Wall Street? You can't handle the truth!!

The world is in depression? Maybe so, but bankers are enjoying a large and controversial deluge of annual bonuses. The economy may be in the dumps, but Wall Street enjoyed record profits of $50 billion in the first nine months of last year—"nearly two and a half times the previous annual peak in 2000."

Why? Indeed a good question. "Profitability," adds the state of New York, "has soared because revenues rose while the costs of doing business—particularly interest costs—declined" (in other words, thank you Federal Reserve). As most countries cut their interest rates, this runs true across the board.

Personally the bankers and related are heavily spoiled, and the industry is providing them with reason to be. Those in the financial industry are indeed highly mobile, can and will simply seek work for someone else if they are denied some ridiculous compensation. As such, they argue that record profits should equate to record compensation.

Laughable argument but let us evaluate what this really means.

Exactly where are these alternative job opportunities that warrant leverage for "outsized compensation"?

In case you haven't been paying attention, the "official" unemployment rate for the U.S. is 10% but the actual percentage of working-age people that have a job has fallen to levels last seen in the early 1980s. Of those who are of working age and not in prison (that is, available to work) only a smudge over 58% are employed - a six percent drop, roughly, since the hayday in 2006. Since numbers if interpreted corrected do not lie, that's roughly 98 million people who could be working but aren't. Beyond the "structurally unemployed", some 25 million people were added to the workforce from 2000-2009 yet not one of them actually became employed, while in the last 18 months some 9 million were fired. A very large percentage of those fired, along with many who entered the workforce, are highly-skilled individuals.

So exactly where are these alternative jobs for the "mobile" workforce?

Answer: Nowhere. A job is better than no job, whether you get a $5 million bonus or not. But that is no reason not to feed the greed by making up lame excuses for making 50,000 times what the average low-end worker makes per month.

As for the "record profits", despite what the quarterly report claims, they are simply a grand-scheme fraud to protect the public from mass hysteria and anger at the system.

Simple math. We'll call it "subtraction."

During the bubble years, hundreds of billions of dollars in Home Equity lines were written. A good number of these were securitized and sold off, but not all - there is a huge percentage of them sitting on these bank balance sheets. If the property is worth less than the first mortgage that they are behind, they have zero recovery value in a foreclosure.

This is one of the schemes that was promulgated by "mark to fantasy" accounting adopted in early 2009. These loans were worth nothing, being carried at dramatically above their actual market value, the homes collaterals would go into foreclosure and receive a fat zero recovery. This means that virtually every large bank is still insolvent, as none of these loans can be refinanced if the property is underwater and as a consequence the "recast date" is a hard wall that will force them to default.

Now let's ask the seminal question: What has factually changed about the character of these "assets" on bank balance sheets since March?

Here's the scorecard on the fundamentals behind the valuation of these "assets":

1. Home prices have continued to decline. That is, more homes today are worth less than their first mortgage than were in March of 2009.
2. The "skew", that is, where those declines have happened continues to be centered in Arizona, Nevada, California and Florida, just as it was.
3. Mortgage performance, that is, the percentage of loans that are current has continued to deteriorate. Indeed, it has deteriorated a lot since March of 2009.
4. The so-called "HAMP" program is a dismal failure, having led to fewer than 10% of the so-called "qualified trial mortgages" turning into permanent modifications. While everyone makes excuses nobody pays attention to the elephant in the room - the 2004, 2006 and 2007 warnings from the FBI, HUD and private credit analytics firms that about one in ten of these exotic loans were made to people who actually provided an accurate income. That is, nine in ten HAMP "modifications" are failing not because the program is defective in its design but because the person in the house could not ever and still cannot afford it.
5. The recast wall for OptionARMs is closer today than it was in March of 2009. A disproportionate percentage of HELOCs are behind these sort of tricky loans.
6. The labor rate (percent of employment-age people actually employed) has fallen 1.5% since March of 2009. That is, 3.6 million fewer Americans are working today than were in March - half of them by coming into the workforce anew, the other half as a consequence of losing jobs and dropping out of the workforce.

How is it possible for you to make "record profits" while your asset quality continues to deteriorate, payment performance continues to deteriorate, the ability of people to pay loans you gave them continues to deteriorate and the recovery value of the assets behind those loans continues to deteriorate?

You get to define "record profits" by intentionally understating both fair value and reasonably-expected losses. Major institutions are paying out "compensation" with what amounts to fake money that was in fact not earned (due to all the hidden losses) is almost precisely what Madoff did with his clients – albeit a much larger scale. Can someone spell ponzi? Maybe that word is too hard to learn.

Unfortunately, such a strategy is purely temporary as the underlying quality (or lack thereof) of the assets will eventually break light, forcing recognition. By then, these "earnings" will have evaporated, leading questions “Where have my money gone?”.

What really ticks me is bogus valuations that continue to be claimed by institutions and their refusal to come clean about the false profits being made. The fact that these institutions could escape such a levy by breaking themselves up and thus not being subject to it offers a positive. Broken up they would lose their seminal argument for why they should be "too big to fail".

We are past the point when we argue that allowing all of these institutions to go bankrupt would have destroyed the economy or lending generally. If any, it would have destroyed those who bought fraudulent securities and those who issued them, which is actually the only right thing to do.

When the FASB decided to (temporarily) suspend mark-to-market and replace it with mark-to-whatever-you need-to-make-your-quarterly-bonus, it ripped out one of the last pillars of true accountability.

The most common rationale for the move was the idea that banks shouldn't be penalized by short-term movements in the asset price, if their intention is to hold the loan until maturity. Sounds legitimate, until you look under the hood: no rational accountant would have allowed marking bonds at par, simply because of the plan to hold them until maturity. There's another issue at work, namely, the creditworthiness of borrower. Nobody believes these crummy loans are worth a hundred cents on the dollar, including the guy who just sold them for 35 cents.

Similarly, according to The Canadian Press, President Barack Obama said with reference to his proposed plans to impose a $90 billion tax levy on big financial institutions to recoup some of the costs of the financial crisis:

If the big financial firms can afford massive bonuses, they can afford to pay back the American people.

The $90 billion Obama will extract from Wall Street won’t even begin to shrink the monster deficit the Fed has run up. But that is a problem for the next administration (probably Republicans). Who said politics isn’t fun? As Obama’s assistant Rahm Emanuel put it, ‘Its a shame to let a good crisis go to waste.’

Now, do we live in a world of fools that none actually realize when market conditions are characterized by unfavorable valuations, overbought conditions, over-bullish sentiment, and upward yield pressures, the market’s tendency is exactly that - to make continued marginal new highs for some period of time, followed by abrupt and often steep losses virtually out of nowhere? I think not. Many simply live in denial, hoping to postpone the problems to such time in the future when they would not be around to suffer the consequence.