Monday, July 20, 2009

Banks Lying About Balance Sheets

Guess who is going to get stuck with the bill, taxpayers?

"Ain't life grand?

.... let the lucky among us combine this:
  • on the one hand, the fact that foreclosures are still increasing while home prices are decreasing, and that unemployment keeps rising while prices are falling,
  • with on the other hand, the fact that Goldman will likely pay out record bonuses, which causes a sentiment that leads markets up
So how healthy are the markets, the economy, the banks? A grain of truth emanates from a Bloomberg report on an apparent change of focus by Washington head honchos Barney Frank and Christopher Dodd. It's sort of a tale of chickens coming home to roost. The health of the banking industry, or at least the image of it, has been elevated by creative (read: phony) accounting. One of the main fields in which this has been done is real estate: mortgages and the securities written on them. But because "values" of loans have been kept artificially high in this way, there is a new problem looming: mortgage modification, meant to keep people in their homes.You can't modify a mortgage to represent a value X minus 1, while the bank that owns the loan has it on its books for X. And adapting the value to reflect the real world out there, while it may allow some owners to stay put, could reveal a picture far more ugly than any banker or politician wants to acknowledge. We’re talking real ugly. Loans marked down presently by 4% would sell only if marked down by 60%. Bank earnings would be 42% lower than reported.

Barney Frank, Chris Dodd Do Banking Back Flip
Congress can’t make up its mind. First, legislators pushed to let banks take a rosy view of the value of some hard-hit holdings. Now, two key committee chairmen claim banks aren’t being realistic enough about the values of some loans.

The allegation by House Financial Services Chairman Barney Frank and Senate Banking Chairman Christopher Dodd that banks are holding some loans at "potentially inflated values" should trouble investors, since it came just days before institutions like JPMorgan Chase & Co., Bank of America Corp. and Citigroup Inc. are due to report second-quarter results. If some loan values are "inflated," that again calls into question the quality of banks’ results.

Why, after arguing for banks to have more leeway, is Congress now pushing back? Because many government responses to the financial crisis are more about manipulating prices -- and behavior -- than truly getting markets back on their feet. Dressing up bank balance sheets was a first-quarter political priority. Now there is a push to get banks to modify more troubled mortgages. That effort is being stymied by a rosy view taken by many banks of the value of home-equity loans and second-lien mortgages.

"Many banks have marked down these loans only by 3 percent to 4 percent, said Paul Miller, bank analyst at Friedman Billings Ramsey & Co. These loans in many cases would likely fetch about 40 cents on the dollar if sold in today’s market. The losses are "a big part of the toxic asset issues facing banks [..]"

A first mortgage on a house often can’t be restructured without the agreement of the holder of the second loan, which would entail writing it down in value. Banks have balked at doing that, due to the losses that would result. And why shouldn’t they? Congress, the Obama administration and regulators all told them earlier this year to hope for the best when it came to valuing their assets.

Let’s review. Congress this spring browbeat accounting rulemakers to make it easier for banks to ignore dour market prices for some holdings battered by the credit crisis. That was designed to help banks’ finances look better. Without subsequent rule changes by the Financial Accounting Standards Board, earnings at 45 banks and financial companies would have been 42 percent lower than reported [..]

Isn't it just great that people are thrown out of their homes only to allow banks to hide the fact that they're bankrupt? Isn't that the true American Dream?

PS: And now Tyler Durden reports that British ideas about securities may force US banks to write down the whole shebang anyway. Ain't life grand?



"Goldman's $4 Billion High Frequency Trading Wildcard And based on a few lines of code, retail investors get suckered into a rising market that has nothing to do with green shoots or some Chinese firms buying a few hundred extra Intel servers: HFTs are merely perpetuating the same ponzi market mythology last seen in the Madoff case, but on a massively larger scale."