Tuesday, 08 February 2011 12:06

Dr. Benjamin Shalom Bernanke, AKA Dr. FrankenFinance, Has Successfully Caused NYC Condo Prices To Be The ONLY Major Condo Market To Rise In Price

Yesterday, I illustrated how NYC is pulling away from all of the other major condo markets - see " ". According to the S&P Case Shiller Condo index, is the only major US condo market that not only has firming prices but is actually increasing in price. Chatter and anecdotal evidence from the ground confirms this as developers and speculators are once again bidding up development land, lots and potential conversion properties.

In the afore-linked piece, I gave what I consider to be the cause of this "newfound", yet hard to come by value. The answer??? Dr. Benjamin Shalom Bernanke. You see, Dr. Bernanke has taken over the helm of the "Great Global Macro Experiment” from Alan Greenspan and has supercharged it to the nth degree - all primarily to save our insolvent banking system. Where is the nexus of banking and finance in this country? Answer, right where you see that little positive blip in a chart of otherwise sharply downward trending assets. Trust me, it is not as if there is any dearth of condo unit supply in our dear city, as can be seen in “Who are ya gonna believe, the pundits or your lying eyes?”.  As excerpted from yesterday's post, here is that same area about a year and a half later...

Now, to remind all exactly how much capital and resources Dr. Bernanke pumped into the NYC area, be aware that this industry was literally on the verge of collapse in 2008 (with two of the five biggest banks literally collapsing and the balance getting bailed out by the government right before they collapsed), yet paid out record bonuses on record earnings less than 8 quarters later. This is even more amazing considering the only fundamental change in to the Frankenstein Monster assets that contributed to these banks [near] demise is that they have further PLUNGED IN VALUE! Yes, I do mean Frankenstein assets. I implore you to delve in further - "Welcome to the World of Dr. FrankenFinance!" and .

Let's revisit the charts from yesterday's  The Latest Case Shiller Index – Housing Continues Freefall In Aggressive Search For Equilibrium, with a few modifications to make the obvious more,,, well, obvious...

Remember, as bearish as this chart looks, it is actually overly optimistic, markedly so. Far be it for me to beggar the obvious, but why in the hell would an environment that causes the worlds largest banks to collapse like anorexics in a Weight Watchers convention, suddenly get  A LOT worse, yet spawn such a surge in the banking industry? Well my dear BoomBustBlogger, its one part regulatory capture (More on Lehman Brothers Dies While Getting Away with Murder: Introducing Regulatory Capture), two parts helicopter stunt man (Great Global Macro Experiment).

On the Regulatory Capture front, let’s revisit the FASB tale: About the Politically Malleable FASB, Paid for Politicians, and Mark to Myth Accounting Rules. Remember, the change of these rules to the status of straight silliness that kicked off one of the greatest bear market rallies in the history of US publicly traded stocks. Now, nearly everything financial (as it relates to M2M) is overvalued.

fasb_mark_to_market_chart.png

I declared insolvency throughout the banking system, and it looked as if I was wrong for some time, then the truth’s ugly head started peaking out. See The Financial Times Vindicates BoomBustBlog’s Stance On Goldman Sachs – Once Again!

Goldman Sachs has revealed details of about $5bn in investment losses suffered during the crisis for the first time this week, in a move that will deepen the debate over companies’ financial disclosures. The figures, issued as part of internal reforms aimed at silencing Goldman’s critics, show that the bank suffered $13.5bn in losses from “investing and lending” with its own funds in 2008. But Goldman’s regulatory filings and its executives’ comments to investors at the time pointed to about $8.5bn of losses arising from its investments in debt and equity, as markets were rocked by the turmoil.

Hmmmm! I walked through this in explicit detail in “When the Patina Fades… The Rise and Fall of Goldman Sachs??? and I did it without being privvy to Goldman’s financial innards. Long story short, practically all of the major banks are lying about the value of some of the largest assets on their books. In addition, the amount of money that has been (and currently still is being) showered upon them is quite simply unprecedented. For those of the shorter term memory persuasion, let's revisit "10 Ways to say No, the Banks Have Not Paid Back Their Bailout from the Taxpayer!"

Yes, some of the banks repaid TARP, with interest and warrants. Okay. The investment big banks (that were still in existence) were offered expedited financial holding company (bank) charters. That is why they didn’t fail, at least in part.

So, running down the list, the banks paid back TARP. That’s a +, but….

