Wednesday, July 02, 2008

The Polemic Fashioned From Purest Envy

It's always a good idea not to start a post with "I'm not an accounting expert but...", especially since my digressions into the world of high finance are meant to bolster my skillz as a financial commentator rather than diminish them. Still, after my mixed record on monolines, once more into the breach... and all that. And you know how I do love taking a pop at financial journalists with better gigs than I (90% of them).

It's usually pretty easy to take a more critical look at what Andrew Ross Sorkin's sources are telling him. His fault, and compared to what he's managed to do for the Times' business coverage, it's reasonably minor, is his closeness to his sources on Wall Street.

So, when top wealthy and tiny egomaniac Stephen Schwarzman wants to agitate for some way of making his financial results look better, Sorkin can be relied upon at least to give his point of view an airing. So we get a thousand-odd words on whether banks are being harmed by having their holdings of crappy debt securities marked to market when reporting their financial results, by valuing them according to what these assets would fetch were they to be sold.

We get some of the arguments as to why FAS 157, an accounting rule I'm sure you can google rather than trusting me not to mangle it, was introduced at the wrong time. He brings up somme guy at Citigroup saying that "securities with little or no credit deterioration" are being marked down unfairly during a period of crisis.

Which brings me to the whole "I'm not an accountant" bit. And I'm really not an accountant. Instead I'm going to look back at what happened during my formative financial crisis, the post-Enron collapse. Lots of banks were left holding loans to power companies that started to go horribly wrong in the months following Enron's bankruptcy. Some borrowers defaulted for structural reasons (ratings triggers, problems with their covenants), but others just stopped repaying their debt on time.

In those circumstances, banks took a long look at these deals, saw if there was something they could do to rectify the situation, and if there was likely to be an impairment, took a provision or, alternatively, just sell the damn things. But they were, by-and-large, in the lending business, and sold thee loan because they could, rather than because they should. The ones that didn't sell, as it happen, came out of the period rather well, because the market picked up in about four years.

But its bankers, who are expected to hold on to their terrible loans come what may, who are allowed to talk about credit deterioration, and about how they are expected to get paid back eventually, once everyone's forgotten what the fuss is about. To be honest, monolines are allowed to do this as well, except where derivatives are concerned.

The guys who absolutely not allowed to do this are investment bankers, that troupe of shiny-haired boffins whose main skill is connecting buyers of financial assets to sellers. The gents are absolutely not meant to care about whether they get paid back one day, because by then they'll have landed a sweet gig at a hedge fund, or some charity gig. Maybe get eulogized by Andrew Ross Sorkin.

They mark this crap to market because the entire point of their existence is to sell them to someone else. If they want to talk about credit impairment, and bitch that one day they're going to get paid why are they getting crucified right now, there's a really simple solution. Go and become portfolio at some podunk commercial bank owned by some silvery-haired pair of community pillars (who, ahem, got heavily into condo lending. But that's a stereotype that can get fleshed out another day).

Now, you will point out that several of the banks that are taking hideous write-downs might properly be called mega-banks, strange and loathesome combinations of investment banks and commercial banks, which in the current market are looking a bit like that dog that got caught in the Fly's matter transporter. Some are more convincingly commercial banks than others, and I've got a tad more sympathy for Citigroup, which is taking deposits from fools like myself, than Lehman Brothers or morgan Stanley, which were furiously buying up mortgage originators or sending up token banking operations in lightly-regulated states liken Utah.

If this post is morphing into a paean to the venerable, and now inoperative, Glass-Steagall Act, which separated commercial and investment banking, then so be it. If you want to be in the business of cooking up debt obligations, and you either wish to be bailed out if the process goes wrong, or financial stability demands that you be bailed out if the process goes wrong, then absolutely a horde of regulators should be crawling over your books at all hours. Absolutely some incredibly conservative leverage levels should be applied to your business. Absolutely your masters of the universe should be incredibly boring people in bad ties and spiritual affinities with Germans.

But hey, I'm not accountant.


Post a Comment

<< Home