Many people are wondering when this recession/depression will end. Well the waiting is over.
Tomorrow a group of accountants will vote on a new accounting rule that will end the financial crisis. This rule, called FAS 157-e, permits banks to make up the value of assets they carry on their books that nobody wants to buy. By letting banks put whatever value they choose on these assets, they will no longer need to tell investors just how badly those assets have deteriorated.
This is obviously fantastic news for the global economy. We can now get back the $12.8 trillion we've spent bailing out the bad bets of banks and insurance companies. That's because the toxic waste that has so far caused them to take $3 trillion in write-offs is no longer toxic. In fact, the banks can mark those assets just as high as they want -- taking a profit by valuing them at, say, $1.20 instead of the 60 cents at which they're currently priced on their books. This increase in value will instantaneously give the banks as much capital as they want.
And now all those 5.6 million unemployed people have a sure-fire way of becoming billionaires -- so their financial worries are over. All they have to do is start a company; put together some paperwork for a complex asset-backed security -- which is amply available on the SEC's web site (here's an example); value the securities at $1 billion; and sell stock to the public. Voila! You've just created a billion dollar company and you never need to work again.
There's just one thing -- today is April 1. And if FAS 157-e is not an April Fool's joke, then our financial system is doomed.
Peter Cohan is president of Peter S. Cohan & Associates. He also teaches management at Babson College. His eighth book is You Can't Order Change: Lessons from Jim McNerney's Turnaround at Boeing.
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Reader Comments (Page 1 of 1)
4-01-2009 @ 2:42PM
Beltway Greg said...
Dr. Pete, couldn't agree more...but at this moment the market for this stuff (wherever that is) is pricing all of this stuff as being worthless which we know it is not. Look at it this way: everyone stopped eating peanut butter when just a little was tainted. The entire industry was tarnished. Are all banks insolvent and is every piece of this debt worthless? No. After BOA's misadventures good folks are afraid to lend a cup of sugar to their mates across the fence because they're afraid they'll never get it back. Somebody has got to begin to price the sugar.
4-01-2009 @ 6:47PM
Dan Barnett said...
But without the mark-to-market rule (which Jim Cramer seems to hate) aren't all valuations more or less fantasy? Isn't that what got us into this mess; i.e. banks financial statements showing this stuff as worth a ton, while in reality it couldn't be sold for even half the alleged value?
4-02-2009 @ 2:15PM
Beltway Greg said...
Dan, shhhh. The baby is sleeping. Capitalism requires a large leap of faith and belief in the abstract. Why is our dollar worth more than the Canadian dollar? Why is our paper money worth anything? It is backed by what? The government's ability to create more of the paper things and tax people and receive more in payment. But please don't mention this to anyone else. Let's have it be out little secret. (And btw, gold is worthless too on judgement day. Try catching a fish with an oz. of gold.) Just give me a shotgun, a fishing rod, and an axe and I'll be just fine thank you.