Defaulting banks - where will it stop?

[Jan Klimkowski]

Karl Denninger on form:

Toxic Assets (PPIP) Death Rattle

Remember, folks, that the DOW surged by more than 500 points, a 7% gain, on the day the PPIP was announced. Now we find out that this plan to "rid the banks of toxic assets" is on its deathbed:

A look at why the program has stumbled underscores how difficult it has been to solve one of the economy's biggest problems: Mountains of bad debt sitting on the books of the nation's banks. As those loans and securities lose value, they are saddling the banks with losses and constricting their ability to lend.

The real problem is this: The banks have been and still are lying about the value of these loans.

Nowhere is this more evident in the mortgage arena. People are being "allowed" to remain in homes where they have stopped paying the mortgage and banks are sitting on the foreclosure process.

Why? Because if they foreclose and sell the house they are forced to book the loss. But if they "forget" to foreclose they can hide the fact that there's an embedded loss, sometimes as much as 50%, from both regulators and shareholders!

The same thing is going on in Commercial Real Estate. Rather than force the defaults that are occurring to be recognized and foreclosed, the banks are "pretending and extending" terms. That is, ignoring the default and extending the terms of loans even though they are not performing, as this way they can (and are) avoiding taking the write-down.

This is accounting fraud, by the way, but nobody in the regulatory or law enforcement apparatus of this country seems to care.

When PPIP was proposed I noted the fact that banks were not taking realistic marks; this has not changed.

Nor am I alone in this:

Citigroup’s $1.6 billion in first-quarter profit would vanish if accounting were more stringent, says Martin Weiss of Weiss Research Inc. in Jupiter, Florida. “The big banks’ profits were totally bogus,” says Weiss, whose 38-year-old firm rates financial companies. “The new accounting rules, the stress tests: They’re all part of a major effort to put lipstick on a pig.”

Further deterioration of loans will eventually force banks to recognize losses that their bookkeeping lets them ignore for now, says David Sherman, an accounting professor at Northeastern University in Boston. Janet Tavakoli, president of Tavakoli Structured Finance Inc. in Chicago, says the government stress scenarios underestimate how bad the economy may get.

The simple fact of the matter is that for the PPIP to "work" assets must be sold into it at somewhat of a realistic price.

But if banks do that, they will be forced to recognize losses they (in conspiracy with their regulators, including The Fed, OTS, OCC and Treasury) have been hiding for the last two years - losses that are sufficient to force all of them under critical Tier Capital Ratios and thus subject them to FDIC seizure and liquidation.

We should have done the right thing and forced recognition of fair-market-value of these securities and whole loans, sent in the FDIC and closed these institutions.

We still should.

Even if they're "big banks."

The longer we wait the more damage our economy will take when, not if, the mounting losses are recognized.

PPIP will do nothing to alleviate the problem, exactly as I predicted, because for it to "work" the banks would have to admit their insolvency, and there is zero political or regulatory will to make that happen.

But to clear the credit markets and allow the economy to truly recover, that admission and subsequent clearing must happen.

http://market-ticker.org/archives/1170-T...attle.html