AN UNINTENDED CONSEQUENCE

Had a great time the other day; my daughter and I went horseback riding down country roads. It was a warm and sunny day, the birds were singing and the flowers were putting on a show of color and fragrance for us. It was stupendous!
It was at about the halfway point that I noticed two houses that were vacant and starting to deteriorate. The gutters were falling off the weeds were high all around the house and a window was broken out of one of them. You know, when you’re out riding a horse for three or four hours there is not much for your mind to do, you butt yes, your mind, no. So, I had plenty of time to think about those houses and came to a terrible conclusion. The banks will let them and the millions like them rot to nothing! HA, you say, this guy is nuts! Perhaps but the fact remains that the banks will let the empty houses AND empty commercial buildings in this country decay, crumble and rot.

AN UNINTENDED CONSEQUENCE
Had a great time the other day; my daughter and I went horseback riding down country roads. It was a warm and sunny day, the birds were singing and the flowers were putting on a show of color and fragrance for us. It was stupendous!
It was at about the halfway point that I noticed two houses that were vacant and starting to deteriorate. The gutters were falling off the weeds were high all around the house and a window was broken out of one of them. You know, when you’re out riding a horse for three or four hours there is not much for your mind to do, you butt yes, your mind, no. So, I had plenty of time to think about those houses and came to a terrible conclusion. The banks will let them and the millions like them rot to nothing! HA, you say, this guy is nuts! Perhaps but the fact remains that the banks will let the empty houses AND empty commercial buildings in this country decay, crumble and rot.
Why, on God’s green earth, would they do that? They have to! It is an unintended consequence of government interference. By now you know, or if you don’t you should know, that we had a housing bubble that burst and the values of real estate are going down nation wide, the nations biggest banks are on the cusp of financial ruin, matter of fact our government has given them billions or is it trillions ( it so hard to track of those little zeros) and to ease the banks suffering and pain the government reversed its ruling on mark to market (fair value) accounting.
Mark to market accounting means that a bank has to show the value of their assets at market value. If, for instance, you have a car that is worth ten thousand dollars but on your personal financial statement you have the value of the car as what you paid for it three years ago when it was worth forty thousand dollars then IF the government told you that you had to account for that car using mark to market you would value that car as ten thousand dollars on your personal financial statement. Subsequently, lowering your net worth by thirty thousand smackaroonies. Conversely, if you had a 1957 Thunderbird and you’ve had it since it was new and you valued it at what you paid for it back in ’57 and you had to mark to market then your net worth would shoot up like a rocket because of the value of that T-bird. That is not the case, however, for the banks.
Late last summer the banks were required to mark to market and it was shown that these banks were insolvent. That is the reason, or at least part of the reason, that banks started failing in heaps. Failing, falling, does semantics matter? The point is that they were dying like locusts shot with Raid. So, in steps our trusty, clueless, elected officials, who in one grand wave of the hand, suspended the mark to market accounting requirements.
Oh, so nice. Everybody is getting back on an even keel, the market is up, spring is upon us and, hey, even Warren Buffet says we are at the bottom. Sweet! I was almost taken in by the euphoria. HA! What happens now? Oh, on a side note: Warren you screwed up! Wasting all of those billions thinking the bottom was at hand. You are still beating the same drum hoping that people will listen and start buying enough to dig you out of your losses. I don’t think so, buddy. You will get burned , AGAIN, if you start believing your own mantra. OK, where was I? Oh, yes. I was about to explain the unintended consequence of this whole thing. So, the banks are insolvent, they have assets that are worth MAYBE thirty cents on the dollar and they get to hide that fact by keeping their assets on the books at what they paid for them. Let’s run a little scenario so even guys like me can get it.
You are running a business, poorly I might add, and you find that you have made bad decisions, really bad decisions and your company is bankrupt. But, to your good fortune, no one knows it but you. You can hide this fact by two things. 1) you don’t have to tell anybody that you are bankrupt. For example if your company had assets that were worth one million dollars and five hundred thousand dollars in liabilities , with that million dollars worth of assets your company would be worth five hundred thousand dollars.But if the truth be told, those assets are only worth one hundred thousand dollars, your company is four hundred thousand dollars under water, in the red, up side down. In other words bankrupt. But, then again, you don’t have to tell anyone. Because, you can just keep those assets valued at one million dollars. Nobody will ever buy them for a million but that’s ok ‘cause nobody is the wiser.
Now here comes another problem and the second part of the sharade. Those assets aren’t making you any money because they went down in value, the people that paid you handsomely for the privilege of using those assets stopped paying but the payments on those loans just keep coming up. Now what? Well you can take money from other assets or work that you are doing to pay for those loan payments, even though the payments are eating your company’s profits to zero or a worse. It is better to do that than to tell the truth (mark to market) because at least your company is still in business. As long as you KEEP those assets no body will know.
What the banks have done is one step better. They have told the U.S. government that they are “too big to fail.” Therefore, the government is making their loan payments for them! HA! HA HA!! If only I could have someone do that for me! I’d be giving myself huge bonuses just for thinking that up!
The bottom line is that as long as the banks hold those assets they can, conceivably, play this game indefinitely. The operative words here are “as long as they hold those assets.” As soon as they try dumping, I mean selling, those assets they will be shown to be insolvent. They will hold the houses and the commercial buildings and the office towers until the government makes them account for them in a fair valuation or the government stops bailing them out. As you can see in our simplistic example as long as the government keeps bailing them out or as long as they have money to pay their bills they ponzi charade will go on.
So, the next time you see an empty and delapidated house, commercial building or CITY, you will know that is was an unintended consequence of helping banks that are too big to fail. Let us pray that this insanity of us throwing trillions at insolvent banks ends soon so that we can start rebuilding our nation.