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Another mid-game SEC rule change

Tuesday, September 30, 2008, 4:09 PM

Every possible effort is being made to make our banks healthier.  And if that is not possible, then to at least make them appear healthier.  The SEC just passed a new rule with this second aim in mind.

And I'm not sure how much it is really going to do, since the rule change will allow companies to place higher values on stricken assets that have already been "marked down."  As I point out below, many companies have not yet done this, so how much of a gain will result is questionable.

Here is an excellent article on the rule change.

Quote:
Some economists are attributing much of the current financial crisis to something as mundane-seeming as accounting.

The Securities and Exchange Commission and the Financial Accounting Standards Board have just made an announcement that, dry as it sounds, may mean a great deal: "When an active market for a security does not exist, the use of management estimates that incorporate current market participant expectations of future cash flows, and include appropriate risk premiums, is acceptable."

There is no market right now for the worthless mortgage-backed securities -- that's one of the reasons we're in this crisis. That means financial institutions that are holding them must value them at zero, or near to it. That makes the institutions themselves worth much less.

The SEC has just said that the financial institutions themselves can now place a fair value on the assets. That could raise a whole other set of issues, but for now, let's just deal with this one.

Accounting is not something that ordinary taxpayers think about much, but it could hardly be more important to businesses: It's the value they place on what they own, what they owe and what they can sell.

An odd-sounding accounting phrase at the heart of this is something called "mark-to-market" accounting. Many think that if this requirement were ended, the crises could be eased.

Simply put, mark-to-market accounting requires companies to set the value for the assets they own at the price they could fetch on the open market right now. The prices must be "marked to market;" hence the phrase.

What does that have to do with the current crisis? The root problem now is that financial institutions have been caught holding value-less, or "toxic," assets on their books, such as the mortgage-backed securities based on sub-prime mortgages that have defaulted.

The government believes that those assets will be worth something soon -- that's why they want to buy them in the $700 billion Wall Street rescue plan. But under mark-to-market rules currently required, they are worth almost nothing, threatening those who hold them with insolvency.

If the holders could place a value on the assets equal to the estimated value they should bring in the future, suddenly the balance sheets of these financial institutions would look a lot healthier.

Now, if lots of companies had taken their assets and put them through the mark-to-market wringer, they could potentially reverse that process and now record those paper gains on their books.

However, instead of "marking-to-market," many companies opted instead to park their troubled assets off into another arcane accounting cul-de-sac called "Level III" assets. 

Definition of Level III:

Assets whose fair value cannot be determined by using observable
measures, such as market prices or models. Level III assets are typically
very illiquid, and fair values can only be calculated using management estimates
or risk-adjusted value ranges.

Here's a snapshot of some financial companies and their Level III asset counts from August.  Clearly, as you scan the list you will note that several of those companies are notably absent from the September landscape.

Numbers are in millions (meaning, for example, that Citibank has $154.6 billion in level III assets).

This new SEC rule change is specifically targeted at the remaining members of this list, especially those at the top. Just for fun, compare the total equity of the organizations (the first column of numbers) to their Level III assets, and you can see why there is great concern that these Level III assets not be marked to their current market value (presently 'zero' for many).  

I don't know for sure how much this new rule change will help; that depends on how many companies already announced writedowns that can be reversed now.  My only point here is that companies with large Level III asset pools have already been hiding the dirt deep in their balance sheets, carrying them at "management estimates."

The SEC rule change will almost certainly not allow Level III assets to be valued any higher than they already are.  So, no big change on that front.

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45 Comments

srbarbour's picture
srbarbour
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And SEC does its best to add to the shadow banking system

Really, didn't we learn from the Japanese that letting insolvent banks fester is the absolute worst thing that can be done?   We'd, frankly, be better off recapitalizing them on the tax payers backs then this bullshit.

Sigh, wheres a politician with the guts to murder banks when we need one?

--

Steve 

aczop's picture
aczop
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How would the bad assets become good assets?
[quote]The government believes that those assets will be worth something soon -- that's why they want to buy them in the $700 billion Wall Street rescue plan.[/quote]Forgive my stupid question as I'm still learning (great site by the way!), but why does the government think the assets will be worth something soon?  That is, under what circumstances could these bad assets become good assets again?
Xflies's picture
Xflies
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Come on Chris, let's be objective... I appreciated your Crash

Course because of it's objective way of looking at things and the very important notion that you have the right to change your opinion as new facts come into play, but this site is beginning to look more and more like those perma-fear mongering sites where the readership are all members of the NRA and all have their own home made bomb shelters.  How can conclusions be drawn from this new Mark to Market rule when we don't know what assets have been written down to close to 0?  The liquidity freeze has left many assets, some of which are not worthless or properly marked.  I do agree that this opens the door to a slippery slope and that the temptation to incorrectly mis-mark assets will be great but one thing to implement would be criminal charges laid upon fraudlent marks.  It's not just this that I've noticed, change in your site... the overall independent third party view that looks at all possible explanations doesn't seem to be there as much and there's no attempt to bring about arguments that would oppose your current views just to 'test if it holds water'.  Suggestions of price fixing and conspiracy theories over short term oddities in price behaviour just fuel the paranoia.  I personally did well making money on buying euro call options but luckily after doing some soul searching, sold them yesterday because I realized that if the theories of mass doom are correct, assets all correlate.  The Euro is in just as much danger, if not more, than the USD because the Fed has more of an ability to affect change than other central banks (good or not, that's the fact) so even if the USD is weakened, it might not weaken against other currencies which are in just as much 'doo doo'.  I've switched to silver as it is statistically cheaper to gold but there are probably other forces at work which should also be investigated or contemplated.  Please don't lose your objectivity in all this, I know a few successful calls and many pats on the back can often lead to hubris.  There have been many doomsayers in the markets and there always will be.  They are now having their day of reckoning but they also missed out on a pretty big bull run.  I never took you for one of those and please don't be offended by my comments.  I really appreciate the work you do but these are just a few of my personal thoughts on how I have seen this site morph into  over the past few weeks... maybe it's from reading all the comments from gun toting NRA folk that suggest people buy flare guns if they don't ahve a gun license because it can cause significant damage at close range  *sighs*.

