In Thursday's NY Times we learn that reporter Eric Dash has a killer sense of humor...
Treasury Now Sees Profit From Bailouts
By ERIC DASH
New York Times
March 31, 2011
Take your pick: A $100 billion loss. A nearly $24 billion profit. A $100 billion profit...
...
...as late as Tuesday afternoon, accountants from Treasury and the Office of Management and Budget were at odds over how to calculate the gains the government made on once-troubled mortgage securities it acquired at the height of the financial crisis in 2008.
As a result, on Tuesday morning the Treasury estimated it would show a $100 billion profit but by late Tuesday that had been reduced to nearly $24 billion....
...
...Why did the numbers move so wildly? For starters, asset prices improved as the economy rebounded. But some of the gains remain on paper, and profits that haven’t been booked have to be continually adjusted to reflect price swings in the market. Then there are the vagaries of government accounting, like how to properly value complex mortgage securities.
Bold type is diarist's emphasis.
Yes, "...how to properly value complex mortgage securities."
(Is anyone reading this familiar with the term, "mark-to-make-believe?")
And, as far as "asset prices" being "improved as the economy rebounded" is concerned, as I reported in my diary, approximately 24 hours ago, the latest reality is pretty much in diametric opposition to this "reported" truth in today's NYT.
Generally speaking: Mortgage insurance is required on virtually all (there are exceptions) mortgages where there is less than a 20% downpayment on the property. The insurance is on the "piece" of the mortgage which constitutes the difference between 20% of the purchase price and the downpayment amount which is actually paid for the property at closing.
So, if you purchased a $100,000 property for 5% down (i.e.: $5,000), you would be required to obtain mortgage insurance on the equivalent of the $15,000 difference. Once the ongoing mortgage payments covered the $15,000 in principal on the loan, the insurance would be dropped (in most cases).
As I noted in my diary last Friday, the 25th, Yves Smith and Chris Whalen have pointed out the inconvenient truth that the entire Private Mortgage Insurance industry is virtually bankrupt, and it has been for quite some time. Therefore, virtually every entity that has purchased mortgage-backed securities which contain PMI-backed loans, essentially, has some form of loss exposure equivalent to what they claim is the piece covered by the insurance.
Smith and Whalen estimate this "loss exposure" may be between $100 billion and $200 billion. (Add that to the $1 trillion in mortgage loans that Bank of America just placed in their "bad bank," [at the moment it's all, still, Bank of America] and pretty soon you're talking about real money! Heh...)
Again, if you take the time to read Chris Whalen's and Yves Smith's reporting on this travesty, you'll learn that the entire mortgage and banking industry is acting as if these mortgage insurance firms are solvent, when it's a known fact that virtually none of them are able to make good on claims. What they're doing is taking in payments and using those receipts to very slowly cover very aged claims, at least in the instances where claims are even being made; and in most/many cases, that's not happening.
As Yves noted, Fannie Mae and Freddie Mac are--just now--getting around to "reconciling" this issue for mortgages originated through 2008.
Can you spell: P-O-N-Z-I?
Funny thing, that! You see, most of the banks are not making any claims. They're running around acting like these insured mortgages are covered with valid policies from solvent firms.
Exacerbating the basic problem here is that, as you're probably aware, most and/or many of these properties have depreciated in value more--in some cases much more--than 20% since their respective mortgages were originated (i.e.: property values are down 40%, 50% and more in states such as Nevada, Arizona and Florida).
Ah, yes. Those details will get you every time (at least when they're acknowledged; which they're not), except when you have a free "Do Not Pass Go. Do Not Make A Mortgage Insurance Claim" card from the U.S. Treasury and the Federal Reserve.
This is just one of the many, many, many stealthy "bailouts" currently in place to enable our too-big-to-fail banks to grow to the point where they now control 20% more in assets than they did prior to the onset of the Great Recession.
Here's the lead editorial from (today's) Thursday's New York Times telling us even more about how "profitable" everyone is on Wall Street these days.
So, while Eric Dash is slapping his knees, his editors aren't too amused. Maybe it's because they know the "joke" is on all of us chumps on Main Street who are still believing this Treasury Department and Federal Reserve spin.
They’ve Got to Fix Their Priorities
NY Times Editorial
March 31, 2011
...Fed officials have concluded that many banks are safe and sound enough to pay out cash and still withstand a severe shock should one occur again. It’s hard to share their confidence. Before it approved new dividends, the Fed required banks to test their crisis-readiness against several criteria, like elevated unemployment, but it did not release detailed results of the tests. Public data do not inspire confidence either. There is much debate over whether banks are valuing their mortgage assets correctly, and, by extension, whether they are adequately capitalized.
What is known is that recent bank profits have been boosted not by increasing revenues, but by downward revisions to expected future losses. With house prices falling anew, further reducing the value of mortgage assets, how reasonable is that?
Even if banks were ready for anything, more dividends and buybacks still would be premature. Big banks that plan to increase payouts still hold nearly $120 billion in government-backed debt under a crisis-era program from the Federal Deposit Insurance Corporation. The subsidized bonds come due between now and the end of 2012. Paying shareholders before the bonds are retired puts bank investors before taxpayers — talk about skewed priorities. Banks also face potentially huge fines in court cases and in settlement talks with government officials over mortgage and foreclosure practices that have harmed both homeowners and mortgage investors. It is irresponsible for the Fed to allow bolstered dividends before the penalties are known and paid. It is also a disturbing omen. Regulators are part of the settlement talks over the banks’ wrongful practices. Are they assuming that banks can afford both stiff penalties and bolstered dividends? Or are they assuming that the penalties will be weak?
When it comes to redress and reward, bank shareholders should be at the back of the line, behind taxpayers who stand behind too-big-to-fail banks and behind homeowners who are bearing the brunt of a housing debacle for which banks bear considerable responsibility. For the Fed to allow new dividends and bigger buybacks before these issues are settled is a display of the same type of “banks first” favoritism that got us into this mess to start.
Bold type is diarist's emphasis.
This is hilarious. So...why aren't you laughing?