I have been waiting for some commentator to make the point. But it’s almost as though there is a conspiracy of silence.
Every bank that I have seen, their earnings report has come out with better than expected figures for the last quarter. Try as I might I have been unable to determine whether the sub-prime loans were valued at mark-to-market or the mark-to-model that came into effect April 1 2009. Note that the new standards could be used on first quarter results. Hence my attempts to determine what model was used to come up with the earning results.
Why do I care?
Well:
- mark-to-model means that the banks are valuing their toxic debts based on the models that failed them in the first place. Think of it this way. I have a rather untidy mess in my study that my maid has failed to clean up. Suddenly she gets word that I am arriving home rather unexpectedly from Singapore. Instead of cleaning up the mess, she uses my computer carpet to hide the mess; you know the sub-prime loans, CDOs etc. Now, the mess has not gone away; just hidden. And as long as there is no second-wave tsunami, the toxic assets will not cause greater damage. But if a second wave occurs……well I’ll leave it to your imagination.
- If the surprise results were based on mark-to-market, we can expect third quarter results, if based on mark-to-model, to contain some greater ‘better than expected earnings’.
For those not up with the arcane ‘mark-to-market’ and ‘mark-to-model’, here are some references:
- Mark-to-market: http://en.wikipedia.org/wiki/Mark-to-market
- Mark-to-model: http://en.wikipedia.org/wiki/Mark_to_model
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There is scam floating around. I checked with Citibank and they are aware of the problem. Here’s how it works. You get the e-mail below. When you click on the link, you are taken to an ‘official looking site’. If you complete the details, you will have given the scammers the info they need to steal your money. Beware!
From: alerts@citibank.com <ALERTS@citibank.c0m>
Date: Sun, Apr 19, 2009 at 11:21 PM
Subject: Banking Alerts: 53567582
To:
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This e-mail is intended only for the use of Citibank, N.A., Member FDIC Citibank.com is the source of information about and access to domestic financial services provided by Citibank retail banking and the Citigroup family of companies. Citibank, N.A., Member FDIC. Citibank Credit Cards are issued by Citibank (South Dakota), N.A. |
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