Written by Pieter Schoonheim Samara
Critical to understand that American Capitalism did not fail. How and why it was caused to fail by a single stealth regulatory change November 9, 2007
Question: How did mark to market accounting start the Bush Recession and cause the systemic collapse? What are the differences between mark to market and hold to maturity accounting?
The answer is both socio-economic and socio-political.
1. It needs to be understood first and foremost that Capitalism means that the individuals in the Private Sector own and control capital, production and fruits of their productivity, ingenuity, creativity and innovation, and that Socialism and its derivatives of Fascism (crony capitalism) and Communism (State Capitalism) is the systematic deprivation, undermining and usurping of the ownership and control of capital to the State, i.e., the US government. The bank regulatory mechanism through which the value relationship of assets to capital is determined is the regulatory basis or playing field for both Capitalism and State Capitalism. In this regard, hold to maturity accounting in the Private Sector, formerly FASB 115, is the regulatory basis for Capitalism within the bank regulatory mechanism, and mark to market accounting, FASB 157, approved by Congress in 2007 (and again October 2008), then, as required by law, approved by the Bush/Paulson SEC November 9, 2007 (upheld December 2008 and reasserted by Obama February 2009) for imposition on the Private Sector banks November 15, 2007, where the government and Federal Reserve retain the sole right to value Private Sector assets on a hold to maturity basis, is the regulatory basis for the transition of ownership and control of capital from the Private Sector to the government, a 4 to 5 year planned process of Executive Orders and Congressional reform legislation and regulation, openly discussed and called by the media as “Regime change” to a “New Normal,” in which the ability for the Private Sector to access credit without some form of direct (or via an owned or controlled government) guarantee program, is impossible.
2. Therefore, to properly understand, the differences between mark to market accounting (FASB 157) and hold to maturity accounting (FASB 115), one needs to understand the regulatory basis within which these 2 have their socio-political-economic impact. The economics of the bank regulatory mechanism is entirely different from economic theory, hypothesis, interpretation, spin, opinion presented as fact provided by economists according to the political interests that pay them, using their interpretation of data to support their projections regarding the economy and society. You can say that the economics of the bank regulatory mechanism is like a Swiss watch, where time is based on exact ratios of interrelated cogs, in this case the interrelationship between ratios of loan affordability based on sustainable cash flows representing production and productivity of borrowers and the ratios of how equity capital of banks (and lenders) is leveraged against the debt capital (cash from bank earnings and deposits), with the resulting financial contracts establishing sustainable market pricing and wealth accumulation and retention for whoever has the right to value assets on a hold to maturity basis, the Private Sector or the government and by extension the Federal Reserve.
3. This means that, unlike other theories based on proving models of data, by understanding and considering the mechanism of ratios that make up the economics of the bank regulatory mechanism, we can analyze and predict any socio-political-economic outcome simply by inputting into these formulas any changes to mortgage and loan affordability caused by changes in tax code, bureaucratic limitations of productivity, regulatory cost to mortgage and loan affordability, changes in borrower and bank equity to liability ratios, changes in mortgage and loan affordability due to cost of energy, cost of medical, cost of money (interest rates) and derive concise no-spin no subsidized slant micro and macro result.
It may be worth reading and absorbing the meaning and implications of these 3 last paragraphs before moving on to the discussion and exposition regarding the differences between mark to market accounting and hold to maturity accounting.
There are several aspects to consider in order to fully understand and appreciate the differences between mark to market accounting and hold to maturity accounting.
Value for money:
The first is that the value of money is based on both (i) a numerical value that relates to how assets are valued within the banking system’s affordability and leverage ratios and (ii) the sustainable productivity behind assets, where in every case only the Private Sector creates wealth, both in the Capitalist system and similar Socialist/Fascist/Communist systems.
Capitalism means that the ownership and control of capital, production and fruits of productivity, including creativity, ingenuity, innovation, belong to the individuals in the Private Sector. What they earn over and above what they need to live can be called savings and capital available for investment. In Marxism gains in productivity are called the surplus value. Under the Capitalist system, this savings / capital for investment belongs to the individual, and, when passed through the banking system as either deposits or as a basis for leveraging to gain access to credit, belongs to the individual to invest, save, donate. Under the Socialist/Fascist/Communist systems this “surplus value” belongs to the State for redistribution into State sponsored investments regardless of any inherent sustainable value or to pay off special interest groups and supporters.
The means through which Socialists rearrange this surplus value is through taxation, borrowing and printing of electronic cash for spending on larger and larger bureaucracies, together intended to drain the savings and investment capital from the individuals in the Private Sector. Because the State owns this surplus value, in effect the work force value is only as fodder for the State.
Taxation: Because the Private Sector uses its savings and investment capital as the leverage basis to arrange credit, it means that taxation reduces and limits the ability of the Private Sector to create and develop wealth, moreover increasing the risk of every investment for lenders.