 

srbarbour's picture
srbarbour
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Re: Bad Assets -> Good Assets

The theory behind that idea is that the market, facing a glut of assets being dumped all at once, is creating a downward price pressure that is misplacing the value of the asset well below the end summation of the money delivered.

One way to think of it would be this:  Imagine that you are in the deserts, dieing of thirst.  Now, you have a gold bar on you, and someone is willing to sell you a canteen of water for that gold bar.   If you refuse, you'll die.   Do you take the offer?

There is, of course, some validity in the argument that many of these 'assets' are undervalued.   Unfortunately, most of these assets are so complex that nobody is sure what exactly that value is.   It could be nothing, or it could be as high as 95% of the face value.   Further, it varies for each and everyone of them.

SECs idea however, is particularly troubling because it is akin to saying:  "Please hide your losses!  That way you won't go 'bankrupt'".  It is as though SEC believes that this problem wouldn't exist if people weren't aware of it.  It all goes back to my Shrodinger's Bank joke  =).   If you don't observe it, it'll never die!

A better solution would be to change the leverage limits on banks so that the leverage allowed when taking action that 'increases debt' is different than the leverage allowed before coerced selling of assets.   This would allow banks some wiggle room to sit back and wait for assets to recover (if they ever do), or sell at a slightly more preferential time, but would still require the maintence of a cushion to reduce the inheriant risk of failure.

Alas, that might make sense, and is therefore rejected by principle.

-- 

Steve 

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joe2baba
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shadow banking system

great post steve

where is ron paul? this is the time there will never be a better time than this. if he doesnt do any thing now he never will. this is the perfect time to introduce a monetary reform bill tho get rid of the fed. everyone in the country is finally paying attention.

if we dont get rid of the rothschilds and their toadies we will be no better off ever

we will be  the argentina of north america

thank you steve

cmartenson's picture
cmartenson
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Hey, go grab a drink, take a swig...

... and re-read what I actually wrote.

I think you'll see that you were way out of line in your assertions and assessments. 

I understand these are emotional times for folks and I'll promise to bring my best objectivity if you promise to bring yours.

pir8don's picture
pir8don
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Kiwi Perspective
Hi Chris, I'm most impressed with your site and thinking but am struggling for the big picture. I understand that we are effectively eating extracted carbon but I don't understand why money is finite. Isn't it just a game played by consenting adults and won't it only end when no one wants to play any more? Won't we always be one step away from the end of money but then find another step added by the rule makers? Isn't this exactly whats happening now? Seems to me we are caught in Zeno's paradox.
Xflies's picture
Xflies
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I did go back and re-read it and
my apologies... you were right.  I do try and take objectivity seriously and notice that you never actually stated that assets that lack a market are indeed worth zero.  I read my comments again and I can see how the tone could seem overly assertive and presumptuous but that's sometimes why the written word isn't the best method of communication because I didn't mean to put the accusation of objectivity solely upon you.  I just have read some pretty one-sided comments from some of your readers and read other sites who have predicted doom and gloom for a decade and it just seemed (again, just my opinion) that this was quickly snow balling into one of 'those' sites.  My call for everyone to remain objective was meant to be a general one and to always take on new information as being potential valid parts of a large puzzle.  On the specific examples where markets can seem disjointed, well I've traded long enough in several different strategies to know that temporary hiccups to market efficiency can happen and will happen going forward but that doesn't always mean that there was some greater conspiracy to it all.  Again, my apologies, I should have written my views differently and like you want to see education spread amongst the masses so we are better able to make informed decisions going forward.
Xflies's picture
Xflies
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I would add to this that perhaps the leverage limits would be
changed if the ratio of Level III assets was over a certain level and that management and directors should be made to defend their marks if scrutinized to a point where they can be held liable outside of their commitment to fiduciary duty.
Xflies's picture
Xflies
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Let me ask you this, do you think it was fair that banks

were forced to mark down assets to 0 when the market wasn't liquid?  What volume or type of bid constitutes a proper mark?  As a trader, I do believe in the mark to market system, I traded several strategies including distressed and high yield strategies that often had positions that were difficult to mark but we still used this system unless I could prove that value was otherwise.  That's why this 'bailout' looked interesting in that it created a market to try and validate asset value... perhaps it wasn't an exercise in collecting toxic assets as much as it was to kick start the market into giving credible marks or to at least start the process of value discovery.  This one's a very sensitive but really important issue and can definitely open the doors to abuse but I also think it was one of the root causes of bank failures that might not have occured if this rule was different... I know, I can hear some readers saying that this is completely wrong and that we are headed into doomsville with or without changes to this rule but I do feel that when markets are illiquid, forcing someone to mark them to 0 is just as wrong as marking them to par.

cmartenson's picture
cmartenson
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Fair?

About the "forced to mark to zero" .... I supose that would be wrong but that hasn't happened yet to any great degree that I am aware of. 

That's the whole reason we have more than a trillion dollars in Level III assets.  Nobody's been willing to mark anything remotely close to market value.