  1. What was the value for bank charter, to get cheap access to the Fed’s funds? did they pay back this value yet? No!
  2. How about the payment of interest on the banks’ excess reserves at the Fed. Have the banks repaid that yet? No!
  3. The Fed and the Treasury have purchased hundreds of billions of dollars of Agency debt, Agency mortgage-backed securities (MBS) and related securities through Treasury purchase programs. Have the banks paid back the capital behind those purchases yet? No!
  4. How about the Term Auction Facility? Has the capital behind the benefits of that program been paid back? No!
  5. Then there is the Primary Dealer Credit Facility (PDCF), has this been paid back? No!
  6. Do you remember the Term Asset-Backed Securities Loan Facility (TALF)? Have the funds behind that been paid back? No!
  7. What about the PPIP? No!
  8. Hey, there’s the Foreign Exchange Swap programs (the currency swap lines, that saved not only our banks but out banks facing counterparties who were short on dollars), has that been paid back? No!
  9. There’s the Commercial Paper Funding Facility (CPFF), have the funds behind that been paid back? No!
  10. Most importantly, the opportunity cost of ZIRP, which hurts those who do not speculate (or have not speculated) with near free money! How do you pay that back to grandma and her .017% CDs?

How do you repay the synthetic bid that the Fed has created under MBS that has rescued the banks from balance sheet purgatory (for now)? How about the accounting fantasy football game that was authorized by FASB last year that has lost fundamental investors who actually count vast sums of money? Then there is those FDIC bond guarantees… Oops, I went way past 10 reasons, didn't I?

To drill down even further, we can Continue With The Revelation of The Fed’s Stealth Bank Bailout (TARP 2.0), We Present Our Analysis Of The Use And Abuse Of The Primarily Dealer Credit Facility

Note: Paying subscribers may download the fully scrubbed model containing all of the date output by the Fed regarding the PDCF as an Excel pivot table here, Primarily Dealer Credit Facility Analysis. Those who are interested in subscribing to our research should click here.

The Primary Dealer Credit Facility (PDCF) was created in March 2008 as an overnight loan facility that provided funding to primary dealers in exchange for a specified range of eligible collateral. The PDCF was intended to foster the functioning of financial markets more generally. The facility expired on February 1, 2010. Analysis of the Primary Dealer Credit Facility data provided by the Fed indicates appalling facts.

1.      A total $8,959bn was loaned to financial institutions (incl roll over) with a weighted average interest rate of 1.53%. The total collateral against this $8,959bn of loan was $9,665bn, a mere 7.88% overcollateralization in a time of distress and rapidly deteriorating assets. The quality of the collateral posted for PDCF was pitiable. Only 1.4% of the collateral, on average, was traditional collateral posted in form of U.S. Treasury or Agency Debt while corporate securities topped the list with 24% followed by equity at 22% and municipal bond at 14%. Collateral as indicated by rating points to the fact that almost 65% of collateral was either junk or equities. Of the total collateral, 42% was virtually pure junk consisting of MBS / BBB / BB / B / CCC and unrated instruments and equities constituted 23% of collateral.  Of the total collateral, 15% was unrated, 7% MBS, 6% BBB, 4% BB, 4% B and 5% CCC or lower. Only 20% of collateral was AAA while 32% was rated A and above. Basically, the Fed simultaneously became the dumping ground for all of the trash that the nation’s big banks needed to get rid of and the world’s largest vulture fund, it’s just that it paid premium prices for the junk.

It is highly recommended that readers continue reading this, for it is highly illuminating. Of course, it doesn't end there. After all, Buried Deep Within The Files That The Federal Reserve Released On Their MBS Purchase Program, We Found TARP 2.0!!! More Taxpayer Money To The Banks! As excerpted...

We have also analyzed the yield on MBS purchased and MBS sold, looking for price discrepancies between MBS purchased and MBS sold. The data points out that the average yield on MBS purchased was 4.71%, 29bps lower than average yield for MBS sold, thus implying MBS purchased were at a higher price than MBS sold. You know that old government adage, buy high and sell low!