When loans are repaid, the reduced credit becomes equity to the borrower, which equity is then valued in the market place based on the strength of the cash flows, i.e., sustainable productivity, generated.
Government borrowing: When the government borrows in the market place, it reduces both the available savings and investment capital of the Private Sector, effectively competing with the Private Sector for credit, driving up the cost of money. However, the government’s guarantee to the banks for funds the government borrows from the Private Sector is based on government’s usurped right to confiscate money from the Private Sector undermining its credit access.
Government electronic printing: When the government prints electronic money, it acts like pulling a plug on bath water, where the accumulated bath water represents Private Sector the value for money productivity, which are drained through spending of cash by the government, meaning that if the Private Sector productivity is outstripped by the government draining of value, then the standard of living and effort to get ahead in the Private Sector are undermined.
The aspect about taxes and government borrowing should be obvious to almost everyone.
What’s not always appreciated is the difference between productive, non-productive and counter-productive work, and the meaning of the government siphoning off funds from the Private Sector and then spending such funds, where the resulting stimulus, is actually counter-productive and a drain on the Private Sector’s access to credit, thereby stunting capital formation.
The value for money is established in the Private Sector based on how banks use loan affordability formulas (also called debt service coverage ratios) to assess the value of cash flows resulting from sustained work. The relative value for homes is a combination of cost of building, comparative values, which are both ultimately based on the affordability of a monthly mortgage payment. When this affordability declines across the board for any region, values also decline. Thus, if you drain the affordability of home mortgages, consumer related loans, business and commercial loans, you also undermine the value of productivity behind money / currency. For the individual it means that they work harder and harder but have to make greater and greater efforts to make ends meet, like swimming in a lake with weights. You have to swim harder and stronger to keep the head above water.
In the Private Sector, every loan has to have a means through which it can be repaid, which also results in the accumulation of equity capital to the borrower, when the loan involves an investment. For example, you can buy an appliance on credit, but in effect, the bank owns the appliance until the credit is paid off. Then it’s yours. Same for a home. Same for a business venture. It’s Capitalism.
Now look at government borrowing. For the most part, the accumulated debt has no productive tangible asset producing a sustainable production. Thus, YOU are the government’s asset. You are the sustainable production that the government is then taxing and competing for credit and undermining through electronic cash printing, in effect enslaving you.
The bureaucracy doesn’t produce anything. It provides some administration, which we understand now from recent studies that pays/bribes bureaucrats 2x the wage and benefits to combat and undermine the productive comparable wages and benefits for Private Sector work.
Only the individuals in the Private Sector produce anything. The bureaucracy is counter-productive, because it makes the cost of work have a greater burden and to add insult to injury, you have to pay them for the service (injustice). You can see from reading the above, why the clear thinkers of the middle 1700’s realized that to maximize wealth, to provide access to capital to foster opportunity, that taxes should be minimum, government bureaucracy at a minimum, government borrowing nil, and government printing of cash prevented.
The government to the Private Sector is like having an Uncle Sam come to live in your home, who goes out and constantly runs up tabs at the local bars entertaining glad-handers and putting the tab on you, thereby limiting your credit lines, depleting your savings and accumulation of equity.
Re the affordability formulas:
Part of the understanding is that each generation enters life and eventually is educated for the work force, and as a result of apprenticeship, training, experience, gradually through their career they earn more money, balance their budgets and save, invest, borrow, repay loans, accumulate equity, create, innovate, use their ingenuity, and accumulate wealth, which they hope will be sustainable. This means that when government or those interested in usurping government to take power over the productivity of the masses (Marx’s idea) on the pretext of benefiting the many, but actually benefiting a few gangsters, hoodwinks youth into wanting higher taxes for those better off, what youth are conned unwittingly into doing is in effect taxing / burdening their own future selves to subsidize society’s non-productive and counter-productive bureaucrats.
The Social Security System and the Medicare Trust are also loaded with Treasuries, which have no productive means of repayment except the draining of people’s own future selves. When the general public is educated that only they themselves produce value and wealth, they will agree, even push for, such savings inherent in the Medicare and SSS Trusts to be managed by and invested in the Private Sector, thereby eliminating the government as a middleman laundering Private Sector equity to invest in government non-productive debt, the repayment of which is based solely on the taxing and borrowing against the Private Sector’s equity and credit, or printing cash, which undermines Private Sector accumulated wealth. When the government is forced to adhere to the principles inherent in American Capitalism, i.e., inherent in the understanding of the economics of the bank regulatory mechanism for the maximization of capital value, then the management of the entire Trust Funds will be secure and stable. Moreover, it returns access to credit locked away from the Private Sector, thereby adding value to the underlying productivity base for everyone. Increased access to capital means a diffusion of capital to support opportunity.
