Mark to Market

The FASB has effectively done away with mark-to-market rules for banks. They have bowed to pressure from Congress. The expectation is that this will allow banks to post large earnings reports for the first quarter.

However, the underlying fundamentals are still shaky. Consumer loan delinquencies just hit a new high. FHA loans are in trouble as well, and Fannie Mae npl's are over 7%. These are all record numbers, and show that the consumer is still in deep distress.

My first thought is that mark to make believe will zombify the banks. Banks will sit with large amounts of non-performing assets but mark them at higher than market prices. The banks will therefore be unable to remove these toxic assets from the balance sheet, as selling them would "discover" a large loss which would need to be booked.

Rosenberg asks who will participate in the PPIP when the banks can just mark everything to 100%? I'm going to predict that they will still use the PPIP, but that it will be surprisingly small, and very toxic. The banks will get rid of only incredibly bad stuff, at outrageous prices. PimpCo (as Mish calls it) manager Bill Gross says PPIP is "win/win/win." Combined with mark to make believe, I think it could turn out to be lose/lose/lose. Taxpayers lose because they're covering all of the losses. Pimpco loses because they have to put up something, and they will greedily bid too much, smelling a no-lose situation, and banks will lose, because they will keep too much on the books at mark to make believe.

And while I'm writing, I have a couple of thoughts on GM. Obama is throwing the Union under the bus. While this is the right move, it may backfire politically. Bankruptcy may be the best option for GM. However, I think Obama will blink and his bluff will be called. A competent administration could come up with a quick prepackaged bankruptcy solution. However, this administration hasn't impressed me, and I think they will butcher the restructuring. It could be long and ugly.