Monday, March 16, 2009
Peter Wallison, Advocate
"In fact, neither of these statements is likely to be true. Both taxpayers and banks could come out well-and so would our economy--if the government were to buy the assets at their 'net realizable value,' which is based on an assessment of their current cash flows, discounted by their expected credit losses over time. ... This is simply what the value of the cash flows would bring in a fully functioning market, including discounts for several factors like anticipated future losses. ... Thus, under mark-to-market rules, the banks must discount their assets' net realizable value. ... A hint of the true situation was contained in a remark by Vikram Pandit, the CEO of Citibank, in testimony before the House Financial Services Committee last week. He noted that Citi marks to market and that 'those marks are reflected in the losses we've taken, as well as in our income statements and balance sheets.' ... In other words, Citi has marked some assets below their net realizable value, and selling them at a price lower than that value would be unfair to its shareholders. ... The banks have already made an assessment of the assets' net realizable values, as Mr. Pandit suggests was done at Citi. The government can quickly verify the accuracy of these valuations, including the rates used for discounting, and can of course come up with its lower evaluation if it disagrees. ... But the key benefit is the boost in the banks' capital which comes from a sale now. This would eliminate doubts about banks' solvency and free up their ablity and willingness to lend again. If this is a win-win for the banks and the government, why is it that no one had thought about doing this before? ... This has run into opposition from the accounting industry and investors groups, who are afraid it will be a license for banks to manipulate their financial statements", my emphasis, Peter Wallison (PW) at the WSJ, 26 February 2009.
This is so bad. What does PW, AB, JD Harvard, think MLEC was if not an earlier attempt to have Uncle Sam overpay banks for junk assets? See my 18 October 2007 post: http://skepticaltexascpa.blogspot.com/2007/10/use-your-own-money.html. Yes, PW wants to give banks a license to produce phony financials. Why listen to PW? We've heard these arguments before. As for Citigroup, did you notice Citi has a $44 billion deferred tax asset on its 31 December 2008 balance sheet? KPMG did not insist it be written off. KPMG did not insert a "going concern" comment in its opinion. KPMG had no problems with Citi's internal controls. Didn't Citi add $49 billion in SIVs to its balance sheet 15 months ago, my 15 December 2007 post: http://skepticaltexascpa.blogspot.com/2007/12/citigroup-comes-clean.html.
What is "a fully functioning market" anyway? If Citi has any assets which Pandit thinks are undervalued, he should buy them for his own account. Or shut up. Why should anyone care about the banks assessment of anything? Would Citi be with us today sans $350 billion in federal money? The "government can quickly verify" what? Arithmetic, not value. Which by the way, is what much of Big 87654 auditing is, just checking arithmetic.