Mark to Market

OK, Enough of this baloney of mark to market.

As long as there exists level 3 accounting rules, there is no mark to market, period.

If it were so, Citi alone could have up to $5 Trillion in writedowns, today.
AIG could have $1.6 Trillion in writedowns, today.

It actually might be A LOT worse.

Last August, when the FASB was supposed to implement rules which would have eliminated level 3 accounting (you know, Enron-esque math), Chris Whalen from Institutional Risk Analysis wrote this story. In it he included this nifty little chart:


Remember to add 000 onto all of the totals.

These numbers are from last August, when all the banks were supposed to move all of these level 3 holdings onto active accounting sheet ledgers (like you must balance your checkbook every night).

Last July (in error in a previous post I had written June) the FASB decided, under heavy pressure from the Federal Reserve, White House and large banks, at the last minute, to not implement the rule until November, 2009. Unless the new administration reverses the Bush policy of hide the losses, expect that deadline to be moved further out into the future.

The very fact that level 3 exists means all of the level 3 holdings are MARKED TO FANTASY, not marked to market. All of these numbers represent CDO's, CMO's, CLO's SIV's, and the CDS insuring them. The banks are claiming they are all worth FULL VALUE. They are also claiming that if they hold onto them through maturity, they may still get full value.

Never mind almost all of these derivatives are based on mortgages and housing prices at 2007 prices and before. As every foreclosure goes by, the derivative that represents a bet on the mortgage from that now foreclosed house has lost that portion of return, forever.

If Citi were to have "marked to market" all of its level 3 holdings last August, the best they might have gotten is .50 - .55 on the dollar. With $38 Trillion in level 3 holdings, that would have meant an immediate writedown of $17 Trillion.

To be fair, this chart is from last August, and some of these holdings have been removed. But, certainly not all of them, and in some cases, the majority are still there.

Chase had $90 Trillion in derivatives. No need to wonder why they wanted to swallow Bear Stearns, it was to protect, and hide, their counter-party risk.

This list includes only a few banks, and none of the broker-dealers that have since become banks just to receive TARP monies. Goldman Sachs, Morgan Stanley and others have significant level 3 holdings. Much of these are in off shore accounts, with no way for regulators, should they ever want to, to even see them.

Please keep in mind, as of August last year, there were at least $600 Trillion in derivatives globally. The majority written by US Investment Banks. Many estimates conclude the amount of derivatives has increased since then.

Our government, or any government, has no business trying to fill the void left by the losses associated with derivatives. The banks most exposed should be seized, bondholders and stockholders equity taken to make depositors whole, and the rest to float on the market to get whatever it can.

Let's do the numbers, at a very generous 55% return on these derivatives, and see how big a partial hole is;

Bank of America - $38 Trillion x .55 = $20.9 Trillion. 38 - 20.9 = $17.1 Trillion in losses.

JPM Chase - $90 Trillion x .55 = $49.5 Trillion. 90 - 49.5 = $40.5 Trillion in losses.

CitiGroup - $38 Trillion x .55 = $20.9 Trillion. 38 - 20.9 = $17.1 Trillion in losses.

Wells Fargo/ - $6.4 Trillion x .55 = $3.52 Trillion. 6.4 - 3.52 = $2.88 Trillion in losses.
Wachovia

This represents $77.5 Trillion in losses among only four banks if the return would have been 55 cents on the dollar (Merrill sold several Billion for only 5 cents on the dollar), last August. Again, to be fair, some of these holdings have been written down already. But, many banks and brokers have increased their level 3 holdings since then. In the last quarter of 2008, Wells Fargo increased their level 3 holdings 50%.

The next time you hear some genius spout off that "mark to market" is unfair and killing the banks, just remember, most of the toxic assets are in level 3, and to be in level 3 means they are not marked to market.

The banks are getting away with robbery. The Federal Reserve is buying their derivatives at full value. At this point in time, would you?