Yield on sale: 5.00%
Yield on purchase: 4.71%
Difference in bps: 29.1

Assuming a 4.0% implied yield on all securities, 95% of the MBS securities were purchased at a premium to market value while assuming 5.0% implied yield 28% of securities would have been purchased at a premium to market value. Of course, the question remains… Why pay a premium to market value at all (with even .01% of total purchases) in a distressed and downtrending market with highly questionable collateral? Had the government/Central Bank followed the prudent man rule and paid a slightly higher yield (avg yield of 5.0% instead of 4.75% – basically a discount for the assets as is called of in distressed buying), it would have saved $62bn of tax payers’ money on MBS transaction while a 6.0% and 8.0% yield would have saved $391bn and $869bn of tax payers’ money, respectively. Please keep in mind that Ex-secretary Paulson’s initial TARP request was for a mere $750 billion. One could be rest assured that the private sector using its own money at full recourse will be looking for steep discounts, unfortunately our fair government was all too generous.

So, where in the hell did all of this money go? I mean...

  • $9 trillion from the PDCF
  • Nearly one $trillion in OVER payments in MBS purchases (that's overpayment, not payment)
  • $750 billion in TARP
  • QE 22.0 (or did I mean 2.0?)

As you can see from "10 Ways to say No, the Banks Have Not Paid Back Their Bailout from the Taxpayer!" the list can extend much longer, and if itemized, we will easily break $20 trillion or so. So where did it all go? Was the money well spent? Let's see...

Cocky Goldman Sachs bankers and rest of Wall St. soaking up record Nahhh!!! Say it ain't so!

Just about the only New Yorkers cheering the news that Wall Street will get record pay this year were a handful of cocky Goldman Sachs bankers hanging out in a downtown bar Wednesday night. "Up 4%? My bonus better be a lot better than that," said one brash trader, who insisted bankers deserve every penny of their lavish bonuses. "Of course we do. If they don't pay, we'll go where they will."

Wall Street's 2010 bonuses may top last year Dec 15, 2010 ... Wall Street bonuses may top last year's as earnings soar ... month in a delayed payoff from last year and their record-setting 2007 bonuses...www.msnbc.msn.com

Wall Street Bonuses Up 17%, Profits Could Hit 'Unprecedented ... Feb 23, 2010 ... That's nearly three times Wall Street's record increase, .... Wall Street Bonus and Compensation Levels Likely to Set a Record...www.huffingtonpost.com

Record Bonuses Return to Wall Street as Big - Bloomberg Nov 9, 2009 ... Goldman Sachs Group Inc., Morgan Stanley and JPMorgan Chase & Co.'s investment bank, survivors of the worst financial crisis since the Great ... www.bloomberg.com

Does this PISS YOU OFF? Only probably if you don't work on Wall Street, and/or don't pay taxes. Well, don't hate the player, hate the game. As Dr. Benjamin Shalom Bernanke while you revisit this chart of the overly optimistic values behind the assets that caused Wall Street to collapse in the first place. Be sure to make note of the asset value levels in 2008, when much of the aid was administered, and the asset value levels in December 2010 when the record bonuses were announced. The only year that came close to those record bonuses was 2006/7, the very top of the bubble caused by the people getting the bonuses - of course!

Let's keep in mind that there is precedence for property values to fall farther, much farther - for much longer. Let's just journey over to Japan's recent history...

Well Dr. Benjamin Shalom Bernanke, with his tens of trillions of helicopter style aid did afford a minor blip in the highly glutted NY condo market though. That taxpayer funded bonus money had to go somewhere. Just remember, don't hate the player, hate the game! I'm sure another $15 to $20 trillion or so could push the blip deeper into this year. Would that be QE 2.5?

The following listings are courtesy of Corcoran:

2109 Broadway
Upper West Side
$4,495,000

130 West 30th Street
Chelsea
$2,695,000

136 West 22nd Street
Web ID#: 2129558

Interested readers can follow me on twitter, peruse my Residential Real Estate postings and/or my Commercial Real Estate opinion and research. I will be lecturing on this “realistic” viewpoint of real asset valuation and the outlook for 2011 as the keynote speaker in both New Amsterdam (Harlem, NY) on Thursday February 10th, and Amsterdam (the Netherlands) on April 8th.

See www.seminar.ingref.com.

Last modified on Tuesday, 17 January 2012 07:16

2 comments

  • Comment Link Reggie Middleton Wednesday, 09 February 2011 05:19 posted by Reggie Middleton

    Notice how this is written by economists and analysts, not real world investors that are investing THEIR OWN CAPITAL! I cannot fathom how anyone who had their own money at stake would ever want more ambiguity in pricing assets, in lieu of less. Let me pick this apart...
    "Somehow it believes that marking everything to market (even when that market is illiquid) will somehow make the world a better and safer place"

    Well, when the market is illiquid, the assets in said market have a lower market value. It really is that simple.