Before going into the bank regulatory mechanism / related to the leveraging of equity capital (savings used for investment) to debt capital (savings), I want to explain the difference between stimulus from the US government, as opposed to Stimulus in the view of China and Singapore, and, these days, Russia.
The real use and intention of the 2009 $878 billion stimulus:
As you probably know, the first $256 billion of the $878 billion Obama Stimulus, was used to fulfill a campaign promise to give 95% of the lower and middle class a cash gift from the government, whether they work or not, which came to $400 per person. It had no effect whatsoever on the economy, because it was much like the story of giving a person a fish or a fishing rod. It was non-productive, even less than a wash of depleting Private Sector credit access, then laundering the funds through the bureaucracy, then returning the funds to the populous, on the pretext of fulfilling a campaign promise if Obama won – anywhere else a crime of vote buying.
Another $150 million went to various slush funds and grants to political cronies with only 7% to presumably shovel ready projects, which we now know were essentially wasted use of funds, having virtually no positive benefit to the promotion of sustainable productivity to the society, with any job creation discovered to cost anywhere from a few hundred thousand USD to over $1 million per job produced. Moreover, the government drained and continues to drain cash from the Private Sector and launders the money to pay non-productive make work jobs.
Why hasn’t the balance in the stimulus been spent? The government’s bait and switch!
The $423 billion balance remains unspent, while government borrows month after month greater levels of stimulus to support political payoffs, such as broke union pensions, to provide loan guarantees to banks with money government had deprived from the Private Sector. Around $423 billion remains of the $878 billion stimulus not for any project, but set up in a “bait and switch” to cover an interest guarantee on the $13.5 Trillion national debt until the government has effected a “Regime change” to a “New Normal” which was projected to take 4 to 5 years from the inception of the planned collapse starting December 2007, at the end of which time credit will only be available through government owned and controlled financial institutions and Patronage.
Consider how China’s spending of its stimulus propagates wealth to all Chinese.
Many times the US goes to China and Russia complaining about human rights issues, blaming China for not having social programs for the poor, unemployed, etc.. In effect, to a large extent, China uses the private charities and Religious charities to take care of the populous needs, because they realize that to use money for non-productive and counter-productive purposes drains the wealth they are trying to foster for the country and its citizens. This sounds like an Adams, Jefferson and Franklin concept for how the poor should be covered, versus being supported by the State! PM Wen of China and PM Putin of Russia both lambasted Obama, when the US Stimulus was proposed, as draining the wealth of the nation – the path of Socialism.
What China does is that they both borrow and print cash for their stimulus. The cash is printed as an offset to deflation, because deflation drives down the monetary or paper value on the books of banks creating a paper loss, where there is actually a real value gain. This means that for the US, as Russia and China, there needs to be some printing and spending of electronic cash to offset the deflationary effect on the assets of banks. This was postulated as a necessity for the same reason by Keynes, but where he got it wrong, and China, Singapore and Russia right, is that Keynes proposed that the funds be used to put people on the dole, the New Deal, Great Society, Obama’s Hope and Change to Fundamental Transformation – the New Normal, etc., use for anything at all, not realizing that such spending without a productive means to repay, versus draining the populous through taxes and borrowing, will deplete the wealth created by the people.
So, here’s what they do in China: (see Sun Yat-sen to understand China’s socio-economic-political process)
They select an area, for example, Shanghai, where in 1998 they commandeered by eminent domain 3 sq. km of land upon which there were 2 story old brown and black wooden hovels for poor workers in Shanghai that had been there for 200 years or more. They built a suburban town just on the outskirts of Shanghai with condos, shops, etc, including mass transit above and below ground back into the city. Then moved the entire population of that area to the township. Then they master planned the entire area to be converted into commercial lots for long term lease, upon which would be built ultra modern skyscrapers of 40 to 60 stories, and contracted their Private Sector construction companies, some government owned, to build a modern infrastructure of water supply systems, sewage treatment, electrical supply, roadways, etc..
Within 3 years the area had been demolished and converted into commercial lots having a value several times the cost of construction. This value was then leased to the Private Sector for 50 years, who proceeded to build horizontally and vertically the entire 3 sq.km. within that 3 years of condos, apartment buildings, office space, retail, commercial, medical, etc., which, moreover, had been completely leased up and sold out within that period to the Private Sector, generating an enormous multiplier of jobs beyond those that lived in the hovels, who now lived in quality modern space with modern transport back into the city to work. I know this story first hand, as I went to Shanghai in 1998 looking for investment opportunity and was told that of this plan and returned again in 2001 to see what space might be available for purchase or rent, only to discover that I had been too slow both times in taking advantage of the opportunity. Meanwhile, since then, the government continues to collect a high rate for leasing the infrastructure it created on the 3 sq.km., while the Private Sector continues to convert the debt from the build out into equity, demand continues to drive up rents, property and wages in real terms.
