the package that’s before Congress right now. I’m hopeful it will be passed quickly and without a lot of other stuff tacked on.