A few days ago I commented on Geithner’s toxic asset plan as the second quarter drew to an end. The problem of reporting toxic asset values at current (massively depreciated) values looms for banks’ earnings reports. A bloodbath was on the horizon.
Magically, the Federal Accounting Standards Board did what bureaucratic offices rarely do: it acted quickly. It relaxed the standards for toxic assets, essentially allowing banks to report totally worthless real-estate assets (foreclosures, etc) at their original prices. Thus they get to tell a lie with immunity in order to put on a good public face. This lie is good for stock prices: financial were up on Wall Street which will apparently believe anything as long as it sound good.
Meanwhile, this will create problems for Geithner’s toxic-assets plan. Those who would have bought into his public-private partnerships in order to invest in cheap assets will now shy away from the same assets due to “official” higher prices (investors know that the assets are actually worth little to nothing). No dummy would buy in like this. If an asset was worth five bucks in current market conditions (with no upside in sight) and yet the bank told you that bidding starts at a hundred (because it’s “worth” a hundred), would you take the “risk” (aka leap)? Now, multiply that figure by a few million.
As Mama used to say, once you tell a lie, you have to keep telling another one to cover it the last one. The ball-under-the-shell-game continues: someone will eventually get stuck with the losses from the toxic assets. Banks, Geithner, are Congress are all hoping to keep the problem hidden, but we all know the public will eventually pay up in the form of the hidden tax, inflation.