When the US complains that China has to create a welfare fund and food stamp program and unemployment benefits as part of “human rights” for the non-productive, what China does instead is create another ultra modern master planned city and instead of putting people on the “human rights” dole, as demanded by US Progressives trying to get China back to Socialism, the Chinese government tell all the unemployed people that want to work to show up at that next city.
China started with mostly the border cities on their water front and have been moving systematically to the cities throughout China, each time taking underutilized land and converting it into valuable land at a fraction of the cost of the conversion, based on real construction contracts with mostly Private Sector contractors, then letting the Private Sector build ultra modern sky scrapers, as happened in Shanghai. China leads Asia in the construction of Platinum LEEDs skyscrapers. Super highways, toll ways, high speed passenger and cargo railways, water and sewage systems, all to a large extent designed by Western architects and design engineers, leave in their wake an enormous expansion of jobs, for which there are a multitude of job training programs, everything pay as you go, leading to greater salaries based on real productivity.
More than 50% of the entire development in China is for construction. Western economists say that they have no way to repay it and a bubble is forming, but in reality the present value of these converted land leases, enable China, without taxation, to generate astronomical long term income, which, because they rejected the US call for worldwide hold to maturity accounting in the Private Sector, represents an overall value increase to both the people as a whole and to developers. And with low level “Laffer Curve (1)” taxation of workers generating exponential taxes. They practice the same with government investments into Private Sector R&D, where whatever is created is then leased, licensed or sold to the Private Sector, providing, yet again an underlying value to the Chinese people, and those international interests able to invest.
Their idea is not to stifle wealth, but rather maximize revenues to both the government ADD the Private Sector, recognizing that the Private Sector is the Goose that lays the Golden Egg, not government. These are the same concepts as Hong Kong and Singapore have developed to make these island States so enormously wealthy and unrelentingly productive, but now applied to a vast land mass having a population of 1.3 billion. (As government owns all land, it is leased out.)
This is the opposite of the US government’s strategy where taxation has been used by Progressives each time the Private Sector was close to launching into a Golden Age by raising taxes and borrowing against Private Sector credit and depleting wealth by wasting printed cash, then launching a media campaign blaming Capitalism. Whether FDR raising taxes to 95% ostensibly to fund his New Deal, LBJ raising taxes to fund his Great Society, Republican (Bush 41) raising taxes to fund his City of 1,000 Lights, each time requiring War to bolster the US economy, and now the Progressive Democrat Congress and Obama have increased taxes to fund their “Hope and Change” “Fundamental transformation of society,” while both Progressive Parties continue to create an expansion of borrowing, printing and spending towards non-productive and counter-productive areas having no actual means in and of themselves to repay the amount except to tax and borrow against people’s production, essentially enslaving them to a government oligarchic elite, while the rest of the world moves towards the concepts of America’s Founding Fathers.
Progressives and crisis: It’s been said that, when the Jews were brought to the Concentration camps, they panicked because they knew they would be killed. However, the Germans running the camps knew that, if they could provide Hope in a Crisis, the Jews would march obediently into the showers willingly to do anything asked of them, even thanking their German masters.
Umberto Calvini in The International: [In explaining the "true" nature of banking in the world] The IBBC is a bank. Their objective isn’t to control the conflict, it’s to control the debt that the conflict produces. You see, the real value of a conflict, the true value, is in the debt that it creates. You control the debt, you control everything. You find this upsetting, yes? But this is the very essence of the banking industry, to make us all, whether we be nations or individuals, slaves to debt.
Before moving on, there needs to be an understanding of the vast difference between predatory and crony Capitalism and State Capitalism versus American Capitalism, where the intention of the US Constitution was to foster American Capitalism through the establishment of a government that acted 1/ as referee, 2/ to prevent predatory, monopolistic and crony Capitalism and State Capitalism, and 3/ to prevent foreign powers and influences from establishing predatory and crony Capitalism and State Capitalism. Looks like all the other nations of the world are incubating themselves more and more from American predatory and crony Capitalism and State Capitalism, and fostering within their domains the concepts of American Capitalism’s Founding Fathers.
The bank regulatory mechanism prior to the Nov. 9, 2007 FASB 157 induced paper crisis:
Now we can move into the bank regulatory mechanism as it pertains to the way in which equity capital (savings and investment) is leveraged with debt capital (depositors savings) to foster the creation of wealth and to establish predominant market contracts and related pricing stability.
