Monday, February 21, 2011

The Price is Wrong

The most successful, longest running game show in the world was popular enough to establish a committed audience for a few reasons.  Originally The Price is Right was one of the only game shows that was presented beyond a quiz show format and six decades later it’s still a show that captures our attention by asking us what the value is of everyday items we all use.  As opposed to auctioning off pots and pans or washers and dryers they can be won by having the closest guess of their worth.  Imagine if the show were different though.  Take away all the lights, cameras, models, and host and have a format where instead of estimating worth you got to create it.  But instead of creating the worth of lame cars and pretty appliances that don’t belong to you, you got to do it for something more substantial and even more common that actually affects people’s livelihood.  Other people’s homes for instance.  Then let your imagination do something extraordinary and consider that this isn’t a product of anyone else’s wicked imagination but something else.  Something that’s already been happening.
No, come to think of it we’ll still need a host.  Only in place of Bob Barker we’ll let Congressman Barney Frank, former chairman of the House Financial Services Committee assume the title.  The HFSC is what oversees the entire financial services industry which includes the insurance, securities, housing, and banking industries.  It is the observation of what has happened to housing and banking under such Frank leadership that the following points will be respectively scrutinized.
Right now home values have been down for a record 17th straight quarter, over 4 years of decreasing worth.  At present, there have been so many foreclosures now that the Census dept recently revealed that there are over 18.4 million vacant homes.  An astonishing 11% of the countries entire housing units are completely vacant on a year round basis.  In spite of the fact that the affordability of homes has greatly improved homeownership is at its lowest point in well over a decade.  This devastating market has shaken buyer confidence.  Those who can afford to buy homes have seen too well what it’s done to friends and family and are “playing it safe” in the prospect of renting.  So how did this happen?
Fortunately the government asked the same question and designated a small committee to publish a report known as the “Conclusions of the Financial Crisis Inquiry Commission.”  Unfortunately, it’s a government report on account of a heavily government accountability problem.  Some government responsibility is acknowledged in the document by using language such as “scant regulation” and “public stewards of our financial system ignored warnings” but in an interesting way.  Throughout the entire 14 page report the only “government office” of which these comments are referred to is blamed specifically on the Federal Reserve.  It’s interesting that the only government department whose decisions are exempt from any executive or legislative ratification is on the receiving end of the most “government” blame.  Several other corporations are specifically mentioned as well but somehow the one government committee that overseas the most relevant industries that brought the disaster upon us isn’t mentioned once.  In order to further understand the relevance of the HSFC role in this catastrophe some brief history should be considered.
Traditionally banks would lend up to 75% of the value a home could be sold for.  For the past eight years Barney Frank as well as some other congressmen have pushed lenders and the FHA into lending up to 97 & 100% of home value.  Why was such easy and available credit beneath an umbrella of such “scant regulation?”  After so many people started taking out loans they couldn’t pay back the banks began to experience the weight of an even heavier problem.
Since they were loaning out exponentially higher percentages of money for home worth they simultaneously had to deal with the new negative home values the market endured after so many foreclosures.  Obviously, once someone is unable to pay back their mortgage after so many payments the bank is forced to assume the ownership of the home in order to make their money back.  The foreclosure problem in this new market has presented a massive problem for bank assets which have created some pretty repulsive balance sheets.  If Banktown USA loaned $250,000 to Jake for the home he couldn’t make payments on than when Banktown USA acquires the home they also have to acquire ownership of the fact that it’s now worth $180,000.
A balance sheet is a snapshot of the financial well being of any company.  Of course no body likes ugly snapshots, especially shareholders.  So what can be done to ensure that the public gets to continue looking at pretty snapshots?  Show them fake ones of course.
Economist Karl Denninger of Market Ticker reported some of the following results recovered from the FDIC’s recent archives.  The Bank of Illinois was recently seized by the FDIC when their balance sheet showed assets of $211.7 million and they had deposits of $198.5 million which would indicate that they were $13.2 million in the negative when in fact that was just an excessively gross exaggeration.  Their assets of $211.7 million were overvalued by more than 25% which put their actual loss at $53.7 million.
Waterford Bank of Maryland reported $155.6 million in assets and $156.4 million of insured deposits which would reveal an $800,000 shyness when in fact they generously overvalued their assets at over 30%.  Their actual loss was something over $51 million.
If those balance sheets were bad than Sun American Bank of Florida deserves a medal for excessive fraud.  They reported $535.7 million in assets and $443.5 million in total deposits.  Clearly it would look like they had a positive balance except for the fact that they happened to overvalue their assets at an astonishing 37%.  Instead of being over by $92.2 million it puts their total actual loss at $103.8 million.
These are just some the banks that have been found out.  Or rather, only those that have been caught so far.  From Florida to Illinois to the Northeast banks across the nation are reporting fraudulent balance sheets.  Not to mention the above examples are all of local banks which begs the much larger question of whether or not the big banks are doing the same thing.  At that point it’s a matter of whether or not the big banks were making easy available loans.  Do the trillion dollar empires of Citibank, Chase, or Bank of America possess a considerable amount of foreclosures now?  Since big banks issue more loans than the smaller ones and in fact own many of the smaller ones it than it would be reasonable to imagine that those big balance sheets have got some “tall tale” assets of their own.  So what indicates that the housing market is going to come back before actual home values are realized?  If the housing market doesn’t prosper before the overvalued assets of so many of these banks is discovered than the recession to come looks to be far greater. 
It’s troubling to think that such made up numbers could be so devastating.  It kind of makes me miss just having tuned in and making them up with the rest of the studio audience.  Although we should be careful to remember that ultimately and always it is the audience, the people that have true power.  It is by the people’s wishes that such “higher powers” must be obedient to.  The scoundrel forces that create the dark clouds and droughts of such an economic climate are dogs among men.  We should not be blindsided by such dogs, no matter how vicious they become, they’re still just pets.  Pets we must not only protect ourselves from but that of our children as well.  The accounting fraud that destroyed Enron and Worldcom is now happening across the banking industry.  This would be a good time to remember to have our pets spayed or neutered.

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