Monday, September 22, 2008

Pointing Out The Truth.

Read the Wall Street Journal?

Probably not because you are one of those excessively liberal left wing government should solve all my problems, pure communism is really not such a bad approach to civilization and you know that the U.S.S.R. was not really a “true” communistic state … big government properly staffed with good liberal thinking people would make life better for the “real people”.

So, I guess you don’t read the Wall Street Journal. Well, I do.

There was a recent op-ed piece that really got my hackles up. I am not sure what hackles are but if I did know what they were I am sure they would be up and taking umbrage. Don’t ask me where my umbrage would be taken. You are just trying to distract me from my anger and outrage and yes, I know what those words mean and that is what I feel.

Don’t let me forget air travel or family events …

So, there was an op-ed piece by William M. Issac former head of the Federal Deposit Insurance Corporation from 1981 – 1985 and currently chairman of the Washington financial services consulting firm of The Government Should Stay Out of My Way Except to Bail Me Out When My Greed Exceeds My Ability, Inc.”.

Well, Mr. Issac’s piece entitled “How to Save the Financial System” slurred the accounting profession. Now, I don’t often run right out and protect my profession even when a TV show routinely makes the accountant the nerd and not even the nerd that gets the hot, smart woman. I mean there is a mathematician nerd who gets his own show and the beautiful mathematician female professor and he is even Jewish … see Numbers on Friday night … oops you don’t watch TV on Friday nights … Thanks Hashem for digital recording devices. Maybe next season we will have Forensic Accounting – NYC staring Edward Norton as the lead accountant. Remember, these were the guys that brought down Al Capone.

So, back to Mr. Issac and the solution for the financial mess or how I solved all problems for the masses while protecting my customer’s ten million bonus. He gave three major actions which have caused the current financial crisis. Rather than bore you with all three reasons and why he is among the dumbest people allowed to write a half page op-ed piece for the Wall Street Journal, we will just concentrate on my issue.

Now, he does not find fault with the bankers who gave mortgages to people with no money to buy property that was appraised by drunken, stoned appraisers for twice its real value and then to be fair make that mortgage for 105% of the purchase price so the buyer could leave the closing a little better off and money in his pocket. Those same banker people then told themselves they could write crappy mortgages and sell them to other greedy, drunken, stoned fools for a profit who would be happy to buy crap and then do it again maybe 100,000,000 times more because that is how many greedy, drunken stoned-out fools in the world if not more, These people were not at fault. Of course not they were only keeping the economy growing. How about the regulators that watched this going on, were they at fault? No, because they were busy buying property to flip for a substantial profit before construction was even completed.

What does this genius give us for something which brought the house of cards down?

Warning: Here comes the boring shit … you could skip the next three paragraphs and not hurt my feelings.

Well years ago, the accounting profession decided that balance sheets that merely presented the assets (stuff bought like building, land, equipment or investment like mortgages) at cost might be misleading when the value of those assets were permanently impaired (go down in value) and no longer worth their cost. What the heck does that mean in English? Well, company buys a building for $10 million dollars in 1980, it carries that $10 million dollars as an asset, something of value, making the company worth a million dollars more (less of course the mortgage but for this example they paid cash so no debt). Nice purchase. Well now ten years later, that neighborhood has gone down the tubes, and the company could not give that building away for only $1 million. A drunk sailor, no offense to the sailors out there but a drunk one has more brains than a banker or a mortgage lender or a politician trying to solve problems, would not take the building.

So, the evil accounting profession instituted fair value rules and the company needs to present the fact that their multi-million dollar building is only worth one million. So what? Well, the illiterate banker looks at that financial package and says … oops, the loan we gave you where you used that building as collateral is not worth what we thought and therefore either you don’t get any more money or we want our money back … pay the loan because your collateral is worth less than the loan. Company has a major problem. Have I lost you?

Let’s try this company’s total assets minus what they owe is $1,000,000. They go to bank and borrow $500,000 or 50% of their net assets. Okay? Now, the assets drop in value because they were in Galveston and Ike put them under water. The real value of those assets now drops to $600,000 and according to bank agreement … can only borrow $300,000. So, Mr. Banker comes along and says very politely … I would like my $200,000 back ($500,000 less $300,000). Well, he does not do it so politely but rather you have one week to pay up or else we will take your trophy wife that you put up as additional collateral. Crap, I really like trophy wife and if I don’t have any money it will be hard to get a replacement. So, you can see that fair value accounting could be a real problem. Life sucks when you have to interject reality.

Now bring this to our current financial crisis, see all those financial institutions have hundreds of billions of dollars of mortgages given to Mr. I Got No Money and Property I Can Not Afford If I Had to Finance It With a Normal Mortgage and I Just Lost My Job. So, what is that mortgage worth now that Mr. I Got No Money decides to stop paying? Not so much. So, financial companies having to comply with the rules of the game have to write down the value of their mortgages to what they are really worth. Merrill Lynch takes a $10 Billion hit, Lehman takes Billions in loss, Freddie and Fannie take Billions and Billions in loss, AIG Insurance Company went so far as to insure against this kind of loss and wrote a Trillion Dollars worth of insurance. Oh, my Lord in Heaven how drunk and stoned was I when I signed that agreement? Okay, its only paper losses but CNN can not understand that so it sounds like real money.

By the way, this huge number of bad mortgages, is just over 3% of all mortgages and only slightly higher than the historical average for bad mortgages. Problem is they are mostly in Florida, California, Arizona and Las Vegas, the same places where housing costs were going through the roof but that is really another post.

So, Mr. Issac says the greedy stupid men and women who screwed up royally were not brought down by their own greed and excessive stupidity. It was the accounting profession who made them write the shit down to what its worth. Accountants suck … they really messed up.

But, don’t worry. The Government just announced they are going to use your money to buy that shit so the greedy, stupid, drunken bankers and insurance guys can get the shit off their balance sheets. The GSDB (greedy, stupid, drunken bankers) can then collect their multi million dollar bonuses for solving the problem they got themselves into and also fire the accountants.

So, on behalf of my accounting profession, I apologize for pointing out the truth.

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