Banks, before November 9, 2007, had 4 classes of risk allocation, where the combination of the 4 would allow for a maximum of 25x leverage, meaning Tier-1 equity capital had to be no less than 4% of total assets, while the assets classes themselves, called risk buckets, were based on a leverage of 8% capital, at least half of which had to be Tier-1 risk equity. Government unconditional guaranteed debt, such as Treasuries and then Ginnie May, etc. has a zero % capital requirement. AA rated debt, securities, conditionally guaranteed government debt as was formerly Fannie Mae and Freddie Mac, had a 20% risk weight, meaning only 1.6% in capital was required to make a loan, thus providing a 62.5x leverage. Residential mortgages and certain Municipal and Industrial Revenue Bonds would have a 50% risk weight, meaning only 4% capital was required to make the loans, a 25x leverage, with all other consumer, commercial and business loans having a 100% risk weight, meaning 8% bank capital, 12.5x leverage. Both the Private Sector and the government / Federal Reserve valued assets on a hold to maturity basis.
Consider that on the one side the principal value of bank assets is based on loan affordability ratios related to cash flows from productivity of persons and companies, and on the other side these affordability values or valuation of sustainable productivity are categorized into leverage risk weights, i.e., the leveraging of different qualities of risk relative to bank capital, where provided that a bank has more than 8% in risk adjusted capital and that such capital is no more than 4% of the total assets, the bank has liquidity to lend and the economy expands through access to credit. Then consider that if they have less than 8% in risk adjusted capital, then the bank has to stop lending. To offset the occasional loan loss provision due to a loan default, one of the solutions the banks had, prior to November 9, 2007, as their capital declined due to loan losses, declining markets, etc., was to shift out of the 100% and 50% risk weighted assets classes and incrementally into zero risk weighted assets, the result of which was to quickly return the risk adjusted capital into compliance and allow banks to lend. Typically, banks made loans based on different maturities, so that every year, while generating spread income between the cost of deposits and interest revenues, fees and profits, they also had loans being repaid, the combination of which was available for lending. When the economy is becoming stronger, they shift lending towards the 3 lower risk weights or Private Sector lending, and when the economy is becoming weaker, they shift lending towards the zero % risk weight, i.e., the government. After November 9, 2007 the rules related to the booking of losses became entirely based on changes to affordability models having nothing to do with actual loan defaults, while undermining (i) the effect of Federal Reserve lowering of interest rates in restoring the principal value of bank assets relative to their capital and (ii) any possibility that there can be an improvement in real and paper wages to restore the underlying economic wealth capability of the Private Sector.
Inherent in this lending prior to November 9, 2007 are 2 aspects.
Predominant market contracts:
The first is that inherently banks generate financial contracts with borrowers that have a contracted term, which the banks hold to maturity or pool and sell to acquire AA rated securities to hold to maturity, including short, medium and longer term loans of different risk weights, maturities and yields, representing around 70% of all assets, including cash and assets intended for sale, as mentioned above, or to sell to change maturities and yields. The result of these financial contracts held to maturity dominating bank assets, prior to November 9, 2007, is that predominant market contracts are established, based on cash flows, which establish predominant market pricing stability, which prevents speculation, as traders pushing pricing above the predominant market contract pricing, will meet short sellers, and those shorting will meet with long buyers, both bringing pricing back into predominant market pricing stability.
Predominant market pricing:
The second is that because of the predominant market pricing stability, depositors have the security that there is a solid value to the assets, so that in the event of deposits leaving the bank, the bank is easily able to fill the loss of deposits at little or no change in cost, because the depositors see that the assets have a solid sustainable value representing 70% of the bank’s assets because they are valued based on their being held to maturity, versus value based on speculation, especially for what are mostly illiquid assets.
By illiquidity is meant that in the capital markets and the banking system itself, there are typically around 30% (+/-) cash available to invest and lend at any time. Typically banks would roll over loans to lend around 10% to 15% of their total assets value every year, because the remaining assets are locked into medium and long term financial contracts. This means that if there is a collapse in liquidity, and banks are forced to sell to speculators, then, because the cash remaining in the market is only around 20% to 30% against a forced pricing purchase of 70% in fixed term cash held assets, the value of those assets can be no more than the cash in the market!
With this background into the mechanism of Capitalism, and understanding that capital value represents productivity relative to money (currency) vis-Ã -vis gold, that Capitalism means the ownership and control of capital, production and fruits of productivity by the individuals in the Private Sector, we can move on to understanding why the key regulation to Capitalism is hold to maturity accounting, formerly FASB 115, and that removing that and replacing this value mechanism with mark to market accounting in the Private Sector with only the government and Federal Reserve retaining hold to maturity accounting, FASB 157 as of November 9, 2007, we can consider the differences between mark to market accounting and hold to maturity accounting.