    "Somehow it believes that marking everything to market (even when that market is illiquid) will somehow make the world a better and safer place"

    Yes, because if said banks had to liquidate their loans the only place to liquidate them would be said "illiquid" market. This goes to show you how the value of the loans are probably highly overstated by those such as the authors of this article. Guarantee me that no bank will ever go bust again - guarantee me that no bank will never, ever need to sell assets, and I will soften my stance some on mark to market accounting. Until then...

    "banks will be allowed to carry loans on their books at amortized cost, reflecting cash flow (payments), as well as reasonable estimates of likely loan losses."

    This should now mean that the price of all unsecured loans should drop immediately and dramatically, for FASB and these authors are not differentiating between loans backed by collateral and loans not backed by collateral. They are also not taking into consideration the financial and strategic advantages of defaulting on a loan against an asset with negative equity. So, if the banks can now benefit from pricing loans at will, regardless of collateral, why shouldn't that benefit be passed onto the consumer and allow them to enjoy said valuation/pricing perks. Just loan me $4 million with nothing hard to back it. Does this make sense to you?

    "Like the sword of Damacles, mark-to-market accounting has been hanging over the head of the economy. As long as it could be broadened, or brought back in the form it took in 2008, the risk of turning the next recession into a panic or even a depression was very real."

    Nonsense and rubbish. If mark to market would have been implemented faithfully, the last crash would not have been asset based for the bank/developer/investor assets would have had the clarity of valuation that would have prevented the FUD that surprised the banks and caused them to collapse in mid air. Notice how absolutely NO ONE was complaining about M2M between 2003 and 2007 when asset prices were flying through the roof. When the market started turning, banks wanted to keep their marks at the elevated prices and actually won the right to do so through regulatory capture. The US banking system is now built upon one giant LIE!

    "According to Milton Friedman (in his book The Great Contraction), fair value accounting was the predominant force for bank closures in the early stages of the Depression. These bank failures fed on themselves making the Depression worse."

    Oh, okay. It's good to learn that. I thought it was irrational exuberance, greed, and a run up of prices unfounded by the fundamentals.

    "There is absolutely no academic research on the role of MTM accounting in the Great Depression"

    'Nuff said! The authors seem to be either be lacking in credibility due to an obvious agenda or incapable of seeing the facts. Check this out...
    "Nothing has changed. Back in 2009, Congress passed the Dodd-Frank financial regulation bill based on a flimsy theory of the crisis’s causes even before the report from The Financial Crisis Inquiry Commission. But that report would not have changed much policy anyway. On January 24, 2011 – the same week as FASB’s surrender – the FCIC said that the debacle was caused by a combination of stupid and unscrupulous business practices mixed with lax oversight by regulators. No surprise there"

    Well, if M2M was adhered to and enforced, those business practices labeled as stupid would not have been profitable hence would not have been pursued. If banks were forced to retain the risk of loans that were written and that risk was regularly and accurate marked to market, any "stupid and unscrupulous business practices" would have resulted in the market putting said operations out of business and thus there would not have been an effect from "lax oversight by regulators". You see, it really is that simple. Let the market work, don't just let it work when the prices are going up.

    "It was on March 9, 2009 that Barney Frank’s committee announced a hearing on fair value accounting. FASB was brought to the table and forced to correct its misguided rule"

    This says it all. Politicians are forcing accountants to do things their way. After all, how in the hell will accountants know as much about accounting as professional politicians such as Barney Frank do???!!!

    "The stock market bottomed on that day and has virtually doubled since then. The recession was not ended by stimulus, TARP, regulations, PPIP, or any of the other alphabet soup government programs. It was ended by the correction of mark-to-market accounting. The risk of another Depression ended on that day and the economy and market have done nothing but move higher ever since."

    Actually, the guarantee of reality catching up with the fantasy that was codified into regulation has been firmly entrenched. The authors are making the same novice error that many ivory tower and naive investors make, and that is assuming that stock market prices necessarily reflect value. The Fed, Barney Frank, et. al., and the Treasury colluded to lift the prices of equities, real assets. government bonds, and the derivatives based upon them to considerably above their fundamental values in an attempt to reflate the bubble and pull the country out of recession the "stanky" way. The big problem with this is that markets tend to revert to mean. Unless said market values fundamentally catch up with said market prices, you will get a snapback. That is what is happening in residential real estate now.