But the price discovery offered by the dumping of some of the CDO stuff (I am thinking of ML's revent 22 cents on the dollar experience here) ran the danger of forcing similar assets to be marked down and that was fright enough I suppose.

The alternative to the SEC rule change would have been to revoke Sarbanes-Oxley so that nobody would fear a jail term for failing to mark down a similar asset.

If you know of any data as to the amounts of 'forced to zero' assets I would be most interested in that.

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cmartenson
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In response

Thanks for the comments, I appreciate your reply.  All I can say is that everybody is coming at this massive change with a different perspective and I do not feel qualified or responsible for trying to "steer anybody right".  My personal opinions of which people are the closer to the truth and which are further has shifted so dramatically over the years that I now bite my tounge and listen to everything as I am no longer confident that I know which way is true north. 

There are lots of ideas, emotions, fears, hopes, plans and data that need to be processed right now and I like the people who have been drawn to this site via the Crash Course. We are everybody.  We are people.  We are from all over the world.  And I am OK to just let that be and trust that wherever people are at, and whatever drew them here, now is a great time to be pulling together an figuring this all out.

Because this isn't doomngloom, this is the greatest shift of a lifetime.

So we might veer off the cart path from time to time but in our defense we are blindfolded and it's dark out there.

Xflies's picture
Xflies
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I've been looking for that exact stat... I either heard it on

CNBC or read somewhere that certain assets (not sure if they were already classified as Tier III or not) were being marked well below what some would deem as actual value.  I am hoping someone reads this and can find out by talking with an analyst who may have asked management that exact same question... were there assets that you had to write down below what you felt was true value and close to 0 because of this mark to market requirement.  Also, if the market was truly this illiquid and we see wild price swings where assets are marked when a trade occurs and there can be 20 points in between trades, doesn't that mean we should be seeing mark-ups occur?  What are your thoughts as to the possibility that all $700B doesn't have to be spent to kick start the markets into going into true price discovery mode and have marks more relevant?  I don't want to take up any more of your time on this, thanks for responding to my posts so far, I feel badly for taking up your time when everyone (including me) is anxiously waiting for chapter 20 :)

srbarbour's picture
srbarbour
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Re: Why is money finite?

Why is money finite is an interesting and difficult quesiton to answer.  In the end, it really depends on "what do you mean by money?"

It is true, for instance, that the government can print an infinite amount of cash.  Tomorrow the Fed could roll out black helicopters and begin raining down a new shiny $1,000,000 dollar bill upon the citizens of the United States.   Many a country has proven that the only limit to how fast a currency can inflate is how fast they can tack an extra zero to the miles of paper they are printing.

However, it is important to remember that money is just a symbolic representation of a promise, and since the number of things 'promised' cannot be printed and increased so easily (if they could, you wouldn't bother printing money!), actual wealth cannot be increased by such a mechanism.

Monetary Printing is not though, exactly what Chris seems to be referring to when he says money cannot expand infinitely.  He is in my understanding talking about monetary expansion through debt  (I really hate that conception, it is entirely misleading.  Economists need to invent a better set of terms for this.)  Debt, as you should well know, cannot expand infinitely.   There is a finite number of people who can be in debt,  there is also a finite limit to the amount of debt that can be repaid by any individual,  and finally a finite limit to the time over which it can be paid  (Laws prevent debts from being passed onto the next generation, and even if they could be, very few debts can be considered stable for a 100+ year period).

Because, once debt expansion passes its limits the fiscal system on which it is based starts to collapse (because debts aren't being repaid, and debt owners stop lending because lending imposes the risk of transferring their wealth to others) debt can be said to have very real limits.  Therefore, any society whose monetary expansion is based largely on debt expansion, should be terrified of a logarithmically increasing money supply.

Of course, I'd point out that a large portion of America's every increasing money supply is actually monetary printing.  Which, as mentioned above, really is infinite.  Of course, if you print too fast nobody would want your money, no matter how much you had.  =)

--

Steve 

cannotaffordit's picture
cannotaffordit
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Posts: 273
I agree...

...but unfortunately even the truth about the real position of the Fed in our society is still so new to so many folks that there is not yet enough public "outcry" for the changes that so many wise souls have told us we need to make, in the past.

I had a free market fundamentalist argue me down this past weekend, that the Fed does indeed belong to the U.S. government, and therefore the people.  How do you deal with that kind of ignorance, when they are totally unwilling to do any research, whatsoever, on this subject.....or any other.

Perhaps it is true:  "The dumbing down of Americans."  As has been so succinctly said:  "there's stuff we know, and there's stuff we don't know, but these folks don't even know that they don't know."  What a sad commentary.

Ben

pir8don's picture
pir8don
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Thanks but

Thanks so much for your very full reply and take most of the points you raise. Is it realy true that the lenders will stop playing if the US keeps printing money or have they, as Chris suggests elsewhere on his site, got a very vested interest in still playing?

I searched for "the end of money" after it had dawned on me that was what we were about to see and found this. I am delighted to have someone authorative to quote. What I find is that the only ones listening are the young and they don't have the power. There seems no way to break the money mindset of my generation.

 

srbarbour's picture
srbarbour
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Quote:I had a free market

[quote]I had a free market fundamentalist argue me down this past weekend, that the Fed does indeed belong to the U.S. government, and therefore the people.  How do you deal with that kind of ignorance, when they are totally unwilling to do any research, whatsoever, on this subject.....or any other.[/quote]

Well, it is difficult to fully describe the nature of the Fed.   It isn't truly a public nor a private entity.   I perfer the term Quasi-public-private.  

Personally, I see a central bank as necessary.  History has proven over and over again that a gold standard never stands.  I however, would perfer to see it broken off as a true 'fourth estate'  (a seperate branch of the government, whose powers are checked by congress, the president, the judiciary, and the people).