Empirical data 1 – the sudden Bush Recession: First of all there is the empirical result that followed the November 9, 2007 approval by the Bush43/Paulson SEC of mark to market accounting limited to the Private Sector, with government and the Fed retaining hold to maturity values, FASB 157. This lead to the sudden and systemic collapse retracting 2 years of economic expansion in every market in the single month of December 2007 and sudden start of the Bush Recession. As proprietary funds and oil interests speculation on oil prices from May 2007 @ $60/brl to November 2007 @ $95/brl, due to their anticipation of FASB 157’s release and elimination of the binding effect on predominant market pricing, banks suddenly had to adjust their affordability models, forcing them to book fictitious losses related to the changes in affordability of the 3 Private Sector risk weighted assets against their bank capital. This forced banks to withdraw credit from the Private Sector consumers, businesses and home and commercial real estate borrowers and dramatically shift such lending to unconditionally guaranteed government and Federal Reserve debt, which retained hold to maturity accounting valuations. This government coup resulted in a collapse in Private Sector capital formation and access to credit and the Fed’s quick and sharp reductions to 1% interest rate. Moreover, within a year of unbridled speculation, due to mark to market accounting’s elimination of predominant market pricing stability, by September 2008 over $14 Trillion in Private Sector equity was lost.
Empirical data 2 – FASB 157e temporary reprieve: Next we consider the empirical result of FASB 157e made under pressure from the Private Sector banks to Congress by FASB April 2, 2009, much to the consternation of Progressives in the Private Sector and government wanting to continue the systemic collapse of the Private Sector into government ownership and control of Private Sector capital, property, production and productivity. However, as the government still did not have a waiting vehicle to take over control of lending, i.e., the Dodd Frank Financial Reform Bill, FASB 157e gave a temporary reprieve on mark to market accounting that allowed banks to refinance loans and book them in hold to maturity status, until there would be (i) [FASB 157e Level 1] any sharp decline in asset pricing, such as a prevalence of revaluations of properties foreclosed at 65% their loan amount, where regulators force banks to revalue the principal of all mortgage assets on that basis, (ii) [FASB 157e Level 2] any significant change in loan affordability relative to loan affordability models used in the refinancing of mortgages and loans that would slice into net disposable incomes of individuals and debt service coverage ratios of businesses, i.e., Progressive and foreign weapons against the US Private Sector, such as (a) sharp tax increased, (b) higher cost and taxes related to Obamacare, (c) another speculative energy price spike, as May 2007 to July 2008, (d) Fed increase of interest rates (e.g., the sharp interest rate increases the Fed imposed in 1929 after Hoover forced mark to market accounting on the Private Sector), (e) another 9/11 type of attack grounding airlines, business and vacation travel, business, where (iii) [FASB 157e Level 3] the combination of Level 1 and Level 2 revaluations forces banks and all leveraged financial entities to downdraft the losses against their capital, and radically shift all remaining lower 3 risk weighted Private Sector loans valued on a mark to market accounting basis to the government zero % risk weight valued on a hold to maturity accounting basis.
The Progressive proponents resulting irrefutable socio-political-economic outcome here is intended to achieve a blend of (a) increasingly widespread bank failure, (b) absorption of smaller banks into designated bigger “too big to fail financial institutions” to be covered under the new Dodd/Frank Financial Reform Bill hold to maturity valuations, as was also the intention of the AIG “bailout,” preserving assets in government’s hold to maturity valuation, thereby preventing the collapse of Trillions USD losses in credit default swap and Derivatives that would have resulted if valued under Private Sector mark to market valuations, and (c) the nationalization of banks.
Empirical data 3 – The FASB 157e Level 3 trigger: As mentioned further above, such collapse in bank capital adequacy ratios and bank liquidity resulting from the FASB 157e Level 3 trigger time bomb would cause all assets not covered under the government’s hold to maturity valuations to be priced based on the cash available in the capital markets at around 20% to 30% of their value on a hold to maturity accounting basis, as happened between December 2007 and September 2008, where unbridled speculation made possible by FASB 157’s elimination of predominant market pricing allowed unopposed oil price manipulation and unopposed short selling of both MBS and financial institutions (competing with Progressives’ interests), having to downdraft their asset values against their capital through the above mentioned FASB 157 devaluation Levels, while wiping out depositor’s protection afforded by the previous predominant market pricing security. The definable bottom was reached September 2008, when (i) Paulson and Bernanke obtained approval to have all assets of Fannie Mae and Freddie Mac wrapped by an unconditional guarantee of the government, allowing their values to be sustained under the government’s hold to maturity valuations, as otherwise Sovereign funds and bond funds around the world would have dumped them resulting in an unmitigated collapse, and (ii) CNBC proclaimed they exposed 5 million brls of horded oil, previously claimed as sold to China, that came on the market September 2008, proving that proprietary funds of Goldman Sachs (formerly Paulson and Rubin Chairmen), Citibank (former Treasury Secretary Rubin), JP Morgan/Chase (Rockefeller et al), Soros (all immediately unraveled after September 2008) and oil interests had manipulated and directly caused the systemic collapse. The anchor was immediately shut up by other anchors that ran in to prevent his enthusiastic exposure, which proved the quotes (i) from the new Gekko / Oliver Stone “Money Never Sleeps” quote that “The mother of all evils is speculation — leveraged debt” and (ii) BB&T’s former CEO John Allison (2009), “I think the news media unfortunately has been quite willing to jump on the criticism of capitalism and not the [government].”
