Comments on: Dysfunctional US housing market. Dysfunctional capital market as well?

By: PSC

PSC — Sun, 06 Jan 2013 09:19:47 +0000

I massively dislike FASB, and because of the wonders of internet anonymity I’m happy to disclose that I think the SEC are a bunch of hopeless jokes who will be first up against the wall when the revolution comes … but …

1) The problem in the first part boils down to state law in the US. Some states have quite strict bankruptcy/foreclosure, some don’t. This isn’t a federal/agency issue. To my knowledge there’s no difference between the foreclosure times on mortgages in agency and non-agency MBS.

2) WTF? If you’ve $2 mil of capex, you need $2 mil of cash. And if you allow everything do depreciate immediately, then your PPE will be zero, and your accounts will be a fiction, as your plant will have zero value on balance sheet.

Blaming FASB for the credit crisis is original. They deserve a lot of flack, but the ultimate cause of the credit crisis was a bunch of people lending money to others who didn’t have the capacity to pay it back.

3) the SEC’s accounting arm, FASB??? What is he smoking? FASB is private.

And he’s grumpy that banks won’t lend to him. Yes, (functional) risk management departments of banks are pains in the arse. That’s their job.

By: Pyrmonter

Pyrmonter — Sun, 06 Jan 2013 05:14:07 +0000

carrying assets at the lower of cost or market is Accounting 1; to do otherwise involves fraud on the lender and equity holder: they don’t have access to assets of the value the debtor asserts. If you want them to share the risks, fine – tell them – ie mark to market. They might be willing to accept the risk at a price. But promoting inflated balance sheets has been and remains one of the most common large scale frauds.

By: Entropy

Entropy — Sun, 06 Jan 2013 03:02:11 +0000

It is like if your neighbor sold their house at fire-sale prices, your bank tells you that although you paid all your installments, you now have to pay more equity into the home loan immediately, or be foreclosed.

This is actually a real potential problem in the Australian rural sector.

A farmer defaults so badly (or managed to successfully fake his circumstances for so long the bank kept lending money until there is negative equity) the bank is left with no choice but to foreclose and recover at least some of the money.
The firesale results in a devaluation of all surrounding properties, technically placing the neighbours in situation where their equity is eroded and the banks must start to consider administrative action. The rural papers are stuffed full of properties for sale, but nobody is buying because it is hard to get finance in the sector as the banks are very worried about their exposure, and the expectation property values will fall further.

The market must correct of course, over the last twenty years land values rose well above its potential to earn, as credit was easy to obtain in the expectation of ever rising appreciation of land values. But it really sucks for those looking to expand the business in those years,who now have high debt loads and falling equity.

As you can guess the Katter solution to this problem is for the government to step in with buckets of OPM and offer reconstruction loans at next to zero interest. For farmers only of course, because they are special. The idea could be expanded by the creation of a new state bank just like the Fannie Mae and Freddie Mac discussed in this article. What could go wrong?