[quote]Perhaps it is true:  "The dumbing down of Americans."  As has been so succinctly said:  "there's stuff we know, and there's stuff we don't know, but these folks don't even know that they don't know."  What a sad commentary.[/quote]

Saying that American's have been dumbed down is far too optimistic an impression of past Americans. ;)

No really, I can't be angry with American's that are ignorant (but I wish they weren't).   As a working adult, I understand that urge after a long day to just 'veg'.  I also understand that many American's have less free time then me, work overtime, and have to care for a family and a score of chores they are behind on.   Given that most people don't like politics or anything academically related, it is a bit unreasonable to demand they squeeze in a few hours here and there to keep appraised.  Especially when they are mostly content about how things are going.

Now, if we had the same kind of free time as the French...  Less working hours and more holidays for a more perfect union!  Rah!  Rah! 

--

Steve 

James Wandler's picture
James Wandler
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SEC rule change
[quote=Xflies]

How can conclusions be drawn from this new Mark to Market rule when we don't know what assets have been written down to close to 0?  The liquidity freeze has left many assets, some of which are not worthless or properly marked.  I do agree that this opens the door to a slippery slope and that the temptation to incorrectly mis-mark assets will be great but one thing to implement would be criminal charges laid upon fraudlent marks.  

[/quote]

As an accountant that doesn't value these types of securities I have some limited familiarity with the accounting involved. 

This rule change actually won't affect Level III assets because these assets already don't use mark to mark for valuation (see Chris' definition above).  Not only is mark to mark not used for these types of assets but it can't be used for Level III assets.  For instance, if a company was to purchase a Level III asset that the company internally valued higher than the purchase price then the asset would be increased to the company's calculated value. 

This rule change will affect the valuations of those Level I securities for which an active market does not exist (such as mortgage backed securities that aren't trading).  Prior to the rule change these securities would need to be valued at their market price.  However if there isn't an active market that doesn't mean that the assets should necessarily be valued at zero - it means that there is a range of values from zero up to the holding value or beyond that could arguable be the appropriate value.  This means that some companies might try to hold the securities around their holding value and argue that a lower value isn't appropriate because there isn't an active market.  This SEC rule change will help companies support this argument.  First implication: assets that may have been under consideration to be written down now might be able to hold a higher value.  Second implication: companies that wrote down Level I assets for which an active market doesn't exist could now reassess this valuation using Level II criteria (i.e. management's estimates) and this might allow them to raise the asset value.

Unfortunately there may be a tendency to have rosier expectations within the management's estimates that don't fully reflect that a) house prices are falling with no bottom in sight and many foreclosures can be expected into 2010 until Option ARMs reset and b) additional foreclosures that arise from a slowing economy from decreased construction, auto, and financial jobs plus the general feedback into the rest of the economy and c) foreclosures that are becoming REOs that eventually need to come back on to the market.  For a detailed assessment of the California house market please refer to Mr. Mortgage's website. http://mrmortgage.ml-implode.com/

I wouldn't rely on criminal charges preventing these rosier assumptions since I think you can appreciate the subjectivity involved.

As time passes then these internal valuations will decline as the true extent of the economic landscape reveals itself. 

For those making posts I suggest we all consider the increasing traffic to Chris' website and consider the potential impact that more dramatic comments have on new visitors and remain positive since Chris is spreading a message of a) awareness of the issues we face and, once he completes Chapter 20, b) the steps we can take. 

These steps we can take are ones that we'll need to take together.

James

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Xflies
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Thanks for that informative post, I guess I did take posts like
the ones that suggest flare guns are a good alternative because of their ability to do a lot of damage in close proximity... that sort of stuff just makes my skin crawl and because I value this site so  much especially during times like these where I find staying informed is my best defence, that I was disappointed somewhat. 
srbarbour's picture
srbarbour
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Re: Lending, and stuff

[quote]Is it realy true that the lenders will stop playing if the US keeps printing money[/quote]

Lending to whom?  No really, if the United States prints money it is bad for two kinds of lenders:

1) Those who lend to the US (government debt obligations are in surprise surprise US dollars.)   In other words, it is akin to the United States saying to everyone who own United States debt that the 'debt'  has now been lowered by 'X%' where X is the amount monetary printing inflated the dollar.

 2) Those who lend debt in the United States, or anywhere whereupon the debt is rated in dollars.    For the exact same reason as the above.

To put it another way.  If you gave your friend $1 to buy coke and then, later, your friend gave you $1 back which bought 1/2 as much coke... would you feel fully repaid?   The lenders certainly dont!

History has shown the direct result of high inflation is very high interest rates.   

[quote] I am delighted to have someone authorative to quote. [/quote]

I wouldn't call myself authoritative.  I don't, after all, have a PH.D in economics.  But I'd wouldn't mind in the least if you quoted me.  =)

[quote]What I find is that the only ones listening are the young and they don't have the power. [/quote]

I have long said that real change will wait until enough Baby Boomers keel over from old age.   Though I also blame, in part, all the pro-capitalist anti-communist propaganda we fed ourselves during the cold war.  It has horribly distorted our world view and ability to think clearly about economics.

--

Steve 

pir8don's picture
pir8don
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Yes

"To put it another way.  If you gave your friend $1 to buy coke and then, later, your friend gave you $1 back which bought 1/2 as much coke... would you feel fully repaid?   The lenders certainly dont!"

But that is exactly what is already happening - US importers buy foreign goods with money they borrowed (from overseas lenders) in the first place and then pay back with more borrowed money which is worth less because they printed more and they keep the goods (not my original thought but can't find source). 

