Bank Balance Sheets: The ‘Hidden Cause’ of What Looks Like Irrational Behavior by Lenders?

09 Mar

Whenever I try to explain off book accounting to people – to tell them what it is the banks are doing – or, for instance, why they would rather not take the short sale, do the loan mod or ‘help’ the homeowner…

I get blank looks, blank stares and shrugging shoulders. It’s not so easy to understand because it is so blatant that it just doesn’t seem as if something like this could really be going on in the good old US of A…

People say things like “Well, they can’t do that can they?” or “Isn’t that illegal?” or, one of my personal favorites: “Why hasn’t the government done anything to stop this?”

Of course the answer is that the government is the one who told the banks they could play this game – back in Spring of ’09 when they allowed the banks to ‘adjust their accounting’ for the ‘stress tests’. Uh huh. Yeah, that… so that they could continue to show defaulting mortgages at PAR (that means being paid as expected and current, up to date payments on book) even though they had not received payments, in say, two years…

This is the underlying truth about why no one can tell what is happening with their own mortgage by looking at their neighbors’ houses or mortgages. The answer depends on how the bank has decided to handle the books on each individual loan and they clearly handle them differently for reasons no one can fathom from the outside.

The latest interesting wave of these odd ball experiences of homeowners is the Notice of Cancellation and Rescission of Notice of Default – this new creature began showing up just before the end of 2009 in the mail of homeowners who were still behind, had no loan modifications completed, were still trying to work out how to save their homes or do short sales or what have you – and in cases where the homeowner had made no significant change in their status as behind on the subject loan(s).

Turns out there was another way the lenders could get paid – through insurance policies, and homes in default got a smaller insurance payoff than those that were not marked with the big red D.

This little piece by Mr. Denninger sheds some light on the bigger picture to help everyone see it more clearly:

ADMISSION By FDIC: Massive Balance Sheet FRAUD

Remember this Ticker from a few days ago?

I am constantly amused by those people who claim there is some vast “conspiracy” in this country when it comes to banks, balance sheets, and fraudulent lending and accounting.

There is no conspiracy.

It is, in fact, “in your face” fraud.

Well, one of the people on the forum emailed The FDIC to ask about what I had alleged. This was their response:

That’s the value the bank had them on their books on their year-end financials, but the true value is much less. It is similar to someone in Las Vegas saying that their house is worth $300,000 because that’s what they paid for it three years ago, but the reality is, if they had to sell it in today’s market, they’d only get $250,000 for it. The FDIC has to sell assets in today’s market.


Or tomorrow’s market.

The simple fact of the matter is that there it is, right in front of you.

A raw admission that the banks are carrying these loans at dramatically above their actual value.

Yes, this means that essentially all balance sheets must now be considered fraudulent, and thus the valuations assigned by the market to them are also fraudulent.

Extending this to the stock market as a whole you now have a market that is intentionally overvalued as a direct and proximate consequence of fraud, permitted and endorsed by the government, of somewhere between 25-40%.

Now you know why the market rallied off the SPX 666 lows to where it is now. 1139 (where we are now) * .60 (a 40% haircut) = 683.40, or awfully close to that 666 bottom.

Of course this “valuation” expressed in the market can only be maintained for as long as the fraud is. If the ability to maintain that fraud is lost for any reason then values will instantly collapse back to reflect reality.

Still sleeping well with your investments?


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