Posts Tagged ‘FAS 167’

American Credit Crisis Returns January 1, 2010

Ever heard of FAS 167?

Most investor’s haven’t. Which means they aren’t aware that it could cause another credit collapse come January 1, 2010.

FAS 167 is a rule from the Financial Standards Accounting Board (FASB) that forces banks to put securitized off-balance assets back onto the balance sheet.

In other words, all of those failing mortgages and credit card assets that banks hold will be out in the open, for everyone to see the true value of. And banks will have to put more cash in loss reserves for these assets (some of which are deteriorating rapidly in value).

As you can imagine, banks are scared shitless.

From Fincriadvisor.com…

The American Bankers Association declared the NPR a disaster-in-the-making, noting that the effect of the proposal would be to require higher levels of risk-based capital against assets that pose minimal risk, diminishing the “resurgence of bank lending that is so critical to the restoration of a vital U.S. economy.” The ABA also noted that FAS 167 could force banks to account for billions in assets in investment funds managed for third parties.

Here’s what Freddie Mac had to say about it…

“Under these accounting standards [SFAS 166 & 167], the company will record the underlying mortgage loans in these single-family PC trusts and some of its Structured Transactions on its balance sheet. These mortgage loans have an outstanding unpaid principal balance of approximately $1.8 trillion as of Sept. 30, 2009… While Freddie Mac continues to evaluate the impacts of adoption, the company expects that the adoption could have a significant negative impact on its net worth.”

Wells Fargo isn’t happy either…

“I want to update you on our most recent analysis of the impact of the application of FAS 166 and 167, which is expected to result in the consolidation of certain off-balance sheet assets currently not included in our financial statements. We provided a preliminary analysis in our second-quarter 10-Q. Based on our continued refinement of this analysis, we now expect approximately $55 billion in incremental GAAP assets to be brought on balance sheet, representing approximately $28 billion in incremental risk-weighted assets… we continue to explore the sale of certain interests we hold in securitized residential mortgage loans, which would further reduce the amount of incremental GAAP assets and incremental risk-weighted assets.”

Up until now, banks have kept these assets off balance in special investment vehicles. As long as the assets were off balance, the banks could essentially make up a value for them, resulting in less cash going into loss reserves.

But you and I know better.

Banks in America are practically insolvent.

The only reason this hasn’t come out in the open is collusion between the banks and the government. Hell, the government even forced the FASB to lighten up on mark-to-market rules earlier this year in order to keep the banks solvent.

This collusion isn’t over, either.

From 12^th street capital…

A bit of good news for banks today. In a Bloomberg interview, FDIC Chairman Sheila Bair said that she is in favor of giving banks “some breathing room” to raise the additional capital that will be required to support the hundreds of billions of dollars of securitized assets that will be consolidated onto their balance sheets as as result of the implementation of FASB Statements 166 and 167. Bair said she hopes to have the matter voted on at the December 15 meeting of the FDIC’s board.

It’s obvious the FDIC is worried about this. And the reason is very simple: The FDIC is in charge of taking over any other banks that fail. So this rule could have a disastrous effect on the FDIC. They’d be inundated with failed banks and have too few resources to take care of them effectively.

At this point, the banks all know that FAS 167 is in the works. And to compensate for the insane amount of capital they’ll need to build to cover the losses on these new assets, banks have hoarded cash, slashed credit, and increased fees like crazy.

Banks are in survival mode. And FAS 167 is one big reason why consumer credit has dropped for 9 straight months.

We’ll find out on December 15 whether the banks will have more time or not before FAS 167 takes effect. In the meantime, it’s adding a lot of uncertainty. And even if the rule is pushed off by six months, all it does is buy the banks time – time to slash more credit and increase more fees in a vain attempt to raise more cash.

Is 10,500 a no go?

10,500 is like the land the Dow dare not close above.

It didn’t even matter that the unemployment count for November was far better then expected (a 11,000 drop). After starting the day up over 1%, the Dow Jones and the other two indexes both ended the day barely in the green.

The funny thing is that the good economic news actually contributed to the markets rough going. It all has to do with the complex and far reaching implications of an improving labor market and its effect on the dollar.

You see, most currency traders like to see an economy producing jobs. It makes them want to buy more of that currency, pushing the price higher.

The problem is, the dollar is being used to fuel a huge carry trade. If the value of the dollar  increases,  the carry trade becomes more expensive. Eventually any fund that is short dollars (borrowing) will have to unwind its carry trade (close out the loan and take a loss). And the dollar moves up, up, up.

This scenario is pretty much what happened today, albeit on a small scale. The November unemployment report came in strong, and some currency traders took that as a sign of strength for the buck. At the same time, the increase in the dollars value spooked carry traders into closing out their positions.

This drained liquidity from the global markets and resulted in all three major indexes closing at the lows of the day. Frankly, i’m shocked we didn’t close out deeply in the red.

Here’s the kicker…

If the market is weakening over employment numbers, how badly will it weaken once the Fed announces an end to its MBS purchases in the first quarter of 2010? How will the market react if the Fed raises rates by June 2010?Or the passage of FAS 167 in January 2010? All of these things are dollar bullish and should add downside pressure to the stock market throughout the year.

And on a finally note, let me show you a chat of the Dow Jones. It shows the important inflection point we now sit at.