New Accounting Practices Will Boost Bank Equity Values

Incase you missed it, the SEC has announced new accounting rules that will help companies value illiquid assets.

Taken from this article, Rethink of rules on value boosts banks

The Securities and Exchange Commission said on Tuesday that managers could use their own judgment when valuing securities in illiquid markets, which means they can use measurements other than actual market prices.

I believe this is utter hogwash. Bank managers should never be allowed to use a measurement other than Mark to Market to value an illiquid asset. This kind of accounting applied to a typical wholesaler would create a huge mis-valued inventory. Lets say I owned a company that sold sportswear, if there was suddenly no market for my particular brand of sportswear, the new accounting rules would allow me to book a subjective value for the inventory assets instead of basing them on true closeout prices.

The new rules will benefit most of the large banks such as JP Morgan (JPM) and Goldman Sachs (GS). I’m not sure if the SEC’s decision is wise, since it will just mask the problem of investor confidence and an on-the-brink failure of the OTC derivatives market. I believe the new rules will also give leeway to possible accounting manipulation. For investors, the rules further obscure our ability to determine the value of a companies equity.

Mark to Market is an important principal behind our financial ecosystem. To read more about Mark to Market, I suggest this article, Financial Crisis: Mark to Market Accounting Demystified.

Taken from the article:

[Mark to Market]…was primarily intended to prevent shady accounting practices that hide underlying liabilities. The Accounting Standards bodies were concerned that companies were keeping “bad” assets on their books instead of “writing them down” to their real value (assigning a new, lower value to the asset). Mark to Market gives investors a much better “picture” of the health of the company if their assets are correctly priced (i.e. market price).

Congressman Ron Paul, A US Dollar Crises

Raw Greed readers should pay special attention to the Fox Interview below where Texas Congressman Ron Paul speaks about a US Dollar crises.

Here are some notable quotes taken from the interview:

“What we are doing here is guaranteeing the devaluation of the dollar.”
“This country is bankrupt and we wont admit it.”
“Eventually the dollar will go bust.”
“We are on the verge of destroying our dollar.”

If our global lenders lose faith in the US Dollar it will no longer carry any worth. I believe a dollar collapse is unlikely, however some degree of hyperinflation has been guaranteed by the Fed’s actions. Lowering the Fed funds rate and printing money at a veracious pace will ease access to credit and has been the formula for recovery since the Greenspan era of the Fed.

The Collapse Of The Great British Pound

The speed at which the Great British Pound is falling against the US Dollar is staggering.

Historically, the GBP has fallen under 1.4 twice in the past 16 years. Current levels are a stark contrast to the levels set at the end of 2007, when the GBP traded a bit higher than 2.1. In less than a year the GBP has fallen roughly 23%. I believe there is a possibility that we may revisit the sub 1.4 levels.

This is an extreme oddity, considering that the Fed Funds Rate stands at 1.5% and there is a possibility that the Fed may cut rates to 1%.

Taken from this Reuters Article, US RATE FUTURES-Bets tilt further toward 50 bps Fed cut:

WASHINGTON, Oct 21 (Reuters) - U.S. short-term interest rate futures on Tuesday tilted further toward an aggressive rate cut at next week’s Fed policy meeting, picking up on prospects for an protracted slowdown in the U.S. economy.

For the first time, futures suggest more than a 60-percent chance for the Fed to lower rates by one-half percentage point at the Oct. 28-29 meeting, backing up a similar-sized emergency cut on Oct. 8.

Normally falling interest rates would cause the base currency to fall in value against higher yielding currencies. In the past year when the Fed started dropping interest rates the USD fell against higher yielding currencies such as the New Zealand Kiwi, the Australian Dollar and the Great British Pound.

There is a market expectation that governments around the world, and especially in those with a high yielding currency, will drop rates aggressively similar to the USD.

The USD strength is non-indicative of a Fed Funds Rate of 1.5% and possibly lower. The Fed is now creating and pumping cheap money into the financial system at a breakneck pace. The debt racked up by the credit crises is close to getting out of control and we still haven’t faced the full brunt of a possible OTC derivative collapse. To compound the problem of the influx of new money, the Fed has announced the possibility of a second stimulus package.

Taken from this Forex Article: Mid-Day Report: Dollar Strengthens on Talk of Second Stimulus Package

Dollar strengthens in early US session after Fed Chairman Bernanke said that additional fiscal stimulus package should be considered to help improve “access to credits” by consumers, homebuyers, businesses and other borrowers given the “extraordinarily uncertain” economic outlook. In his testimony to House Budget Committee, Bernanke said that such actions might be “particularly effective” at promoting “economic growth and job creation.” Dollar index soars to as high as 82.92.

The USD Index has broken the 85 level and may well be on its way back to the 90 level. If the USD does break 90, we should see the GBP fall under 150 and possibly 140 if GBP rates are slashed aggressively in the near-term.

A Note of Appreciation

Raw Greed readers may have noticed that a few of the graphical and plug-in glitches with the blog have been fixed. The changes were handled by Vladimir Prelovac, a Wordpress Services provider. I highly recommend Vladimir if you have any WordPress development needs.