DawsonTimes.com

As those who helped make this mess, break their arms patting themselves on the back - here's the "real take" from outside of DC:

Peter Shiff - "Let's Pretend" http://www.europac.net/externalframeset.asp?from=home&id=15884&type=schiff

When elementary school kids want to escape the confines of their circumstances they pretend to be pirates, princesses, and Jedi knights. Now, with the relaxation of “mark to market” valuation rules announced yesterday by the accounting trade’s self-regulatory body, our bankrupt financial institutions can escape their own reality by pretending to be solvent. The unraveling of our fairytale economy over the last few months has not yet convinced us that the time has come to put away childish things. The applause that greeted the news yesterday on Wall Street is a clear sign that we still have some growing up to do.

The imaginative conceit that lies behind the accounting change is that the toxic assets polluting bank balance sheets are not really toxic at all. They are in fact highly valuable assets that for some irrational reason no one wants to buy.

Using the “mark to market” accounting method, mortgage-backed securities were valued relative to the latest prices fetched by the sale of similar assets on the open market. Currently, those bonds are being sold at deep discounts to their original value. By “marking” their unsold bonds down to those prices, the insolvency of our financial institutions had been laid bare. The new accounting changes will allow the nervous owners to assign more “appropriate” (i.e. higher) values. Problem solved.

It is important to note that the Financial Accounting Standards Board made their rule modifications only after intense pressure had been applied by Washington and Wall Street. In their heart of hearts, I can’t imagine that there are too many bean counters happy with the outcome.

The banks and the government have argued that the assets should be valued based solely on current cash flow. Most mortgages, after all, are not delinquent. Therefore, a few bad apples should not spoil the whole cart, and those that are not yet delinquent should be valued at par. This method assumes we have no ability to look into the future and make assumptions about what is likely to happen, which is presumably what the market is already doing by valuing the assets lower than the banks wish.

All kinds of bonds (corporate, government and municipal, etc.) that are not in default frequently trade at discounts. In fact, the reason that agencies such as Moody’s and Standard and Poor’s rate bonds is to assess the probability of default. The higher that probability, the lower the value placed on the bonds, regardless of their current cash flow.

For example, GM bonds that mature 10 years from now currently trade for only 8 to 10 cents on the dollar, despite the fact that GM is current on all interest payments. The 90% discount reflects investor awareness that GM will likely default long before the bonds mature. By the new logic, financial institutions with GM bonds on their balance sheets should be able to ignore the market and value these bonds at par.

Some argue that the comparison is invalid because GM’s bonds are liquid while mortgage-backed securities are not. However, if sellers of GM bonds were holding out for 70 or 80 cents on the dollar, those bonds would be illiquid too. The reason GM bonds are trading is that sellers are realistic.

The same should apply to bonds backed by mortgages. To assume that a 30-year, $500,000 mortgage on a house that has declined in value to $300,000 has a high probability of remaining current to maturity is ridiculous. The borrower could lose his job, his ARM might reset higher, or he may simply tire of paying an expensive mortgage for a house that is unlikely to be sold at a profit. Any bond investor with half a brain will factor in these probabilities and look for deep discounts. The only way to accurately assess a real present value is to let the market discover the price.

Despite the pleas from bankers and politicians, mortgages are not plagued by a lack of liquidity but a lack of value. If sellers would be more negotiable, there would be plenty of liquidity. Who knows, at the right price I might even buy a few. The problem is that putting a market price on these assets would render most financial institutions insolvent, which is precisely why they do not want to let that happen.

Simply pretending that all these mortgages will be repaid does not solve the underlying problems. It may keep some banks alive longer, but when they ultimately do fail, the losses will be that much greater. In the meantime, solvent institutions are deprived of capital as more funds are funneled into insolvent “too big to fail” institutions – hiding their toxic assets behind rosy assumptions and phony marks.

Going from the sublime to the completely ridiculous, in a speech at the just-concluded G20 summit in London, President Obama urged Americans not to let their fears crimp their spending. It would be unwise, he argued, for Americans to let the fear of job loss, lack of savings, unpaid bills, credit card debt or student loans deter them from making major purchases. According to the president, “we must spend now as an investment for the future.” So in this land of imagination (where subprime mortgages are valued at par), instead of saving for the future, we must spend for the future.

I guess Ben Franklin had it wrong too – apparently a penny spent is a penny earned.

WAKE UP!!!

http://publiccentralbank.com

And the latest budget talks involve Pentagon spending:

:::ARTICLE::: Apr 7, 6:33 AM (ET) By ANNE GEARAN

WASHINGTON (AP) - Defense Secretary Robert Gates is recommending a broad overhaul of military spending that would start almost immediately and slash giant weapons programs and the private sector jobs that go with them.

The Pentagon should stop buying a futuristic jet fighter that hasn't fought a day in either Iraq or Afghanistan, scrap an expensive new presidential helicopter and spend more money on tools soldiers can use now, Gates said Monday.

The Defense chief said he is gearing Pentagon buying plans to the smaller, lower-tech battlefields the military is facing now and seems likely to confront in the coming years.

With rising unemployment rates and a global economic funk, Congress is unlikely to go along with many of the cuts in Gates' proposed $534 billion budget for the 2010 budget year, which would be an increase over the $513 billion for 2009.

"I am extremely disappointed in this decision by the Obama administration," said Sen. Saxby Chambliss, R-Ga., said of the proposal to quit buying the F-22 Raptor plane beyond 187 already planned.

"America has maintained air dominance in every conflict since the Korean War, and now this administration is willing to sacrifice the lives of American military men and women for the sake of domestic programs favored by President Obama," Chambliss said. :::END Article:::

Some corrections are in order: Defense Secretary Robert Gates is NOT part of the incoming Obama Administration, but rather, the only "carry-over" from the Bush Cabinet. The decision to halt production of the F-22 Raptor (@ 187 planes) has been in discussions for several years (it actually began in '04-'05 during the "Republican Rubber-Stamp" - let's triple the size of government, era).

For Clarence to insinuate that America will somehow "lose air dominance" over this decision, completely ignores the fact that no F-15 Strike Eagle has EVER been shot down - we have about 800 of them. It completely ignores the effectiveness of the F-16 - we have about 1,000 of them. It completely ignores the need to replace the A-10 Warthog with the new F-35 and the additional costs associated with that endeavor.

And most importantly, he once again ignores fiscal facts that Robert Gates is trying to INCREASE the Pentagon budget by over 20 BILLION dollars. HELLO!!! 30 million jobless, TRILLION DOLLAR DEFICITS, more government expansion, more BILLION DOLLAR BAILOUTS, another year of record foreclosures...

WAKE UP!!!

It is estimated that Obama's plan could benefit 8 to 9 million homeowners from the new modification procedures. So how do you know you qualify for the Mortgage Modification? Check the website http://obamamortgage2009.blogspot.com/ to see if you qualify. I was also in trouble and I am glad I did check it before I talk to my mortgage company and it helped - John Mayer, California

It is estimated that Obama's plan could benefit 8 to 9 million homeowners from the new modification procedures. So how do you know you qualify for the Mortgage Modification? Check the website http://obamamortgage2009.blogspot.com/ to see if you qualify. I was also in trouble and I am glad I did check it before I talk to my mortgage company and it helped - John Mayer, California