James Kwak over at Baseline has an post about the accounting treatment of Bank of America and Fannie Mae; quoting John Hempton:
If Bank of America were to provide at the same rate its quarterly losses would be 50-80 billion and it would be completely bereft of capital – it would be totally cactus. It would be – like Fannie Mae – a zombie government property.
Hempton claims that BAC has the right recognition policy and Fannie is being crushed by regulatory conservatism. I think that’s about as likely as the Easter Bunny, but Hempton deserves credit for thinking outside the box.
Winston Churchill said that in war, the truth is so valuable it must at all times be accompanied by a bodyguard of lies. It could as well be inscribed on the entrance to the Treasury. The Obama administration that ran – somewhat naively – on openness has embraced lying as an actual policy of itself.
The administration would like the following:
- Consumer confidence in the integrity of the banking system;
- A robust equity market;
- Broadly-distributed private-sector ownership of financial institutions;
- Robust equity valuations of the financial services companies
For a little while in the spring, it seemed an impossible dream. Banks were writing down assets at an alarming rate. Some of the largest banks could not possibly have positive book equity. Continued loss recognition was going to lead to either a crisis of confidence if the government refused to nationalize or a crisis on Wall Street when the government nationalized. Either case would tank the market and further the initial Republican talking point that there was an Obama downturn in the market.
Obama’s solution was simply lying. Without any formal change in the rules, the government looked the other way as all manner of stakeholders talked up the finance companies. Then in April the government leaned on FASB hard enough that mark-to-market was eliminated. And the lying could begin in earnest.
Some people reading this blog might not be finance nerds, so here’s a non-nerd parallel: John McCain went around throughout the campaign talking about the need to “win” in Iraq. It was as stupid an objective as it was in Vietnam. What would it mean to win? The Vietnamese had no power to force us to leave their country. Had we been willing to pour our youth into their jungle forever, there is nothing they could have done to stop us. They were never going to take DC. The war was expensive, but not so expensive that we would starve to death in Iowa. As long as we were willing to keep going, we could refuse to cry “uncle” and keep playing for the win.
In reality, however, we lost at some point in the early part of the Johnson administration. We lost when we were committed to fighting on the side of an unpopular, unrepresentative government against an enemy with too many people for us to suppress at an acceptable cost. Everything from then on out was just pride.
Eliminating mark-to-market allows for hiding the inherent bankruptcy of a company. So long as the Fed is willing to lend for virtually nothing – in the words of StatsGuy, so long as the power to print money is handed over to anyone with a banking license – the fiction of solvency can be maintained.
We assume integrity on the part of our public officials. It’s a bit childlike and entirely necessary; if we did not, our society would not function. Look at Brazil. The problem comes when that trust is not repaid. The government wants the banks to lie, because it is trying to get us back to 2007 as quickly as possible and does not want to spend its remaining time in office digging through the skeletons of the housing and banking crises. It’s the same reason the Chinese Communist Party keeps the picture of Mao on the wall; actually articulating the horrendous things he did would force them to act against those things – and the only reason they hold power is that he consolidated it in the name of the CCP.
I thought more about it while reading the excerpts of Tim Donaghy’s book on Deadspin (since it seems the NBA might succeed in blocking publication, I would strongly encourage you to read the link).
For those of you who don’t know, Donaghy was an NBA official who ultimately went to prison for betting on games. He is undoubtedly angry at the league and in need of money. Here is his description of Dick Bavetta:
From my earliest involvement with Bavetta, I learned that he likes to keep games close, and that when a team gets down by double-digit points, he helps the players save face. He accomplishes this act of mercy by quietly, and frequently, blowing the whistle on the team that’s having the better night. Team fouls suddenly become one-sided between the contestants, and the score begins to tighten up. That’s the way Dick Bavetta referees a game — and everyone in the league knew it.
But on that day in Oakland, Bavetta looked at me and casually stated, “Denver will win if they need the game. That’s why I’m on it.” I was thinking, How is Denver going to win on the road in San Antonio? At the time, the Spurs were arguably the best team in the league. Bavetta answered my question before it was asked. “Duncan will be on the bench with three fouls within the first five minutes of the game,” he calmly stated.
