"SEC loosens requirements for banks to report investment values"

As that towering intellect, Federal Reserve Chairman Ben Bernanke 'and others' point out "... totally removing the rule would erode confidence that firms are owning up to losses."

So, er, partially removing the rule only partially erodes confidence, so that's a good thing, huh? Or not as bad? Or what?

EU Referendum reported today "Many experts, Congdon included, are attributing ... the failure of Northern Rock, Lehmans [to the requirement that banks report investments at their market value] and, most recently, Bradford and Bingley, all of which were solvent by traditional accounting rules and need not have gone down."

I opined on this back in April (to which EU Referendum kindly linked after I pointed out that the debate had been rumbling for some time) and see no reason to change my mind. If it is true that nobody trusts banks any more (why should they, the banks don't even trust each other) where is the logic in allowing banks to prepare financial statements using fantasy figures?

Hysteria aside, there is a significant underlying value to sub-prime mortgage assets - even in a worst-case scenario, the write offs are measurable and quantifiable and some value is recoverable, even if only in the medium term. The perceived problem is that there is no proper market value.

So here's my compromise suggestion; banks can report these investments ('toxic assets') on their balance sheet at original cost or valuation (with full details of valuation method etc), but they'd have to disclose, in the notes to the accounts or on their website or wherever, the full gory details of what those underlying investments are, who the counter party is, how they are secured and so on.

That way everybody can make up their own minds. It would take a specialist days to follow all the trail all the way from the ultimate holder back to the proverbial 'unemployed man in a string vest' but it could be done (the history of accounting shows that disclosure always came before valuation anyway).

Armed with all this extra information, The Markets would be able to work out with their usual unerring accuracy what the banks' net asset positions really are, and with time confidence would return. The alternative is that full disclosure would lead to a complete meltdown in confidence and the most terrifying run on banks that has ever been seen*. Is that why they are being so coy? Who knows?

* Per Doc Emmett Brown in "Back To The Future II"; "Granted, that's a worst-case scenario..."

Franklin D Roosevelt's First Inaugural Address. Updated.

FDR, 4 March 1933:

"The only thing we have to fear is Hank Paulson himself"

Outbreak of commonsense in The House of Representatives!

Woo hoo!

228 good men and true (and women, obviously) refuse to approve lunatic $700 billion dollar corporate subsidies, aka "Fed bail out"!

Interestingly, a large majority of Democrats voted Yes and a large majority of Republicans voted No.

OK, that's not what the linked article says, because that's from half an hour ago. Try this one.

Final net cost of Fed bail-out - $20 trillion?

Denis Cooper (via email) has been doing some digging...
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I notice that Ambrose Evans-Pritchard has repeated the canard that US taxpayers profited from the last major debacle, the Savings and Loan crisis:

"The RTC was created in 1989 to absorb the bad debts from the Savings and Loans crisis. The assets of the bankrupt lenders were taken over by the state, preventing fire-sales that can drive prices even lower in a self-feeding spiral. It worked well enough. The RTC sat on the devalued assets until the bloodbath was over. In the end it made a nice profit."

I wish somebody would tell him that is definitely NOT the case that "In the end it made a nice profit" - see here, here, here, or here.

US taxpayers are still paying for that bail-out, and their children will also be paying for it until all the extra US government borrowings have been repaid with interest. The final net cost remains unclear, but it will be somewhere between $166 billion and $500 billion, depending on how much interest is added.

Initially it was estimated that the Savings and Loan bail-out would need between $30 billion and $50 billion of taxpayers' money, but in the event it turned out to be more like $400 billion - say ten times as much...

If that was repeated this time round, the $1 trillion presently being talked about would eventually turn out to be $10 trillion, and the taxpayer would lose twice as much once all the "toxic assets" had been bought, and gradually sold off at less than the purchase cost, and then the necessary US government debt had all been paid off with interest - ie, the final net cost to US taxpayers could be as much $20 trillion spread over the next 30 or 40 years.

That may seem impossibly high, but the US GDP was $13 trillion in 2006, so an average of $0.5 trillion a year would still be only a few per cent of GDP. To roughly scale down to the UK - taking GDP in 2006 as $1.9 trillion, that was about one seventh of the US GDP, while the UK population is about one sixth of the US population.
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That seems to stack up to me (to within a huge margin of error), unless anybody has a better guesstimate?

UPDATE: the author of the original piece has sent me a follow up email admitting that he may have been double counting, in which the full cost would be 'only' $10 trillion rather than $20 trillion.

"Fed cuts rates by 75 basis points"

This is all rather chortlesome, really.

It has always been the case that changes in the very short term rate paid on loans between central banks and commercial banks have had little effect on long term rates. Indeed, increases in the short term rate sometimes lead to a reduction in long term rates, because a higher short term rate chokes off inflation and thus makes long-term bonds a better investment (and vice versa). In today's markets, there is not even any correlation between the Fed funds rate (or BoE base rate) and variable rates charged on mortgages. See for example a couple of Thursdays ago, when the BoE left rates unchanged and some UK banks celebrated by increasing mortgage rates by 0.3%.

The problem, as ably outlined in today's FT, is that nobody trusts anybody any more.

So this is not so much throwing caution to the wind as flushing it down the toilet.