    "With FASB finally giving in on the issue for good, the future looks a lot brighter than most people suspect. The accounting rule fell, it has been ignored by most, but the impact of that fall is very good for America."

    Well, its good for those astute and capable individual investors who can parse balance sheets and value assets on their own. Its an insult, slap in the face, and condemnation to a perpetual guessing game, Ponzi scheme and virtual casino for the average individual and institutional investor.

    Report
  • Comment Link gjk313 Tuesday, 08 February 2011 21:51 posted by gjk313

    Hi Reggie, I thought I would post this commentary here to get your and others thoughts:

    FASB Surrenders - America Wins



    If an accounting rule falls down and decays in the woods, and the business punditry and politicians completely ignore it, does it still have an impact on the economy?



    The answer is YES. Especially when that rule is Mark-To-Market Accounting – aka: Fair Value Accounting. Everyone should breathe a huge sigh of relief…we are.



    The Financial Accounting Standards Board (FASB) wanted to broaden the reach of its fair value accounting rules. Somehow it believes that marking everything to market (even when that market is illiquid) will somehow make the world a better and safer place. So, even after almost destroying the economy in 2008, FASB was pushing to have banks mark their loans – yes their loans – to a bid in the market place.



    The good news, which went virtually un-reported on January 25, 2011, was that FASB surrendered on fair value accounting for loans. In the face of overwhelming opposition, banks will be allowed to carry loans on their books at amortized cost, reflecting cash flow (payments), as well as reasonable estimates of likely loan losses.



    This decision is a huge win for the markets and the economy. Like the sword of Damacles, mark-to-market accounting has been hanging over the head of the economy. As long as it could be broadened, or brought back in the form it took in 2008, the risk of turning the next recession into a panic or even a depression was very real.



    Most people don’t know this, but mark-to-market accounting played a role in the Great Depression. According to Milton Friedman (in his book The Great Contraction), fair value accounting was the predominant force for bank closures in the early stages of the Depression. These bank failures fed on themselves making the Depression worse.



    In 1938, Franklin Roosevelt ended mark-to-market accounting and the economy recovered. There is absolutely no academic research on the role of MTM accounting in the Great Depression, but the more we study the issue the more convinced we become that it played a major role in that fiasco and the recovery from it.



    One reason that its role is ignored is that government wants the story of economic crisis to be a simple one that blames business and praises government (or at least blames government for something that requires more government). Conventional wisdom blames a bubble in the stock market, greedy business people and a lack of government oversight for the Great Depression. This story-line led to the creation of the SEC and many other government agencies, programs and regulations.



    Nothing has changed. Back in 2009, Congress passed the Dodd-Frank financial regulation bill based on a flimsy theory of the crisis’s causes even before the report from The Financial Crisis Inquiry Commission. But that report would not have changed much policy anyway. On January 24, 2011 – the same week as FASB’s surrender - the FCIC said that the debacle was caused by a combination of stupid and unscrupulous business practices mixed with lax oversight by regulators. No surprise there.



    Clearly, some people in the private sector made mistakes in assessing the riskiness of loans. That’s easy to see in hindsight. But, government’s role was much more detrimental than this, but was totally ignored by the FCIC majority.



    A dissenting opinion was penned by Peter Wallison. He blames Fannie Mae, Freddie Mac, the Community Reinvestment Act, and mark-to-market accounting for creating the crisis. We completely agree, but we would also add the policy of 1% interest rates by Alan Greenspan to the list. If the federal funds rate would have been left at 3.5% or above, the bubble in housing would have likely never existed or would have been much, much smaller.



    It was on March 9, 2009 that Barney Frank’s committee announced a hearing on fair value accounting. FASB was brought to the table and forced to correct its misguided rule. The stock market bottomed on that day and has virtually doubled since then. The recession was not ended by stimulus, TARP, regulations, PPIP, or any of the other alphabet soup government programs. It was ended by the correction of mark-to-market accounting. The risk of another Depression ended on that day and the economy and market have done nothing but move higher ever since.



    With FASB finally giving in on the issue for good, the future looks a lot brighter than most people suspect. The accounting rule fell, it has been ignored by most, but the impact of that fall is very good for America.



    Brian S. Wesbury - Chief Economist

    Robert Stein, CFA - Senior Economist

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