Hedge Fund Blogs From HedgeCo.Net


News that Moves: Nassim Taleb & Mark to Mark Rules / AIG Responsible for Banks’ Profitability

Nassim Taleb: A brilliant analogy explaining the absurd and fraudulent idea of changing the mark to mark (MtoM) rules for banks.

As the theory goes, under the MtoM rules of today banks are forced to use current prices to value assets they intend to hold long term. The proponents of a rule change blubber that this is unfair because the assets will be worth more in the future (how they know this is spurious, but I digress), so they should be valued more today. Nassim Taleb, author of Black Swan a 2006 book predicting the banking crisis, made the following analogy that I will paraphrase:

Allowing banks to change the MtoM rules would be the same as allowing homeowners to change the value of their homes. A homeowner who “intends” to live in the house for a number of years should be allowed, under new MtoM rules, to value the house at a much higher price than where it is valued today. Housing prices historically double every X amount of years. Why not let the homeowner value his house at double today’s price, which would mend his financial situation?

The farcical nature of this example sheds some much needed light on the fungus-like ideas growing in the back rooms of government.

As long as we are discussing farce and exposing fraud, let’s address the “strong” January and February banking announcements that led to the March stock market rally. One of our respected colleagues explains it best:

…During Jan/Feb AIG would call up and just ask for complete unwind prices from the credit desk in the relevant jurisdiction. These were not single deal unwinds as are typically more price transparent – these were whole portfolio unwinds. The size of these unwinds were enormous, the quotes I have heard were “we have never done as big or as profitable trades – ever”.


…AIG
, knowing it would need to ask for much more capital from the Treasury imminently, decided to throw in the towel, and gifted major bank counter-parties with trades which were egregiously profitable to the banks, and even more egregiously money losing to the U.S. taxpayers, who had to dump more and more cash into AIG, without having the U.S. Treasury Secretary Tim Geithner disclose the real extent of this, for lack of a better word, fraudulent scam.
In simple terms think of it as an auto dealer, which knows that U.S. taxpayers will provide for an infinite amount of money to fund its ongoing sales of horrendous vehicles (think Pontiac Azteks): the company decides to sell all the cars currently in contract, to lessors at far below the amortized market value, thereby generating huge profits for these lessors, as these turn around and sell the cars at a major profit, funded exclusively by U.S. taxpayers (readers should feel free to provide more gripping allegories).

What this all means is that the statements by major banks, i.e. JPM, Citi, and BofA, regarding abnormal profitability in January and February were true, however these profits were a) one-time in nature due to wholesale unwinds of AIG portfolios, b) entirely at the expense of AIG, and thus taxpayers, c) executed with Tim Geithner’s (and thus the administration’s) full knowledge and intent, d) were basically a transfer of money from taxpayers to banks (in yet another form) using AIG as an intermediary.

For banks to proclaim their profitability in January and February is about as close to criminal hypocrisy as is possible. And again, the taxpayers fund this “one time profit”, which causes a market rally, thus allowing the banks to promptly turn around and start selling more expensive equity (soon coming to a prospectus near you), also funded by taxpayers’ money flows into the market. If the administration is truly aware of all these events (and if Zero Hedge knows about it, it is safe to say Tim Geithner also got the memo), then the potential fallout would be staggering once this information makes the light of day.

About Bret Rosenthal

Interpreting the news that moves markets. Principal of RCM, LLC, and founding partner of the Fortune's Favor Family of Funds
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