January 6, 2011
Can US Bankers and Politicians be Truthful?
By Ron Robins, Founder & Analyst -
Investing for the Soul
Like their counterparts elsewhere, US bankers and
politicians regularly speak untruths. American bankers
are unlikely to be truthful if it impacts negatively on
the economy, their businesses—and especially their
bonuses. And American politicians will rarely be honest
if it inflicts damage on their poll numbers. Thus, are
we dreaming to expect truthfulness from American bankers
and politicians?
By 2006, it was clear that the US Federal Reserve’s (the
Fed’s) own figures on mortgage and other consumer debt
were demonstrably flashing red. And yet, Ben Bernanke,
chairman of the Fed’s board of governors and thus
arguably America’s most important banker, did not issue
a warning about them.
Was Mr. Bernanke afraid to tell the truth about
America’s mortgage/consumer debt problem? Perhaps he
felt that given his position he could not provide such a
warning as financial markets might react badly to such
comments and thus he would be labelled as the instigator
of a financial-economic slowdown.
Regardless, he appeared to offer even further
encouragement in the promotion of mortgage/consumer
debt.
On February 15, 2006, Mr. Bernanke said “our expectation
is that the decline in [housing] activity or the slowing
in activity will be moderate, that house prices will
probably continue to rise, but not at the pace that they
had been rising.” Then, just as the sub-prime mess was
starting to unfold, on March 28, 2007, Mr. Bernanke
said, "at this juncture, however, the impact on the
broader economy and financial markets of the problems in
the sub-prime market seems likely to be contained.” Only
a few days later on April 2, 2007, one of the largest
sub-prime lenders, New Century Financial, filed for
bankruptcy, and the sub-prime mortgage panic began to
engulf America and the world.
By contrast, perhaps having learned the lesson of the
US, Mark Carney, the governor of Canada’s central bank,
the Bank of Canada, together with the heads of Canada’s
major banks this past December 16, openly expressed the
desire to slowing the growth in Canadian
mortgage/consumer debt. Canadian consumer debt levels
are now close to those prevailing in the US before the
credit markets there imploded.
At least in Canada we are seeing some truthfulness from
top bankers. But as we know such truths by American
bankers were virtually non-existent prior to its
financial debacle.
At the heart of the US financial crises were bank
balance sheets that were crippled with ‘toxic’
assets—mostly, but not exclusively, mortgaged-backed
securities (MBS) where markets were largely
non-functional and prices distressed. This led to
massive losses on bank income statements and balance
sheets.
Now a balance sheet is supposed to show the true
financial condition and net worth of an entity on a
given date. But this fundamental rule of honesty in
accounting has been squelched to make banks’ balance
sheets (and income statements, etc.) look much better in
the wake of the 2008 financial collapse. It was claimed
that continuing to value assets on the balance sheets at
distressed prices accentuated the financial turmoil.
Hence, under extraordinary pressure from the US
government and the banks in the spring of 2009, the
American Financial Accounting Standards Board (FASB)
relaxed its requirement that banks value applicable
assets at real life market values. FASB now allowed
banks to price difficult to value, thinly traded
securities or those in distressed markets, to a
self-proscribed bank computer ‘model.’ Magically, banks
were suddenly profitable again and balance sheets
improved! Here the belief is clearly that the “end
justified the means.” Truth in basic accounting values
got sacrificed.
Perhaps bankers, who purportedly espouse honesty and
integrity, should have their banks issue two sets of
audited public financial statements: one which accounts
for assets and liabilities being valued, where possible,
at market prices (so called ‘mark to market’ or ‘fair
value’), and the other set of statements using the
current FASB’s directives. Then let investors and
stakeholders draw their own conclusions about the banks’
financial condition!
Just as US bankers are found lacking in truthfulness, so
are American politicians. Martin Jay, a history
professor at the University of California-Berkeley,
discusses the honesty of politicians in his recent book,
The Virtues of Mendacity: On Lying in Politics. In an
interview with US News & World Report on May 6, he said,
“I’m not urging governments to lie, and I'm not urging
the citizenry to be complacent about mendacity. But what
I'm trying to say is that it's more important to focus
on the issues, on the policies, and on the effects these
have on people's lives, than to constantly look for
discrepancies in promises and performance, or to look
for inconsistencies in a person's career.”
So perhaps the electorate should be more interested in
the issues and policies than about the politicians’
honesty. But if a person is seen as knowingly speaking
lies or hiding truths, we believe they cannot be
trusted. It is probably this dilemma that results in
politicians almost everywhere being held in such low
regard by their electorates.
But possibly, Americans do want to know more of the
truth concerning the state of their economy, its
unfunded liabilities, and so on. And if politicians were
more truthful, then, perhaps, the respect the public has
for them will improve. And maybe those politicians
speaking more honestly will get elected. This yearning
for truthfulness seems partly responsible for the growth
of the US Tea Party Movement.
American history is replete with bankers and politicians
telling lies and misleading the public. Maybe sometimes
the consumer, the public, is not ready to hear the
truth. But perhaps the only way for bankers and
politicians to regain the confidence of their respective
public is for them to be more honest. However, does the
public not also share in the blame of the pervasive
untruthfulness of bankers by allowing them inordinate
power, and for continually electing politicians who
disrespect or hide truths?
Copyright
alrroya.com |