Agree about us boomers. 

If money is a promise then it isn't being kept is it?

I always resented the attention I've had to give to money. Now find myself giving more and more attention to the dammed thing.

 

And could it be both that money is finite but the number of steps to it's end is infinite?

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joe2baba
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disappoinment

hi xflies sorry to disappoint you i did say i was a quaker.

someone i know was killed on a sailboat this year off the coast of

s america by pirates. if he had used his flare gun he might still be sailing on top of the deep blue sea instaed of resting on the bottom i have taken long sailing trips and if you go

into foriegn ports you have to declare  your weapons it is a big hassle so many sailors simply have  a number of flare guns.

in the 60's and 70's when we were having these very same discussions it always came down to yeah we can have our own water we can grow our own food and we can heat with wood and we can survive. but that all was dependent on the social fabric to remain intact. an eventuality which i am not willing to accept at the moment . i have no idea where you are or who you are but there exists the very real possibility of this entire country coming unglued. witness new orleans. when the bloods and the crips exit the cities in search of food and water then intellectual discomfort suddenly becomes irrelevant.

 this country was founded on the use of guns. in my opinion we are at the most incredible time and have the awesome opportunity to take it back   and some out there will take up arms. some will need to defend themselves. i have a daughter who i love and who lives alone and has been stalked. i gave her the flare gun advice. 

i appreciate the financial advice this site provides it is invaluable but i think the long emergency we are entering is rapidly changing the paradigm. kuntsler does not paint a very pretty picture and when confronted with the threat of some one doing physical harm to you or one of your loved ones just what are you going to do? i suggest you stay informed as to when bubba is gonna come to your house. as for crawling skin i always use aloe vera.

i hope this clarifies things for you 

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joe2baba
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education

steve i agree with both you and ben. the american people are not stupid they are ignorant. that is the result of many factors, the education system being a major reason. of course the time issue is huge both parents working , kids mortgage- for those that are still  paying them. of course the only media that even comes close is coast to coast some talk radio and lou dobbs but the rest is just stuck in an old and useless paradigm. i just spent the day with a friend and turned him on to the money masters. he was blown away. he is going to show it to his parents who are retired and scared of not having enough to live on. they have worked hard played by the rules and lost 100k when a local bank went down. so i see my job as getting the information out to as many people as i can. i  always remember that the revolution in this country was not a popular war and it was not an overwhelming majority.

so i think if we keep putting it out there we just might reach a critical mass to make a change. we have an incredible tool in the internet.  i also think if we act from a place of love and the courage of our convictions well ..............no tellin where we might end up

thanks to all of you.

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cwixom
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Posts: 44
Objectivity??
Anyone who twice bashes "NRA folk" in one run-on paragraph calling for objectivity would be on thin ice as far as credibility is concerned. I am one of those you are so quick to judge without knowledge as are a number of my friends and associates.  I would bet my bank account you could spend a week with these people and not fit any one of them into the mold you have in your mind and have so ubiquitously applied to all of us.  It is a sad fact that many who call for objectivity should really be looking in the mirror as they make their call.
ronbailey's picture
ronbailey
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Shadow Banking System

Ron Paul's bill in the House to fix the system is HR2755. Read it here:

http://thomas.loc.gov/home/gpoxmlc110/h2755_ih.xml

jdownie's picture
jdownie
Status: Bronze Member (Offline)
Joined: Apr 7 2008
Posts: 58
money

Steve, I think you are incorrect to say that money is a symbolic representation of a promise.

A promise to pay is actually credit, or its flipside, debt. Money is the commodity with which the promise is redeemed, being why banknotes used to be redeemable in gold.

Many commodities have been money in days gone by; gold, silver, tea, rum, salt, cigarettes, cattle,...... The now irredeemable promises to pay (currency and electronic credits), past off as money is why debt levels are increasing exponentially and must eventually be liquidated, or hyperinflated away, then liquidated.

It would be more accurate to say that a promise is a symbolic representation of money.

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GeoffreyTransom
Status: Member (Offline)
Joined: Oct 1 2008
Posts: 3
Free market fundamentalist?

Hi dbajba

Whoever said that to you was no free market fundamentalist - anybody who thinks that the Federal Reserve is part of a free market system is an ignoramus. 

The Federal Reserve is a bunch of government appointed hacks who have the hubris to think that they can out-think the collective decisions of hundreds of millions of decision-makers.

They think that they - a set of political bootlickers - can set the optimal short term price of money once every six weeks or so, in a bid to 'fine tune' the economy.

What absolute madness!

As I wrote WAY back in 1997 (when people were starting to get all Chicken Little about Y2K, and that hack Mr Magoo Greenspan was starting to flood the system with credit): anyone who has ever studied monetary economics knows that monetary policy is at best a blunt instrument: a chainsaw, if you will.

Anybody who thinks they can do micro-surgery with a chainsaw is delusional, and is best avoided.

Without tooting my own horn too much, I wrote that two years after topping my masters class in Monetary Eco (and three years after being joint dux of my graduating Honours class). As a result of backing my analysis with my own capital, I retired at 37 and now live in Central France, from which vantage point I watch the nuttery unfold and take potshots at the Tycoon's Whores in Congress from time to time.

 

Cheers

 

 

GT

France

GT's Market Rant

James Wandler's picture
James Wandler
Status: Martenson Brigade Member (Offline)
Joined: Aug 11 2008
Posts: 219
critical mass
[quote=joe2baba]

so i think if we keep putting it out there we just might reach a critical mass to make a change. we have an incredible tool in the internet.  i also think if we act from a place of love and the courage of our convictions well ..............no tellin where we might end up

thanks to all of you.

