What, exactly, does the modification allow?
Postponement. The key phrase is “unobservable inputs.”

We note that you reported a significant amount of
asset-backed securities, loans carried at fair
value or the lower of cost or market, and
derivative assets and liabilities in your
financial statements in your recent Form 10-K.
Statement of Financial Accounting Standards No.
157, Fair Value Measurements, defines fair value,
provides a framework for you to measure the fair
value of your assets and liabilities, and
requires you to provide certain disclosures about
those measurements.

Fair value assumes the exchange of assets or
liabilities in orderly transactions. Under SFAS
157, it is appropriate for you to consider actual
market prices, or observable inputs, even when
the market is less liquid than historical market
volumes, unless those prices are the result of a
forced liquidation or distress sale. Only when
actual market prices, or relevant observable
inputs, are not available is it appropriate for
you to use unobservable inputs which reflect your
assumptions of what market participants would use
in pricing the asset or liability. Current market
conditions may require you to use valuation
models that require significant unobservable
inputs for some of your assets and liabilities.

So, the corporate accounting team looks at the current
market price of the asset and then searches for mitigating
factors. This is pick-and-choose accounting.

For example, consider providing a range of values
around the fair value amount you arrived at to
provide a sense of how the fair value estimate
could potentially change as the significant
inputs vary. To the extent you provide a range,
discuss why you believe the range is appropriate,
identifying the key drivers of variability, and
discussing how you developed the inputs you used
in determining the range.

http://www.GaryNorth.com/snip/534.htm

This reminds of me of the new, improved way of
teaching arithmetic. The student can get extra credit for
explaining why he got the wrong answer.

Investors will still be kept, if not in the dark, then
at least the shadows. But existing investors prefer this.
They do not want the truth. They prefer the illusion of
solvency. Like Japanese bankers from 1990 to 2006, they do
not want the capital losses to be written down where the
investment world can see them.

The game must be kept going for the economy not to
fall into a major recession. Investors were lured into
leveraged investments that have gone bad. These
investments are not going to get better. They will get
written off as losses. The question is: When? The
government and the big banks want this answer: later.

GETTING FROM NOW UNTIL THEN

If the price of housing continues to fall, the number
of bad loans will increase. Borrowers will find themselves
under water: owing more than their homes are worth. They
will either walk away or just stop paying their monthly
bills, and wait for a court to kick them out. This will
take years if they just sit there, paying only their
property taxes on time. They may not know this yet, but
hundreds of thousands of them will find out. The ability
of the mortgage-holding financial institutions to conceal
these bad loans from the capital markets is limited.

The longer the price decline continues, the more of
the loans will be called into question. The standard
figure is $200 billion in bad loans. This is standard
because most of this is behind us. The problem is, the
figure is acknowledged to be overly optimistic. According
to a report issued by the International Monetary Fund,
losses could reach $800 billion. This was reported by
Germany’s major news magazine, “Der Spiegel” (March 26),
but it has received little attention in the American media.

http://www.GaryNorth.com/snip/535.htm

Understand, this is not $800 billion of losses in a
broad market, such as all U.S. stocks. This is concentrated
in the financial sector, which supplies capital to the
economy. This is the center of the economy — exactly
where Ludwig von Mises wrote in 1912 that the forecasting
errors are concentrated during a period of monetary
inflation fostered by the central bank. But, in this case,
the errors were not confined to one nation. They have
spread into the international financial markets that bought
America’s AAA-rated debt.

The bad news keeps dribbling out. It has not created
a panic in the capital markets because investors do not
understand the Austrian theory of the business cycle. They
do not understand the extent to which capital has been
misallocated. They do not see the severity of the losses
under recessionary conditions.

These losses can be concealed by cooking the books
temporarily. They cannot be concealed if the decline in
housing prices continues.

There is nothing on the horizon that I see that will
reverse this decline. The chief economist for the National
Association of Realtors thinks the housing market may turn
up in the second half of 2008. This is similar to the
happy-face prediction that led to the departure of his
predecessor, David Lereah. For a time chart that tracks
their statements and the housing decline, click here:

http://www.GaryNorth.com/snip/536.htm

Yun’s March, 2008 forecast is this:

Rising sales will also bring down inventory and
help strengthen home prices. The national median
price of an existing home will fall in the first
half of the year and then rise in the second
half. For the year as a whole, the median price
will have fallen by 1 percent — after having
fallen 1.4 percent last year.

http://www.GaryNorth.com/snip/537.htm

His figures are immediately suspect. From January,
2007 to January, 2008, according to the Case-Shiller index,
which is widely accepted, the median house price in 10
cities by 11.4%. This is the steepest decline in the
index’s 21-year history. In 20 cities, it was down 10.7%,
the steepest decline in the index’s 8-year history.

http://www.GaryNorth.com/snip/538.htm

We are in the early stages of a recession. Why should
we expect American housing prices to bottom in June? The
interest rate re-sets contractually scheduled to continue
through 2009. Who expects the foreclosure rate to slow?
If they increase, why should prices increase in the second
half of 2009? Or 2009?

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———————

CONCLUSION

The media will promote the changes that will
centralize control under the Federal Reserve System. This
is a foregone conclusion. But the changes will not fox the
financial system’s losses from the previous mistakes.
These mistakes have not begun to spread through the
economy.

The public is not in panic mode. It has not been in
panic mode since 1991. Today’s investors do not remember
what a serious recession can do.

The public’s faith shown in the FED is remarkable.
That faith will be abandoned by a growing minority of
Americans when the economy moves into fill-scale recession.
The press will do what it can to blame anyone and anything
except the FED, but this strategy has limits.

The government and the FED have worked together to
create this crisis. They will work together to cover up
the effects of prior policies. This will lead to even
greater crises.

We have a tiger by the tail.

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