Applied Lying For Dummies

Wall Street is thrilled this morning that Obama plans to let insolvent banks lie about being insolvent.

Stocks extended gains on Thursday as shares of financial services companies sharply cut losses on talk that Washington's rescue plan for banks may include suspension of a key accounting rule, traders said.

"The market suspects there maybe a suspension of mark-to-market accounting as part of the plan coming out of Washington to shore up the financial system," said Peter Kenny, managing director at Knight Equity Markets in Jersey City, New Jersey. "It would be very impactful."

Among bank stocks, shares of Bank of America (NYSE:BAC - News) cut more than half of their losses following the accounting talk. Earlier the stock had hit its lowest since 1984.

So the most effective part of Obama's Bad Bank Bonanza as far as Wall Street is concerned is not the free money injections, and not the loan guarantees for more free money, and not the part where the government gives them yet more free money to buy assets that are literally worthless, but the part where banks get to lie about what their craptastic worthless assets are actually worth.

And people ask me why I'm so convinced that we're screwed.

It works like this. Let's say you have a car as an asset. You buy the car 10 years ago, it goes down in value, you count what the Kelly Blue Book says your used car is worth should you try to sell the car.

Banks on the other hand have the car and they keep screaming at the top of their lungs that the car is worth exactly what they paid for it ten years ago. Replace "car" with "Securitized Mortgage Bundled Thingy" and you have the problem. "Mark-to-Market" accounting means the banks have to value the crap at the crappy 2 cents on the dollar that it's actually worth rather than the 100 cents on the dollar paid for the damn security bond in the first place.

Now, Obama wants to let them lie again. Bank stocks are actually up about 10% across the board this morning on the news. Let's keep in mind that up until about last year when the bailouts started, banks were happily free to lie about this. The number one complaint out of Wall Street was that mark-to-market accounting practices, I.E. THE TRUTH, was killing them. They've been lying about it and have been able to lie about it for years and years under Bush. When the bailouts started, suddenly the truth was woo much to handle.

That's because the truth is our financial sector is insolvent. Completely. They lost trillions of dollars betting on this stuff. Period. Game over.

The only real solution is to nationalize. Won't happen. Lying is much, much easier. Obama has no problem with this. Geithner and Summers have no problem with this.

But you will have a problem with it when our economy folds. Remember, our brainiacs in Washington are counting on applied lying for dummies and throwing money at banks to fix the problem.

If that isn't a Bushian solution, I don't know what is. Of course it will fail. Of course our economy will fail along with it.

It's depressing. As Atrios mused yesterday, "I wonder if this is how empires fall."