Make Sure the Bunker
is Well Stocked
Robert Herz
was forced to resign from his job as as chairman of the Financial
Accounting Standards Board (FASB) because he insisted that the banks
assign a fair value to their assets. That's not what you'll read in the
papers, but it's true just the same. Herz was a major proponent of
mark-to-market accounting, a simple means of determining the value of a
bond or security by comparing the price of similar assets sold at
market.
In other words, Herz is a defender of universally-accepted
accounting principles, which is why he was terminated, er, I mean,
resigned.
According to the Wall Street Journal:
"A new front has opened up in the war over
mark-to-market accounting. Suddenly banks find themselves with an
unexpected advantage in the fight over how they should value their vast
holdings of financial instruments… Mr. Herz had backed a recent proposal to expand
the use of market-value accounting to banks’ loan books....Now, with Mr.
Herz out of the picture, the future of the rule change may be in
doubt."
Pretty nifty, eh? As soon as Herz became a
nuisance for the banks, he got his pink slip. Surprise, surprise. It's
just more evidence that the country is ruled by a Financial Mafia.
Think
of it like this: If you or I went to the bank to secure a loan using a
dilapidated old bicycle and couple bags of empty cat food cans as
collateral, we'd be ushered to the door by two beefy security guards
who'd toss our sorry ass onto the street pronto. But when the banks use
their putrid mortgage-backed sludge to borrow in the repo markets (or to
conceal their true condition from investors), they get high-fives from
bondholders and regulators alike. Herz threatened to blow the lid off
the whole charade by exposing the extent to which the banks are
doctoring their balance sheets and hiding the red ink on their books.
Only he was sent packing (resigned?) before he got a chance to clean up
the system. This is from the Huffington Post:
".... Herz's departure wasn't expected; his
current five-year term runs for another two years...Herz has been "an
effective investor advocate to improve the quality of financial
reporting standards around the world." ..... Banks were forced in the
aftermath of the financial crisis to write down trillions of dollars of
securities tied to subprime mortgages, gutting their balance sheets even
though the assets could eventually recover their value." (Huffington
Post)
"Recover their value"? Not bloody likely. These
toxic turkeys will never recover their value because they were
fraudulent loans made to people who don't have the wherewithal to repay
the balance. The whole thing was a scam from the get go, which is why
Herz got the ax. Without "creative accounting" techniques (think Enron),
the insolvency of the system would be exposed which, of course, the
banksters cannot allow. Thus, Herz got the boot. End of story.
HIGH FREQUENCY CHICANERY: Update on the May 6 "Flash Crash"
Here's something else to munch on from Dennis K. Berman of the Wall Street Journal:
"Today, small investors are fleeing the equities
markets in droves, according to data from the Investment Company
Institute, pulling out a net $34 billion from stock funds so far this
year.....They say, "I still feel like someone is screwing
me......trading feels different than it used to."
Righto. Berman traces the problem to its source,
the "inscrutable interplay between myriad exchanges and high-frequency
traders, whose volume now accounts for an estimated two-thirds of all
trading"..."a market that many perceive as tainted and prone to gaming
by a cadre of insiders."
That sounds like an admission that the market is rigged?
High-frequency trading (HFT) is
algorithmic-computer trading that finds "statistical patterns and
pricing anomalies" by scanning the various stock exchanges. It's
high-speed robo-trading that oftentimes executes orders without human
intervention. HFT allows one group of investors to see the data on other
people's orders ahead of time and use their supercomputers to buy in
front of them. It's called frontloading, and it goes on every day right
under the SEC's schnoz.
In an interview on CNBC, market analyst Joe
Saluzzi was asked if the big HFT players were able to see other
investors orders (and execute trades) before them. Saluzzi said, "Yes.
The answer is absolutely yes. The exchanges supply you with the data,
giving you the flash order, and if your fixed connection goes into their
lines first, you are disadvantaging the retail and institutional
investor."
Today's market is configured in a way that the
only reliable way to make money is by increasing volume and trading on
myriad venues. We're talking about gains of mere pennies per trade on
zillions of trades. The problem is that--when there's a glitch in the
system--the high frequency bullyboys head for the exits taking an ocean
of liquidity with them. That leads to a "Flash Crash" like the one on
May 6 when the markets tumbled nearly 1,000 points in a matter of
minutes. And, guess what; there's nothing to prevent a similar cataclysm
from taking place in the future, because nothing's changed. Everything
is exactly as it was before the crash, which makes another disaster a
virtual certainty.
There appears to be general agreement about the nature of the problem. Here's Berman again:
"When BlackRock Inc. surveyed 380 financial
advisers earlier this summer about the flash crash, their perceptions
said it all: The mayhem had been primarily caused by an "overreliance on
computer systems and some types of high frequency trading" strategies
that roam the market en masse, looking to pick off pennies of profit."
("A Market Solution That Put Investors in a Fix", Dennis K. Berman, Wall
Street Journal)
No one wants to fix the problem, because then the
big players would lose boatloads of money. So the vehicle continues to
speed faster and faster down the mountain veering wildly from one side
of the road to the other. How long before it jumps the guardrail and
plunges to the bottom of the canyon? Stay tuned....
Capital Hill is awash in Wall Street's filthy
lucre, which means that congress will block any law that threatens the
main profit-centers of the big banks or brokerage houses. HFT, complex
derivatives, securitization and repo transactions will all be preserved
in their present state until the next big tremor rumbles through lower
Manhattan bringing the markets down in a thunderous roar. Make sure the
bunker is well stocked.