[/quote]

 Joe,

Already we've seen the traffic on Chris' site grow and it tends to spike on particularly noteworthy newsdays.  Getting the message out right now person to person and hope that they'll go to Chris' site is the best I can do right now.  I look forward to having Chapter 20 finished and having DVDs available.  In the meantime I need to research marketing to better understand how to encourage people to "take the red pills" (re: the movie The Matrix).

In fact - perhaps "The Red Pills" is what should be on the cover of the DVD and be otherwise blank to heighten the mystery (except for the website in small print)?

James

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srbarbour
Status: Silver Member (Offline)
Joined: Aug 23 2008
Posts: 148
Money = Promise

[quote]A promise to pay is actually credit, or its flipside, debt. Money is the commodity with which the promise is redeemed, being why banknotes used to be redeemable in gold.[/quote]

Both are promises.  Money arose as ancient traders found the barter system cumbersome and carrying large amounts of wares too and fro difficult.   As such, they created 'clay coins' which were basically IOU slips that could be redeemed at a later point for the 'commodity' they represented.  These coins were later made gold and silver (to control counterfeiting) and became representative of any and all commodities.   Money, however, was still only a promise, redeemable at any time, for a physical good.  Money, in and of itself, has no use.

In a sense, debt and money are closely related.  Bank issued debt, in a sense, creates an entirely new fiat money system.

-- 

Steve 

RedShift's picture
RedShift
Status: Bronze Member (Offline)
Joined: Sep 6 2008
Posts: 25
mark-to-make believe

And who will "purchase" these toxic securities after "the market starts to grow again"?

How can any growth occur given the very high probability of a global oil production peak?

Who would have real money in five years to make any sizable asset purchase - China? Russia? Saudi Arabia?

Congress and the President are delivering American's children into the next Civil War.

hineslaw's picture
hineslaw
Status: Member (Offline)
Joined: Apr 14 2008
Posts: 6
Fed Reserve

Better yet, let's nationalize the Federal Reserve.  Confiscate every dollar of the Federal Reserve and its 12 member banks, and immediately make it the property of the US Government and American taxpayers.   

That's one "industry" that should be nationalized!

 

 

 

gsti's picture
gsti
Status: Bronze Member (Offline)
Joined: Jul 21 2008
Posts: 60
commie
;)
Fabio's picture
Fabio
Status: Member (Offline)
Joined: Aug 14 2008
Posts: 3
THE FED IS GOING TO HAVE NO RESERVE LIMITS?

I found this on the Dailypaul.com-Forum, where the Ron Paul Fans write:

 http://www.dailypaul.com/node/65803

This is huge, folks, and it is hidden in a small, seemingly innocuous paragraph buried within this bill:

http://www.govtrack.us/sp...

Section 203 of the Financial Services Regulatory Relief Act of 2006 (12 U.S.C. 461 note) is amended by striking ‘‘October 1, 2011’’ and inserting ‘‘October 1, 2008’’.

I wonder if this is the real meat of the bill. What is it referring to in the Financial Services Regulatory Relief Act of 2006?

http://www.govtrack.us/co...

SEC. 202. INCREASED FLEXIBILITY FOR THE FEDERAL RESERVE BOARD TO ESTABLISH RESERVE REQUIREMENTS.

Section 19(b)(2)(A) of the Federal Reserve Act (12 U.S.C. 461(b)(2)(A)) is amended--
(1) in clause (i), by striking `the ratio of 3 per centum' and inserting `a ratio of not greater than 3 percent (and which may be zero)'; and
(2) in clause (ii), by striking `and not less than 8 per centum,' and inserting `(and which may be zero),'.

SEC. 203. EFFECTIVE DATE.

The amendments made by this title shall take effect October 1, 2011.

Here is the original bill to which this is referring:

http://www.federalreserve...

2. Reserve requirements.

A. Each depository institution shall maintain reserves against its transaction accounts as the Board may prescribe by regulation solely for the purpose of implementing monetary policy--

i. in the ratio of 3 per centum for that portion of its total transaction accounts of $25,000,000 or less, subject to subparagraph (C); and*

ii. in the ratio of 12 per centum, or in such other ratio as the Board may prescribe not greater than 14 per centum and not less than 8 per centum, for that portion of its total transaction accounts in excess of $25,000,000, subject to subparagraph (C).

This was pointed out yesterday on Daily Kos, so I decided to look it up myself to confirm. Yes, this is legitimate. They are trying to free up the ability for the Federal Reserve to create credit with absolutely no limits.

They are removing the reserve ratio altogether. Consider that this bill has already been passed (and no one noticed) and was supposed to be enacted in 2011. This was the original timetable. That has been bumped up now. This is why the press and the leaders are so desperate to get this bill passed -- their entire plan is at stake.

We not only need to oppose this "Rescue" bill, we need to further repeal the "Financial Services Regulatory Relief Act of 2006".

Spread the word about the depths of the evil contained in this bill.

draper87's picture
draper87
Status: Member (Offline)
Joined: Sep 28 2008
Posts: 8
little off subject

Hi, I'm pretty new to scanning the markets so forgive my ignorance but could someone please explain why it is that yesterday the S&P, DOW and Nasdaq all went up slightly with oil prices rising and gold declining. Then today the complete reverse happens S&P, DOW, Nasdaq going down, oil down and gold up. Same with the day before yesterday...

 Is this pattern occurring for a reason? if so, why? cheers guys/gals

vesperto's picture
vesperto
Status: Member (Offline)
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Posts: 6
The significance of the SEC announcement

Getting back to Chris’s original observation, I’d like to offer the following.

