Forests, fire sales and mark to market


by David Malone

What have Mark to Market accounting rules got to do with English forests and fire sales?

Officially?  Nothing whatsoever.  In my opinion?  Everything.

But it requires reminding ourselves how we got to where we are now.

Back in 2008 the big banks were in fear for their lives, weighed down as they were with hundreds of billions in loans that were defaulting and assets that were losing value as the markets for them plunged and then closed.  The bank’s bad loans meant they had no cash flowing in with which to pay their own debts.  And their capital was flowing out as the value of the assets they had in their vaults declined along with the markets in which they were valued.

They were running out of cash and needed a ton of it fast.  And they needed to stop their assets losing value, or they would be forced to sell more and more of them to raise capital to replace the value they had lost.

The banks had to find solutions to these two separate but related problems.

The losses from bad loans, the so called Toxic Debts, they solved by getting Henry Paulson to tell Congress that unless it bailed out the banks, there would be social breakdown and tanks on the streets.  The $700 billion Troubled Asset Relief Programme (TARP) was duly passed by a cowed US Congress on 3rd October 2008.  The banks now had a new source of cash to replace that which they were NOT getting from their stupid loans. And that new source was you and me.

The second problem was trickier.  How were the banks to stop their assets from losing value?  The reason they were losing value was because fewer and fewer people wanted to buy them and those who did offered lower and lower prices because the whole market was in free fall.  Not a good moment for anyone to find they had to sell assets to get a little capital.  Such a sale is called a fire-sale.

From the moment the banks realized they were in such trouble that they might be forced in to fire sales, they and their friends began a furious and relentless campaign to have Mark to Market accounting rules suspended.    Mark to market, also known as Fair Value accounting simply says your asset is worth what you can sell it for on the open market.  Simple. Or it would be for you and me. The banks raised all sorts complications which I will write about soon.

Whatever your opinion about Mark to Market one thing remains true, the banks were desperate to have these rules suspended because a market valuation of their assets showed they were insolvent one and all.  That would not do. A lot of very rich and powerful people would have found, overnight, that they were no longer either rich or powerful. 

The banks knew they couldn’t stop their assets losing value, so they did the next best thing. They got the accounting  rules changed so they no longer had to tell people that their assets were losing value.  If they didn’t have to tell people, then who could say the assets had lost any value.

After a frantic year of flooding lobbying money into the accounts of the relevant Senators and Congressmen and women, Mark to Market rules were suspended on 2nd April of 2009.  They were replaced by rules called Mark to Model by which the banks could “… use significant judgement in gauging prices of some investments …”

And suddenly the banks were no longer insolvent and some handy bank-designed ‘stress tests’ were subsequently run to prove it.

Now fast forward to 2011.

Today the nations who bailed out the banks by taking the banks’ debts on to the national debt, are in terrible trouble themselves.  Sovereign debt levels are so bloated that nations are being warned that they must lower their debt levels and raise some cash.  And who is warning them? Turns out it is the same banks and financial system whose debts we bailed out.

So far we have borrowed money and printed money and both options are maxed out.  Plus we are now not getting as much cash flow IN to the exchequer because our tax base is shrinking due in turn to  rising unemployment.  Two years ago cash flow was the banks problems.  Now, magically it is ours.

And now our ever helpful and expert friends in the financial world are advising that we absolutely must cut spending on everything non-essential – which means anything that isn’t a further bank bail out and bond purchase.  (Those we are told are absolutely essential to ensure ‘the recovery’ continues and does not stall.)  And they are further advising that we could also raise some badly needed cash – by selling a few assets!

You might remember how this exactly what was suggested to Greece – that it could pay some of its debts by selling the odd island, or how Ireland could sell off its motorways or airports or electricity grid.

In the UK the advice is being taken up with unsuppressed glee.  The British Government has just announced that it plans to sell off a quarter of a million hectares of  woodland that is currently owned by the people.

No one asked us, but don’t worry there will be a ‘consultation’ no doubt.

Our government is not selling this land because it’s an intrinsically good idea to not own any forests or because now is a propitious moment to sell.  The government is selling because they say ‘we must’, in order to tackle our debts, whether it’s a good moment or not.  And let’s face it, in a recession it’s not a good moment.  Thus it is a ‘forced’ sale – a fire sale.

But who I ask will have the money to buy all these forests?  Will you?

The banks have cash.  And what is more so do the bankers who work there.  Take RBS for example.  In 2009 RBS made a loss of 3.6 billion pounds.  It had no money to pay anyone for anything.  But that didn’t stop them because we had put into the banks tens of billions.  So the bank decided to reward the very same bankers who had bankrupted the bank and lost 3.6 billion that year alone with 1.6 billion pounds in bonuses.

The bank did not pay that money.  Remember the banks had no money.  It had lost all its money.  We paid those bankers.

Now what do you think those bankers will do with 1.6 billion pounds in bonuses.  What to buy?  Oh the decisions!  I know how, about a darling little woodland. There are going to be plenty for sale within easy reach of the City.

And for those big commercial forests, well, what will be needed there are some bank loans.  So the banks will loan the money, our money, to companies and funds and ‘high net worth individuals’ (other bankers) who want to snap up a forest on sale at fire-sale prices.  And the banks will turn around and trumpet how they are lending in to the real economy!

The entire sale aims, according to the government’s own figures to raise about £140 – 200 million.  The debt we have saddled ourselves with as a direct result of bailing out the banks, according to more of the government’s own figures is somewhere between 800 billion and 1.4 trillion Pounds.  200 million from the forests will be 0.2 billion or between one four hundredth and one seven hundredth of the debt paid off!  Worth it?  A good use of the nation’s forests.

“Every little helps” though, doesn’t it?  And those leases will be up in only 150 years during which time we won’t miss them, no restrictions on access will have been introduced and absolutely no harm will have come to them.  Trust us, we’re bankers!

I wonder why Mr Cameron and Mr Osborne feel it will be better to get this widow’s mite from selling a half to three quarters of the last remaining open public woodland into private hands rather than squeeze 200 million back from the banks whose bail out caused our debts to balloon as they have?

Are we selling things because it will really help then long term health of this nation, or are we doing so because this is a perfect opportunity to strip the nation of assets at fire-sale prices?  A perfect privatization.  Push the nation into a fire sale which does what the Tories have always wanted  and set up  the banks for their promised recovery by letting them buy up assets at knock down prices.  Two victories for half the price of one.

And in the logic of fire sales, as one nation sells at knock down prices it lowers the value of similar assets held by other nations.  Ireland won’t be able to get more for its forest than we sell ours for.  The logic of fire sales, the reason the banks were so appalled at the prospect of their own assets being sold this way, is that fire sales create a downward spiral.  Just exactly the buying opportunity banks love when they are fire is burning someone else’s house down not theirs.

You see banks have a love hate relationship with fire sales.  They hate having to sell their assets at fire sale prices but love it when anyone else does.




David Malone is the author of the book Debt Generation. You can read and listen to excerpts from his book here: