Here come the bonuses (again)

Wall Street banks are announcing their newest round of mega-profits and mega-bonuses. This morning in his blog The Big Picture, Barry Ritholtz (Bailout Nation) provides a simple explanation: "Record Bank Bonuses Based On Record Bank Fraud."

Top biggest banks and brokers are on pace to award $145 Billion for 2009, Up 18% from the year before, according to a WSJ study.

This is based on two factors: Zero % money from the Fed, and a massive accounting — and legal — fraud.

How hard is it for any finance firm to make risk free money when they can borrow from the Federal Reserve at zero, and lend that same cash to the Treasury (by buying bonds) at 3%?

I suspect this is essentially the Bernanke/Paulson plan (now Bernanke/Geithner) to slowly recapitalize the banks via the Japanese model, rather than force insolvent institutions to reorganize. What may thwart the massive Fed giveaway are the self-interested institutions, who are not lending, and capturing the lion’s share of this wealth via bonuses.

On top of this, the recapitalization plan can only work if these insolvent institutions get to hide their massive losses from their owners — namely, the shareholders (and in some instances, the taxpayers).

Thanks to the congressionally mandated FASB rule changes back in March of 2009, Mark-to-Market has been changed to Mark-to-Make-Believe. We do not know if these banks are actually profitable, whether they are barely solvent (Chase/JPM), somewhat insolvent (BofA) or totally insolvent (Citi).

Hence, these record bonuses based on huge risk free profits that may not be real. And we won’t find out the truth until the FASB forces accountants to accurately report losses.

There you have it: Our financial system, based on a fantasy!

In short: borrow money from the Federal Reserve for free, invest it (but don't loan it) any way you can (been wondering why the stock market keeps going up?), and hide the real value of billions in mortgages and other loans you know are bad and which you are eventually going to have to pay for. Then, give yourselves big bonuses for your "success" (and just make sure you get out of town before it all comes crashing down—again).