This week's column focuses on "banksters." That's the name recently resurrected by CNBC's Dylan Rattigan for the executives in command of financial institutions who have marched off with huge bonuses.
First, a comment on their perceived ill-gotten gains: This is not to suggest that every person at every one of these companies doesn't deserve a bonus. Nor does it mean that certain organizations might not be far better off than others. It's a broad-brush point that I am making, and there are many exceptions.
One aspect of the bonus controversy no one has really discussed is that the banks' profits are a function of managements' judgments -- essentially the honor system, the same honor system that led the banks to leverage themselves up 40-to-1 or more on worthless or illiquid assets and let them grade themselves on their Level II and III assets, less liquid assets that are difficult or impossible to accurately put a value on.
Banksta rap
Now, the banksters would have us believe that all their assets are correctly and prudently marked, that their leverage is not excessive and that, given their "rock solid" balance sheets, they intend to bonus out large amounts of money that their organizations will not need for their businesses.Color me skeptical.
But they haven't.
Just practice abstinence from forbearance
As it is, we do know that these financial institutions are practicing forbearance (in this case, letting folks stay in their homes despite their inability to make mortgage payments) and that they are reluctant, in most cases, to modify loans or to recognize losses in general.Meanwhile, even more people will walk away from their homes. That's the conclusion reached by Waterfall Asset Management's Tom Capasse, who in a recent Wall Street Journal article headlined "Is slashing mortgage principal the answer?" said: "There used to be a scarlet D on your forehead if you defaulted. . . . Now it's a badge of honor."
And that follows a Jan. 7 New York Times Magazine piece ("Walk away from your mortgage!") in which Roger Lowenstein suggested that maybe skipping out on a negative-equity position is the right thing to do. Clearly, defaulting in the wake of the real-estate bubble does not carry the stigma it once might have.
Thus we know that there are markdowns yet to come. And depending on how many people decide to walk away from their negative-equity positions, there will likely be further pressure on the real-estate market (and thus on loan valuations). In other words, a new wave of write-downs may have its sights set on these financial institutions.
If the institutions were forced to aggressively mark their positions to where the real-estate market quite likely is now or may be in the not-too-distant future, there'd probably be nowhere near as many profits to disburse.
Continued: A revival of the debacle?