I think the SEC’s announcement is closely related to the off again-on again bailout plan still before Congress.  Note that under the mark to market rules, assets can only be classified as “Level III” assets and valued based on management’s best judgment as to likely future cash flows if there is no active market for that type of asset.  Currently there is no active market for mortgage-backed securities, so holders have a great deal of leeway as to the value that they put on them.  If management’s best judgment turns out in hindsight to be overly optimistic, who is to say that it wasn’t reasonable in light of the limited information available at the time it was made?

However, $700 billion makes a pretty active market.  If banks which now  classify their mortgage backed securities under the Level III rules were forced to re-value any such assets they still hold based on the prices that the government actually pays the banks, they might have to do some pretty serious write-downs.  Take another look at Chris’s table to see what that would do to the capital of some of our largest banks.  The loss of capital would force the banks to curtail lending even further, which is just the opposite of what the government hopes to achieve.

Thus the significance of the following paragraph from SEC’s press release (which was issued in question and answer format).

“Are transactions that are determined to be disorderly representative of fair value? When is a distressed (disorderly) sale indicative of fair value?

The results of disorderly transactions are not determinative when measuring fair value. The concept of a fair value measurement assumes an orderly transaction between market participants. An orderly transaction is one that involves market participants that are willing to transact and allows for adequate exposure to the market. Distressed or forced liquidation sales are not orderly transactions, and thus the fact that a transaction is distressed or forced should be considered when weighing the available evidence. Determining whether a particular transaction is forced or disorderly requires judgment.”

In other words, banks will not be forced to base their values on the actual sales prices, since the sales will be deemed “forced or disorderly”.  They are still allowed to use a considerable amount of “judgment” in determining values.

Note that although I am an accountant, I don’t work in this area, and I have only read the SEC announcement once, so this is something of an educated guess on my part.  Still, it certainly seems to fit the current fact pattern.  If anyone who is really an expert on this can enlighten us further, I would appreciate it. 

EndGamePlayer's picture
EndGamePlayer
Status: Platinum Member (Offline)
Joined: Sep 2 2008
Posts: 546
Senate Bail Out Bill link on . . .
http://finance.senate.gov/sitepages/leg/LEG%202008/093008%20Leg%20Text%20of%20the%20Emergency%20Economic%20Stabilization%20Act%20of%202008.pdf
reistr's picture
reistr
Status: Bronze Member (Offline)
Joined: Jul 15 2008
Posts: 50
 In my opinion, it was day

 In my opinion, it was day trading and speculation. Just look at the timeline:

 Monday - Bailout defeated -> Dow drops record amount.

 Tuesday before opening of markets - Bush anounces to the World bailout is still alive. This was a trader's "dream come true" -> Dow climbs by record amount.

 Wednesday - Bailout still not worked out -> Hangover and dow drops again.

 Look at the Wikipedia articles on the Great Depression. The graphs are steeper, but the behaviour is very similar. After every huge loss there was a large gain, but overall never climbing back to the previous level.

 I also love all the attemps during the Depression at market manipulation by the large investors (Rockfeller, etc.) - They made a few moves at buying stocks above market value. The only difference was that they were doing it openly, to to display confidence in the markets and hopefully spread that confidence around (obviously didn't work).

 The central banks and international governments are making similar moves. But this time quietly, so there is an appearance of genuine free market confidence - Unfortunately with just as fruitless results...

 Never mind the fact that under normal circunstances I'm pretty sure that would be illegal.

 

 

Xflies's picture
Xflies
Status: Silver Member (Offline)
Joined: Aug 19 2008
Posts: 157
Can someone tell me if the gov't is FORCED to buy assets?
If the gov'ts primary goal is to kick start the free market price discovery mechanism by offering out bids and they get outbid by others, does this Bill force the gov't to paying up for securities?  If not, then is there a possibility that this bailout works more like a backstop and that the gov't won't need to buy $700B worth of securities and instead much of it will go to foreign investors, private equity and any hedge fund that's still alive?  And even if the gov't buys back securities, I wonder how long it will take for them to burn through $700B... there should be plenty of time to make money in the markets if you don't have your blinders on.  If the gov't ends up buying $600B, then the alarm bells will ring again.
jdb123's picture
jdb123 (not verified)
FDIC Increase---Advice for Chris

First let me start by saying the "rescue" American "buy in" will pass...as we all know.  I may be buying calls on dow spiders before the end of the day today....the senate passing may create a wave i want to ride until friday or monday....???

Re: FDIC increase---WHO CARES!!!!  If/When the banking system fails they couldn't cover $1,000 per depositor....so why not increase to $250K to create illusion of confidence.  My goodness if Wamu went fdic they could barley cover those deposits.

Can you say dow 13K by Jan. 09 or Dow 15K by May 09......I know its almost unthinkable...but what they are fabricating WILL WORK to some degree and for a LIMITED period.....as Chris has said the party on wall street goes on.....and......we MAY be ready to see the PARTY of all PARTIES....we all know where the DOW "SHOULD" be....that we are in a serious recession NOW....but nothing NORMAL seems to matter.

Chris--Unsolicited advice--with all due respect--if I may---

First-you are a most trusted and honest economic commentator....!

When you opened this "forum" I could only have flash backs of ALL the garbage I have seen on messgae boards....I am SURE your intentions were/are nothing but positive-----for the greater good  etc etc etc.....

However--I guess I have a few thoughts.....

1---when you give everyone access to YOUR web site forum....your entire vision..intellegence--direction etc etc gets diluted...to a degree and as you may have seen..and only the beginning  ( message board comment earlier ) this is ONLY the beginning---more nuts--------jackasssssss--and CHallengers to come...

