Just as the major banks report super earnings, Richard Koo issues his report on their condition. If banks were required to keep honest books and mark their assets to market, there would be no earnings and both the finance and real estate industries would collapse.
As described by Zerohedge:
Richard Koo’s latest observations on the US economy are as always, a must read. The critical observation from the Nomura economist explains why the realists and the naive idealists are at greater odds than ever before: the government continues to perpetuate, endorse and legalize accounting fraud in the hope that covering everything up under the rug will rekindle animal spirits. The truth, as Koo points out, is that were the FASB to show the real sad state of affairs, the two core industries in the US – finance and real estate, would be bankrupt. “If US authorities were to require banks to mark their commercial real estate loans to market today, lending to this sector would be extinguished, triggering a chain of bankruptcies as borrowers became unable to roll over their debt.” In other news Citi, Bank of America, and Wells just reported fantastic earnings beats on the heels of reduced credit loss provisions. Nothing on the conference call mentioned the fact that all would be bankrupt if there was an ounce of integrity left in financial reporting, and that every firm is committing FASB-complicit 10(b)-5 fraud. One day, just like Goldman’s mortgage follies, all this will be the subject of epic lawsuits. But not yet. There is some more money to be stolen from the middle class first, by these very firms.
This is devastating news for those that believe the economy is in a recovery, but not news for those who understand what is going on. The government is desperate and complicit in fraud to prevent the collapse of the economy. Unfortunately, they are trapped and there is no escape.
The strategy with the banks cannot work because there is no way short of major inflation that real estate regains the value necessary to correct this problem. Even that is unlikely to work because wages are unlikely to keep pace with inflation, causing commercial real estate bankruptcies. The employment situation and overseas competition (labor arbitrage) is likely to make the inflation scenario a non-winner.
At this point, nothing short of some unknown miracle is likely to save the economy. I cannot even fathom what that miracle might be, never mind its probability of occurrence.
To read Zerohedge’s full commentary and the Richard Koo report, go to the website.