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Banks Have Books on ‘Low Simmer’

Posted by Larry Doyle on August 13, 2009 11:33 AM |

Should we add a little spice for flavoring to the low simmering stew represented by a number of banks’ books and records?

In the spirit of continuing our focus on increasingly delinquent and defaulted loans, I again reference leading Wall Street representatives as sources of information on this topic. Let’s take a whiff of the aroma coming off the stove.

1. The single best financial reporter on Wall Street, Jonathan Weil of Bloomberg, writes Next Bubble to Burst is Banks’ Big Loan Values:

Check out the footnotes to Regions Financial Corp’s latest quarterly report, and you’ll see a remarkable disclosure. There, in an easy-to-read chart, the company divulged that the loans on its books as of June 30 were worth $22.8 billion less than what its balance sheet said. The Birmingham, Alabama-based bank’s shareholder equity, by comparison, was just $18.7 billion.

So, if it weren’t for the inflated loan values, Regions’ equity would be less than zero. Meanwhile, the government continues to classify Regions as “well capitalized.”

What other banks are preparing this meal? Weil does yeoman work in highlighting the following:

>> Bank of America Corp. said its loans as of June 30 were worth $64.4 billion less than its balance sheet said. The difference represented 58 percent of the company’s Tier 1 common equity

>>Wells Fargo & Co. said the fair value of its loans was $34.3 billion less than their book value as of June 30. The bank’s Tier 1 common equity, by comparison, was $47.1 billion.

>>Suntrust Banks Inc. showed a $13.6 billion gap as of June 30, which exceeded its $11.1 billion of Tier 1 common equity.

>>Key Corp said its loans were worth $8.6 billion less than their book value; its Tier 1 common was just $7.1 billion.

In the spirit of full disclosure, not all banks are cooking their books; some have finished the cooking, dined, and washed the dishes under Uncle Sam’s guidance. Weil asserts:

The trend in banks’ loan values is not uniform. Twelve of the 24 companies in the KBW Bank Index, including Citigroup Inc., said their loans’ fair values were within 1 percent of their carrying amounts, more or less. Citigroup said the fair value of its loans was $601.3 billion, just $1.3 billion less than their book value. The gap had been $18.2 billion at the end of 2008.

2. High five once again to 12th Street Capital for pointing out the state of the simmering undertaken by the Federal Home Loan Bank system. KD references an article from The American Banker:

After several consecutive quarters of disppointing results, net income at the 12 Federal Home Loan banks surged 56.4% to $1.1 billion, according to figures released by the Office of Finance Wednesday evening.

The growth comes thanks to accounting rules approved earlier this year that require only small, credit-related portions of other-than-termporary-impairment charges to be recorded against earnings. Total OTTI charges on the system’s private-label mortgage-backed securities came to $2.6 billion during the quarter but only $437 million of that was taken during the quarter.

Under the heading of ‘you can pay me now or you can pay me later,’ obviously the choice has been made to pay the bill later. As foreclosures continue to increase, these credit impairments will continue to grow and the losses will have to be officially recognized. As we dine, those incapable of paying their own bill will be acknowledged, and the American public will be stuck with the tab.

‘Would you like some white or red, or perhaps more appropriately a little saki as this meal is the same one prepared in Japan during the lost decade of the 1990s.’

Pull up a chair at the table and join the conversation. Would love to hear from some of the chefs.


Related Sense on Cents Commentary:
Freddie Mac, Fannie Mae Deja Vu? (May 28, 2009)

  • Larry –

    The lead story on right now is a commentary by Matthew Goldstein of Reuterns on Citigroup. Citi has stuffed over $83 billion of subprime loans into a “Special Asset Pool”, and Citi still has to absorb another $34 billion of losses before taxpayers start footing the bill. He gives lots more interesting info on Citigroup and also talks about the pending demise of Ambac Financial Group, which would be very damaging to Citigroup.


    • Larry Doyle


      Great link and fascinating read. The key for all these institutions, including Citi, is where do they have the assets marked on the books.

      It does seem as if Citi has taken some aggressive markdowns in certain products. That said, there are most likely other assets which have not been fully marked down. What is the real problem here? Lack of transparency.

