FDIC Exposes Mark-To-Market Gaps

July 19, 2010 by · Leave a Comment
Filed under: Bailouts, FASB, General 

When taking over a failed bank the Federal Deposit Insurance Corporation (FDIC) reveals vital information about the current market value of an institution’s assets.
There is a significant gap between the FDIC estimated values to those calculated by bank management using mark-to-model accounting subsequent to the Financial Accounting Standards Board (FASB) suspension of fair value accounting in April 2009,
Among recent bank failings the FDIC using mark-to-market accounting valued assets between 96-125% lower then bank management using mark-to-model accounting.
There are no reports of alleged fraud or negligence on the part of management in these bank failings.
Maybe this describes two things: 1) Bad/misbehaving management and/or 2) Liquidation value vs. economic value. Nothing to report here.

Cutting “Too Big to Fail” Down to Size

June 3, 2009 by · Leave a Comment
Filed under: Bailouts, Market News 

Is a company that is too big to fail really a company? As Sarah Palin might apologize, “I don’t wanna get all philosophicky on ya” but think about it.

A company assumes some degree of risk to make money. You buy inventory in the hope it will sell at a price higher than you paid. You operate machinery in the belief that the goods you produce will sell at a price higher than your cost to produce. Guess right, you win. Guess wrong, you lose.
Fundamental to a market economy is this leap of faith. You need to have some skin in the game.

Too big to fail says this core principal no longer applies. It says, “go ahead do whatever you want, it won’t matter if you fail because we’ll have to bail you out.” This is not a free market economy. It isn’t right. It isn’t fair.

Funny thing is, we figured this out over a century ago. Republican Senator John Sherman wrote the first antitrust regulation in 1890. He, Teddy Roosevelt, and the conservative Republican, William Howard Taft (who some might say was also too big to fail) all saw the importance of fairness and stability in a market economy and they busted up the trusts.

True. Companies “too big to fail” aren’t trusts. But they are the modern equivalent of a Rockefeller or Carnegie monopoly that squashes fair competition. To restore stability to a market economy, like trusts, they need to be resized so their possible failure is again a healthy purging and not a catastrophic, economy-wide collapse.

For banks, let’s institute a sliding capital scale. The bigger you are, the more capital you need. Want to be a trillion dollar bank? Let’s say you need 50% capital. 500 billion? 25% capital. 100 billion? 25% capital. 50 billion?
15% capital. Less than 50 billion? 10% capital.