Empirical data 4 – the April 2nd stock market rise: This date of April 2, 2009 FASB 157e produced the 2nd biggest percent gain in the stock market since the date FDR reinstated hold to maturity accounting in 1938, returning the regulatory basis for Capitalism to the Private Sector, ending 9 years Depression, that started with Hoover’s imposition in 1929 of mark to market accounting on the Private Sector that abruptly ended the Roaring 20s. FASB 157e allowed banks to refinance credits into a temporary hold to maturity accounting status that put speculation at bay, until there would be a significant change in value or model, i.e., affordability ratios. This allowed banks to write up loan loss reserves against bank capital, which bankers attest proves that there were no toxic assets and that the sole cause for the paper collapse was the imposition of FASB 157 November 9, 2007, having the sole purpose to achieve “Regime change” to the Progressive’s “New Normal.” The market subsided, when bankers and investors realized that this was only a reprieve and not a reinstatement of the regulatory basis of Capitalism, as it had been under FDR in 1938, the recorded one day biggest percent gain in the stock market.
Under hold to maturity accounting in the Private Sector prior to November 9, 2007, banks only booked losses, i.e., made loan loss provisions against their capital, when there were actual loan defaults. The incentive was that the banks, desiring to protect their capital, profits and investors interests, would work with the borrowers to bring the loan back into a performing status, as to do otherwise would undermine their capital directly, but in any case to seek to minimize any loss to the principal value of the asset. The hold to maturity valuation of assets meant market pricing was established along the cash flow valuations inherent in medium and long term financial contracts between borrowers and lenders, which both restrained speculation and preserved and sustained Private Sector wealth accumulation from market cycle to market cycle. This enabled banks to refinance and roll over debt at lower interest rates for individuals and companies, including the banks themselves, having eliminated their excess sheaf improving their cash flows and related loan affordability / debt service coverage ratios to start each new rising market cycle.
Under mark to market accounting that was authorized by the SEC on November 9, 2007 for accounting application as of November 15, 2007, instead of losses only being assessed against capital when there would be an actual default, losses were determined based on changes in the lending model values, where the original cash flow basis of loan affordability would be reassessed based on changes to net disposable income due to, for example, oil and energy prices, commodities prices, as happened due to proprietary funds’ speculating on the change from hold to maturity accounting to mark to market accounting based on their insider information through Paulson and others that such regulatory change would be enacted in November, and their historical knowledge that this regulatory change coupled with a change in the debt service coverage ratios would result in economic collapse and unlimited speculation by elimination of predominant market pricing, provided they could manipulate oil prices up and short MBS.
Thus, instead of an occasional loan defaulting, the effect of mark to market accounting, FASB 157, was to devalue all loans in every market sector, across the board, except, naturally oil, which spectators were empowered to continue to drive prices up without being forced down to predominant market pricing. In order to preserve their capital, banks shifted radically in the month of December 2007 from the 3 Private sector risk weight asset classes valued on a mark to market basis to zero % risk weight unconditionally guaranteed government debt valued on a hold to maturity basis. This shift out of the Private Sector loans collapsed at once credit to consumers and business in every market sector across the board and was the single reason why a booming Bush economy fell off the precipice retracting 2 years of solid sustainable growth in the single month of December, with charts looking like the Al Gore hockey stick – “tipping point” to collapse.
This continued through July 2008 when oil prices reached $157/brl, by which time speculators had so drained bank capital and Private Sector credit, that by September 2008 this Progressive coup had wiped out $14 Trillion in Private Sector wealth, a fabricated crisis that was blamed on Capitalism, even though its regulatory basis had been voided November 9, 2007, a con, supported by the media and Progressive government, and Progressive funded Think Tanks, becoming the basis for the start of Regime change policies to the New Normal. Thus, Government’s justifying the con to the media, acting as the government and crony capitalist shill, and its leaving out the will of the electorate as being for their own good, when in fact the destruction of wealth by the government and supporting special interests, made without compunction to the destruction of wealth, productivity and work, was intended solely to create a crisis to justify the expansion of government debt to prevent the Private Sector from borrowing except through government hold to maturity guarantee programs where Patronage would be rewarded with loans, and those not adhering to the government dictates excluded, for example the Republican car dealers for GM and Chrysler that were all forced to close with only the Democrat car dealerships allowed to survive.