2---I want Chris Martenson focusing on ---  the several reports out today...the indicators....the charts....the world economy...analyzing data....checking history and applying it to todays circumstances....finishing chapter 20.....not spending time to the " I don't agree with you" "answer this challenge" or "I dont understand" whiner ( when you've signed up for 3 days ( unpaid--thank you ) you may not totally understand--look listen---evaluate etc etc .....your NOT going to be 100% correct....you and I both know that....

3---Im finding ChrisMarteson.com....a lot less of Chris Martenson than I would like and I lot more of what I don't want or need......

 

Thanks for all your hard work and giudence Chris!!!!

JDB 

 

 

 

 

 

 

 

Xflies's picture
Xflies
Status: Silver Member (Offline)
Joined: Aug 19 2008
Posts: 157
I second that motion even if it means kicking me off the boards
I never meant to be offensive in my previous posts about objectivity but I was affected by posts from others on your site.  I would rather much hear more from Chris and less from others (including myself Foot in mouth) ... I would like to hear your thoughts on both sides of issues, and more of what you would do.  I already know you are not for any type of bailout plan but assuming it goes through, what would you do if you were on that bailout committee?  Personally, I would commit to always providing a 2 sided market once I was able to buy some assets.  If the goal is to enhance price discovery, then a 1 sided market is no good.  Start by buying some assets, drop your bids, no one else comes to bid, stay until u get hit, then lower it... no one wants to sell?  Start offering some... 2 sided markets and a commitment to liquity creates confidence and even more liquidity... but enough of my opinions, I'd like to hear yours.
pir8don's picture
pir8don
Status: Gold Member (Offline)
Joined: Sep 30 2008
Posts: 456
I joined yesterday
This is the only site I subscribe to. I have been near panic and over a week ago cut all news sources except this one. The only strength is diversity and no one has to or will read every post - I agree with Chris's open policy because amongst anyones poo may be some useful manure. Don kiwibog.com
gsti's picture
gsti
Status: Bronze Member (Offline)
Joined: Jul 21 2008
Posts: 60
I do agree with you

I do agree with you pir8don,

This way it is far easier to help others understand issues, and learn things yourself.  I understand that there is alot of rubbish at times, but that can be put down to the fear and confusion people have at the moment.  That will settle down.

pir8don's picture
pir8don
Status: Gold Member (Offline)
Joined: Sep 30 2008
Posts: 456
thanks - Philosophy?

Thanks for your support. I gained my degree 30 years ago with majors in Philosophy, Social Anthopology and Politics. I see many people on this site that are very close to the action. To my mind it is time to look at the situation from a philosophical point of view. Chris has an excellent crash course that covers most of the detail but I would like to see a forum place to discuss philosophy where I might just talk to myself but at least clarify my thinking and maybe engage others. I have been left by circumstances with time to think and hope I have something to contribute to the discussion. Even though I am on the other side of the world (Aotearoa NZ) I know our "leverage" is just as high as the US and that where they go so will we. Even with our small population (50 thousand locally) I dread what will happen when the oil stops coming and the supermarket shelves have no food. We will have no time to grow, few skills and little land left. I've run our home on solar and stored heaps of food - use a tank of gas every two months but none of it will allow my partner and I to live near starving people.

The only idea I have had is that we should form groups with our neighbours but cap the size at 100. Discuss the situation and hopefully act. No leaders and only act on concensus. The neighbours I have discussed this with so far agree but I have chosen the most likely first. 

logBurner's picture
logBurner
Status: Bronze Member (Offline)
Joined: Sep 26 2008
Posts: 58
Help please

Fabio, thnaks for post. Unfortunately Economics is not my strength (catching up as fast as I can) I'm in UK so even more difficult. Could someone put in real easy lay terms. I think I understand the gist but I'm sure others would appreciate any explanation, analogy, . .  . .

Thanks again guys.

Also - observing from UK I get the impression that this time ain't nothing going to stop the bill. Evevery where people are reporting that yes there are still lot's of people complaining [One radio show mentioned with the previous amended Bill a Senate had 1000 calls and only 3 for the Bill] but this time people are getting desperate because they now realise that loans are hard to come by.

FYI - I can't remember seeing a single article in main UK press that really opposed the original Bill - my impression wa that all said it had to go through, for example on BBC a 'reporter' asked what happens if the Bill is not passed and the 'economist' reply was "You don't even want to go there!". Bloomberg (UK) has faired only slightly better IMO.

Fabio's picture
Fabio
Status: Member (Offline)
Joined: Aug 14 2008
Posts: 3
I`m from Germany

Hi logBurner,

I am a so called "financial professional" from Germany, but believe me: 95% of my colleagues is as clueless a our politicians or us ordinary citizen on that subject. I happen to be one of perhaps 1000 libertarians in Germany, so I`m used to "Austrian Economics", but the speed of changes in the last weeks has completely overwhelmed myself. I`ve posted the article hoping that Chris would comment it, if he thinks it is important. To me it sounds like the FED is taking away all the limitiations to just plainly print the money. I don`t understand all the talk about the Bailout-Plan, because in my view the FED does not really need it. I think they do it for the foreign investors who threaten to dump the toxic "assets" otherwise. Now they can dump it on the american citizen.

Our media is also 100% in favor of bailouts and it talks about the opponents as if they where a bunch of selfish rednecks (perhaps a collateral damage of the US republicans having behaved like that the past eight years).

Cheerio

Fabio

PS:

I hope in the Brits like UKIP and the Ron Paul Americans for a real change. Germans are religiously following the State as they always do, so do not expect anything constructive from us.

 

 

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