Going Out Of Business

The Blockbuster Video store in the strip mall in front of my complex just closed and the Borders down the street has done the same. The local malls still look like ghost towns and I really do not know how much longer they can hold out.

But the stock market is going up so everything is just peachy…..or is it ? As Mike Whitney shows, the banks – remember the banks, they facilitated this whole mess – are still in trouble big time.

And, here’s the corker; the banks are still broke. Aside from the fact that housing prices are falling sharply (increasing the banks loan losses) and that there will another 2 million foreclosures in 2011, the real condition of the banks books are still hidden from public view. Here’s a glimpse from the WSJ’s Michael Rapoport,:

“During the financial crisis, investors fretted over “toxic,” hard-to-value assets that banks were carrying. Those fears have faded as bank profits have rebounded, loan delinquencies have declined, and bank stocks have soared 25% in the past five months.

But banks still hold plenty of the bad assets that once spooked investors: mortgage-backed securities, collateralized debt obligations and other risky instruments. Their potential impact concerns some accounting and banking observers.

In part due to those bad assets, the top 10 U.S.-owned banks had $13.8 billion in “unrealized losses” that have lasted at least a year in their investment portfolios as of Sept. 30, according to a Wall Street Journal analysis. Such losses are baked into banks’ book value, but don’t get counted against earnings as long as the banks believe the investments will later rebound. If those losses were assessed against earnings, it would have reduced the banks’ pretax income for the first nine months of 2010 by 21%, according to the Journal analysis.

Unrealized losses are just one way in which the troubled assets obscure banks’ true financial condition, accounting experts say….Another problem: Even when banks do take real charges because of their securities losses, accounting rules allow them to keep some of those charges from hurting their bottom line.

In other words the banks earnings reports ate a tissue of lies. Built on nothing. 2 Million foreclosures. That’s is more than twice the number of houses that exist in all of Summet Co. Ohio (Akron) and Cuyahoga Co. Ohio (Cleveland) combined. So we are essentially back to where things stood in 2007.

One last thing: Along with the accounting shenanigans, the toxic assets, the non performing loans and the gigantic leverage, the banks are also hiding millions of REOs “off market” to keep housing prices from plunging even further. This “shadow inventory” will continue to be a drain on bank resources while keeping house prices “bouncing along the bottom” for years to come. Here’s a clip from an article by Mark Whitehouse:

“Banks’ vast pile of foreclosed homes doesn’t appear to be diminishing. That’s a troubling sign for the future of the housing market.

Back in April, this column tallied up all the foreclosed homes sitting in banks’ inventory, as well as the “shadow” inventory of homes in the foreclosure process or on which owners had missed at least two mortgage payments. At the time, we reported that at the current rate of sales, it would take 103 months to unload it all.

Over the past six months, that number has actually risen. Banks managed to pare down the shadow inventory, but largely by taking possession of foreclosed homes. As of September, they owned nearly 994,000 foreclosed homes, up 21% from a year earlier. The shadow inventory stood at 5.2 million homes, down 7% from a year earlier. Grand total: 107 months of inventory.

The numbers aren’t exactly comparable to the April analysis, as the providers of data have changed. The inventory data now come from RealtyTrac, the shadow inventory data from LPS Applied Analytics, and the sales data from Core Logic. But no matter how you slice it, the housing market faces almost nine years of foreclosure hangover…..

The mountain of foreclosed homes casts a long shadow.” (“Number of the Week: 107 Months to Clear Banks’ Housing Backlog”, Mark Whitehouse, Wall Street Journal)

The dismal plight of the housing market hasn’t changed much since Whitehouse wrote this article a couple months ago. The bleeding continues and prices are falling fast. If Obama doesn’t come up with a remedy soon, the banks will be back on the front steps of the US Treasury with their begging bowls in hand. You can bet on it.

Bottom line: The people who caused the financial crisis have reassembled the same system piece by piece paving the way for another massive meltdown.

And our financial situation is being systematically ignored by Washington and everyone else in hopes it will just magically disappear like a soap bubble.  It has been my experience thought that problems like this do not fix themselves and like an abscessed tooth, just get worse until it is beyond saving.  Like a car teetering on the edge of a cliff, they are just hoping that a bird does not decide to perch on the hood ornament.  The question then is not if the next financial crash comes but when.

Party On.



8 thoughts on “Going Out Of Business

  1. This is worse than you note C. Much worse.

    Dividends are paid upon these profit numbers. This false profit / dividend picture has to be paid for some way. That is being accomplished by the soaring prices of everything. All across the board prices for consumer products have skyrocketed.

    This is without a doubt the biggest shell game ever in all of history. The carney operators on Wall Street and in Washington are complicit in this up to their eyeballs.

        1. cmaukonen

          Madoff was slime to be sure. But he was aconvenient goat who was thrown to the wolves. There are a large number just like him that are still still in business.

            1. cmaukonen

              The systematic lack of regulation has left even the country’s top regulators frustrated. Lynn Turner, a former chief accountant for the SEC, laughs darkly at the idea that the criminal justice system is broken when it comes to Wall Street. “I think you’ve got a wrong assumption — that we even have a law-enforcement agency when it comes to Wall Street,” he says.

              – Matt Taibbi

              My sense of what happened in 2008-2009 — and many of the Wall Street people I talk to regularly say the same thing — is that all the big banks were trading massively on inside information about bailouts, interest rate changes, and announcements about government programs like the PPIP and the TALF. In a way, the whole rearranging of the economy behind closed doors — the backroom deals in which companies like Merrill and AIG and Bear and Washington Mutual and so on were wedded to buyers in taxpayer-aided shotgun weddings — this was all one giant insider trade. Clearly there were individuals who knew about these deals and acted on them before the rest of the world’s investors did. If you look at it like that, one lonely Rajat Gupta isn’t going to cut it, I don’t think.

              I rest my case, your honor.

  2. cmaukonen

    In your interview with Bill Maher you talked Bernie Madoff and how he got the rope because he ripped off the rich and famous. But isn’t Bill Maher rich and famous? Maher got ripped off just like the rest
    of us. Didn’t Madoff get nixed because he wasn’t well connected, unlike all the other figures you talked about in your recent article?

    True, Bernie Madoff ripped off rich and famous people, and true also, Bill Maher is rich and famous, and the guys who ripped him off – namely Lehman Brothers execs like Dick Fuld – have gotten off, unlike Madoff. So I suppose that’s sort of a contradiction. I think the point I was trying to make is that Madoff was really an anomaly, more of a common street con-man who ripped off high-society types, while guys like Fuld and the other bankers represented a more sophisticated systemic sort of fraud that broadly targeted foreigners, pensioners, and the middle and lower classes (and especially the urban poor). Going after one of the latter types would have opened a giant Pandora’s box and forced an industry-wide examination of financial practices that caused the crisis, while busting Madoff was a relatively simple matter that didn’t force the Justice Department and the SEC to take on the whole financial sector.

    Madoff is exactly the kind of case that the SEC likes: a soft target whose investigation doesn’t necessarily lead in too many directions. Also, as former Lehman lawyer Oliver Budde just pointed out to me in an email, they couldn’t NOT prosecute Madoff – he confessed and was turned in! They would have had to do crazy intellectual somersaults to avoid jailing the guy. Not that they aren’t capable, of course.

    – Matt Taibbi

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