In fact, when one understands what really happened due to the imposition of mark to market accounting, FASB 157, it is absolutely certain that had hold to maturity accounting been retained on November 9, 2007, oil prices would have collapsed back to their $60/brl range, the economy would have continued to boom, no crisis would have ensued and some Republican, not even the candidates that ran in the Primaries, probably not McCain would have been selected and won the election. However, has oil prices maintained their high pricing, while the economy may have slowed, nevertheless, as explained above, markets and banks would have adjusted interest rates for depositors and later to borrowers, and a new market cycle would have emerged into another boom. The Fed’s lowering of interest rates would have entirely offset any loss in bank principal values, restoring the economy in its boom cycle. And regarding mortgage backed and asset backed securities, including Fannie Mae and Freddie Mac, while there may have been some losses to those buyers of the B tranches resulting from some default in the subprime Carter/Clinton CRA mortgages, all the other tranches from the BB through the investment grade would have remained solid, and the banking system and economy stable. Thus, it’s only predatory and crony Capitalism and State Capitalism that are not sustainable, not American Capitalism.
To understand this in greater depth go to:
The financial Crisis – The Real Cause (56 page in depth Thesis – the whole story)
In conclusion, hold to maturity accounting within the framework of the bank regulatory mechanism is the very basis for Capitalism, i.e., the right and ability of the Private Sector individuals to own and control their own capital, production, fruits of productivity resulting from their work, ingenuity, innovation, and creativity, because it incentivizes banks to make loans to the Private Sector, while protecting the value of bank assets, establishing predominant market pricing, thereby protecting depositors savings, where banks cash positions and fall back are zero % risk weighted Treasuries and unconditionally guaranteed government debt.
This means that government needs to always be on the ready to make Treasuries available. However, Treasuries are not the villain, as we could see from examples related to the use of Stimulus in the US versus China, provided that government spends only on projects and R&D that result in sustainable productivity, i.e., the concept of value for money, without the bureaucratic go betweens, and the ability to affect repayment through sales, leasing, royalties and licensing to the Private Sector, such Treasuries will have a real underlying value that adds to the common wealth of the nation versus undermining, siphoning and destroying wealth and propensity to prosper.
Mark to market accounting imposed on the Private Sector with only the government and Federal Reserve having the right to value Private Sector acquired assets on a hold to maturity basis, results in banks being unable to provide credit to the Private Sector making capital formation and access to credit impossible for the Private Sector, unless such credit is obtained from a government and or Federal Reserve owned or controlled financial institution, through which government loan approval programs allow the financial institution to value the assets on a hold to maturity accounting basis. In short, the Regime change that followed November 9, 2007, a day in infamy, is intended to result in a New Normal in which all capital, property, production and fruits of productivity will be inexorably owned by the government by the end of 2012/2014.
UNLESS, the electorate comes to hear about, understand and take action –
1. To restore the regulatory basis for Capitalism, i.e., hold to maturity accounting in the Private Sector, FASB 115,
a. To create a Constitutional Amendment to prevent mark to market accounting to ever be enacted by the government
2. To reduce taxes to 11% for those earning over $50,000, based on the Laffer Curve (2) studies showing that the result winds up both maximizing tax revenues and economic growth and the prediction of the economics of the bank regulatory mechanism that such dramatic increase in sustainable affordability of mortgages and loans will also dramatically increase lending to support all classes of Private sector loans.
3. To cut government spending and the bureaucracy in half to provide the Private Sector with access to credit not in competition with government, while
a. Another “Grace Commission” as established by Peter Grace with Edwin Rubenstein as head of Research to go through the bureaucracy to suggest and provide means to 1/ streamline the bureaucracy, 2/ eliminate bureaucratic waste, 3/ sunset bureaucracies, 4/ eliminate counter-productive regulations, 5/ propose alternatives to reduce health care costs, e.g., tort reform, and green competitive versus punitive, where green is not subsidized by higher energy costs, but provides for tax credits.
4. Release oil and gas drilling and nuclear power in the US, which will drive US energy prices down, with every 1% decline in cost of energy equaling a 3% gain in manufacturing.
5. To use the deflationary offset in a balances approach to reducing the government debt and real infrastructure and R&D stimulus, as outlined conceptually above.
6. To eliminate the Department of Education and NEA from public schools and allow the individuals credit to go to the schools of their choice, while requiring Universities and institutes to raise money from the wealthy versus the government.
7. Increase tax credits for charities and foundations, while eliminating welfare, cutting unemployment payments in half.
8. To reinstate the Founder’s vision of American Capitalism, requiring government to become a referee, opposing predatory, monopolistic and crony capitalism / State Capitalism.
The result will be an immediate economic reversal with a sustainable force far exceeding Harding Coolidge 1923/29 and Reagan 1983/88 years that inaugurates a True Golden Age