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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)

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