Bavetta went on to inform me that it wasn’t the first time the NBA assigned him to a game for a specific purpose. He cited examples, including the 1993 playoff series when he put New Jersey guard Drazen Petrovic on the bench with quick fouls to help Cleveland beat the Nets. He also spoke openly about the 2002 Los Angeles–Sacramento series and called himself the NBA’s “go-to guy.”
Curious. Is this really news? Check out Bill Simmons’ post from 2006 on NBA officiating (it’s probably a bit long for fair use, but consider this an NBA lane violation):
Question: What was the most disturbing subplot of the playoffs?
Answer: The officiating, also the most disturbing subplot of the past four playoffs. If you examine the last four NBA playoff campaigns, during every situation where the league definitively “needed” one of the two teams involved to win — either to A) change the momentum of a series so it didn’t end prematurely, B) keep an attractive, big-market team alive in a series, or C) advance an attractive, big-market team to another round — the officiating appeared to be slanted towards the team that needed that game. I use the phrase “appeared to be,” because reviewing an official’s performance is purely subjective. Maybe I’m dead-wrong…
2000, Knicks-Heat, Game 7 … Knicks advance to the conference finals … falling out of bounds, Latrell Sprewell awarded a timeout by referee Bennett Salvatore with 2.1 seconds left even though none of the Knicks called for one … Sprewell admits after the game that he hadn’t called a timeout … the Miami players chase the referees off the court after the game, yelling that they had been robbed … after the game, Jamal Mashburn tells reporters, “They had three officials in their pocket” and Tim Hardaway refers to referee Dick Bavetta as “Knick Bavetta.”
2000, Lakers-Blazers, Game 7 … LA shoots 21 more free throws and rallies back from a 17-point deficit in the final seven minutes … Shaq plays an illegal defense down the stretch, undaunted … Rasheed Wallace absolutely gets manhandled down the stretch, yet doesn’t get a single call … up by four with 25 seconds left, Shaq body-blocks Steve Smith out of bounds and the refs don’t make the call (the most egregious non-call in recent memory).
2002, Lakers-Kings, Game 6 … LA needs a win to stay alive … from an officiating standpoint, the most one-sided game of the past decade … at least six dubious calls against the Kings in the fourth quarter alone … LA averaged 22 free throws a game during the first five games of the series, then attempted 27 freebies in the fourth quarter alone of Game 6 … rumors that David Stern wanted to pull a Vince McMahon and declare himself “The special guest referee” for this game prove unfounded.
(By the way, I would feel remiss if I didn’t share this information: Dick Bavetta was assigned to every one of the above games. That’s an absolute fact. You can look it up. Doesn’t mean anything … I just felt the need to pass that along. It sure looks bad, doesn’t it? Maybe the league could do a favor for Bavetta and not assign him to Game 3 of the Finals, especially if the Lakers jump to a 2-0 lead over New Jersey. You wouldn’t want to rile up those conspiracy theorists or anything. Ummmm …)
Here’s the issue – anyone who followed the game – or, in the case of the Lakers-Kings game, anyone with functioning vision – could see something was going on. But exactly what…well, that’s a lot tougher to process, because the default assumption – the refs are making mistakes and the mistakes are killing my team – is so powerful. It seems crazy to assume that someone is trying to rig something with millions of people watching.
It’s hard to officiate sports. Some sports are harder than others – soccer does itself no favors by employing a ridiculous shortage of officials. I don’t think anyone meant to favor New Mexico over BYU in NCAA women’s soccer, they just weren’t very good at their jobs:
With sports, at least, there is broad agreement that what Donaghy did was wrong, and it is the fear of what would be unleashed if an investigation were launched that has made David Stern and the NBA brass so set on blocking publication of the book. “Knowing” that the games are rigged isn’t the same thing as actually having proof. If there were proof, Stern would need to be fired and the entire officiating roster of the NBA replaced. And they really don’t want that.
I hope that with the much bigger stakes of the financial system in play, the government will consider whether its policy of imaginary reports has not outlived its usefulness. The original panic is gone. If Citigroup were nationalized today, we could handle it. Like trade loading and other ethical shortcuts, the practice of denying any problems and waiting to earn back the difference is a greyhound race that cannot be won. The problems will compound, and someday – probably an unwelcome day, and surely an unexpected one – something will happen that will expose the fraud. Why not retake the high ground now, before we need it?