London's Evening Standard Newspaper wrote a piece a few days ago on how one the city's biggest banks,Credit Suisse,is set to pay out bonuses to more than 2000 investment bankers in toxic debts for a third time in 4 years. In 2008 the scheme was known as the Partner Asset Facility which was worth $5billion(US),the 2nd time it happened 5,500 bankers got paid $17billion(US) in bonuses and this will continue until 2016.When Credit Suisse was asked why it done that,it said it was "to reduce the size of their balance sheets and align bankers with shareholders..."
So what does this all mean to average Joe and Josephine the taxpayer? Here's the thing: If the world's top 5 banks had to account for all the toxic assets that there currently is,then that would amount to a figure of roughly around $600 trillion(US) just in mortgages that we now off. It means it's a at-risk investment that banks take on hoping it will pay interest and principal in full at a later time. It goes against the principles of accounting,which means allowing banks to control the markets by manipulating the accounts. Bankers who make up their own accounting sheets is effectively stealing legally and sinking the market-to-market economy. Also bankers that gamble with customers, i.e.,average Joe and Josephine the taxpayer's money, unregulated and illegally should be held accountable not be rewarded with big bonuses. Defacto fraud on Investors and fantasy accounting quarterly reports should all stop don't you think?
Maybe it's the same where you live where your biggest banks in your country lives by the totally unproven expectation that toxic assets that they hold,will return to its previous value. Supply and demand don't work when it's being manipulated. Is it fraudulent by banks to behave like this? Is the Financial System we currently have corrupt? Are we allowing banks to cause the next recession given what the world economy had been through? Huge $17billion bonuses to some bankers means fewer loans paid out to smaller companies and firms who can't even hire new staff anymore,and average Joe/Josephine who can't even get a mortgage as 1st time house buyers,etc.
How many "closing down sales" or "everything must go" signs have you seen in your High Street lately? Is it just an example of writing off your losses over a period of time rather than taking a bigger hit when all your assets are its lowest value? Misvaluing or undervaluing your assets causes liquidity problems i.e. buying something for $10million that's now just worth $1million but you can only sell it for $3million.So what do you do? Take a $7million hit now or wait for 2 years when it might be worth $8million and you can sell it for $12million? At least if anything you can at least break even right?
So what are toxic assets in layman's terms? Let's just say Ed takes out a loan with FNB,ABSA or Standard Bank of about R2million(SA CURRENCY) for a house. On that loan lets say Ed has to pay 6% interest. The house is collateral,meaning FNB,ABSA or Standard Bank gets the house if Ed is unable to make his payments. However the house is valued at R2,3million,so where's the worry?FNB/ABSA/Standard Bank has what is called a "mortgage paper" which is an asset. The banks can sell the house to whomever they want.
Ed now that he has defaulted,will need to pay back the purchaser who will then get the benefit of his 6% interest. It's an investment that may or may not make any money in the future. However if FNB/ABSA/Standard needs the cash urgently then doing it this way is good for them in the short term. If Ed completely ran out money or becomes bankrupt and can't make anymore payments whatsoever,then FNB/ABSA/Standard will then only be able recover what little they can. The house therefore becomes illiquid(in other words it cannot be exchanged for cash) or it can't pay for the mortgage. The mortgage therefore becomes "toxic assets" as no one wants to pay for an asset where it guarantee you losing your money. Is quantitative easing the answer? The bank will therefore keep the property of the balance sheet as Real Estate Owned. Something innocuous-seeming?
Is printing more and more new money each time you run out of money means debauching your own country's currency,boost high rates of inflation i.e. petrol prices that keeps going up and up or food prices that's ridiculously high. It all looks like smoke and mirrors. Protect your tangible assets like energy sources,precious metals,agriculture and open/raw/untouched land. Because banks have been fixing accounting rules so as to mark the real value of assets to the markets. Shadow inventory sheets with a regulatory wink and a nod seems like something that only an forensic accountant would be able to unravel. Is the fact that banks,if they do have realistic spreadsheets,mean that the Basel Requirement won't be met and economic impact of that will bankrupting the entire Global Financial System? What is the real problem with toxic assets or worthless assets? Not allowing banks to get what they wanted back in 2008 seems now to be far to complicated to unwind. Cash for trash and truckloads of it right? Time for accountability by the banks. Time to find parity wouldn't you say?
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