      Analysts very simply should demand a listing of assets/loans/securities held by the institution and the mark (asset valuation) being utilized. That exercise would promote transparency and integrity. It does not happen nearly enough if at all with many institutions.

      Thanks again for the link!!

  • fiscalliberal

    Larry – I have just started Lawrence McDonalds book : A Colossal Failure of Comon Sense by Lawrence McDonald. It is a good read for a neophyte on bond trading etc. It is about the collapse of Lehman Brothers

    Did you know him? Is there any street perspective on the credibility of his book?

  • Larry Doyle

    I did not know Mr. Mcdonald but knowing that the book just came out it is on my ‘must read’ list.

    I understand he pulls no punches.

  • kbdabear

    Reading material for perusal submitted without comment

    “The New Bull Market Fallacy”

    • kbdabear

      Quite interesting analysis, worth a read although I don’t know enough to comment. A quick summary would be that those in charge have patched the economy Earl Scheib style, with lots of bondo and a quick paint job

  • Larry Doyle

    I look forward to reviewing it. Thanks for sharing!!

  • coe

    LD – just thought I should perhaps throw two more logs on the fire:
    – no doubt that many banks receive an accounting pass and have yet to provide full frontal transparency to their “market value” exposures on the loans and securities, but at the same time, they have never been allowed to receive “full credit” for the benefits derived from their deposit would be interesting to comment on this component of their asset/liability mix – if only in that I believe this retail funding contributes massively to their margin and core value and truly represents their greatest “asset”, so to speak; and
    – the FHLB system in some ways is more complex..the nature of their capital management has their many members essentially participating in a “money market” type fund – i.e. they infuse capital at par, and redeem capital at par (both goesinto’s and comesoutta’s subject to specific rules)..the system is also “joint & several”, with their access to Agency funding offering competitive advantages shared by all of the district banks..the reality, on the other hand, is that the assets of the banks have drifted over the years into longer duration products (mortgages and MBS) with much more price sensitivity than typically embodied by your run-of-the-mill money market, in fact, a number of the banks actually have “broken the buck” when you take the portfolio equity value into consideration..think about how this might really impact their funding – “jointness” becomes a problem for the good districts, and were it not for the OTTI “get out of jail free” card, the banks with the most egregious exposure would be isolated and vulnerable..the connection to the commercial banks and thrifts, of course, is that the banking system derives some better funding through the wholesale FHLB advance program – both rates and collateral terms are skewed in the favor of the banks – so if something unseemly would happen to the FHLB system, the backlash would immediately be felt by their members – extending the capital pressures on both the FHLB system and their member banks! talk about too big to fail – phew!

    I happened to catch Pete Fornatale, the respected rock journalist and disc jockey, give a very entertaining talk on the mythology around the 40th anniversary of Woodstock…somehow when you think of the summer of ’69, with the first landing on the moon and the birth of Woodstock Nation, you cannot help but feel a bit nostalgic if you are close to this demographic, or even if you are just curious…his book, “Back to the Garden”, perhaps is also a metaphor for our banking system – let’s nostalgically try to get back to basics…cannot resist this parting shot – did you know that while Jimi Hendrix closed the festival with his electrifying “Star Spangled Banner”, now a cult classic, the promoters originally had envisioned none other than Roy Rogers to wrap up with a sing-a-long of his classic “Happy Trails”…amazing…thanks, LD, for providing the leadership and insight you do with this site!

  • TeakWoodKite

    O my, LD, Wall Street is Dinner Ditching again?

    A 200 billion dollar check the Taxpayer Restaurant will have to eat. Yum!

    It’s like a protection racket. I will eat free at your diner and you won’t say *()* ’cause you are a single mother and you can’t afford to loose your wage.

    How many more servings of “To Big to Fail” (top selling item on the menu) are we going to get stiffed for before they order “Justice Pie” for these crooks?

    The industrial factory between my ears has been grinding away, making Madoff pastries, wondering who was the chef that came up with the recipe. I worked for a bank data processing company and always marveled at the senior programmers abilities. It takes A LOT of man hours to program an AS/400 to make pork pies. Who was the “company” that ran this box? The mobs accountant wants to know.

    Great read LD thanks.

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