Wednesday, April 22, 2009

Thank God There is No Stress Test On Goodwill Assets Propping Up Bank Balance Sheets.........

Almost every M&A activity during the past few years across all sectors ( miners, tech, industrial, chemicals etc ) has lead to substantial and often spectacular write downs ( Rio Tinto / Alcan, Google/Youtube + AOL , FOX/Wall Street Journal etc )..... The following must read report from Disclosure Insights ( Hat tip Zero Hedge ) is asking the obvious..... Why on earth have there been almost no impairments in te US banking industry ( Europe has taken the hit with ABN Ambro, Royal Bank Of Scotland, Fortis, Hypo Real Estate / Depfa etc, probably no coincidence that they are now "nationalized"..... ) even after the biggest bubble in history has popped and every other indirectly effected sector has taken the necessary step...... I think readers of this blog know the answer.....

Nahezu jede getätigte Übernahme binnen der letzten 3 Jahre in allen Sektoren ( Minen, Tech, Industrie, Maschinenbau, Chemie usw ) hat in den vergangenen Quartalsberichten zu massiven und teilweise dramatischen Abschreibungen auf den sogenannten Goodwill geführt ( spontan fällt mir hier das Beispiel Rio Tinto/Alcan, Google/Youtube+AOL, Continental/Siemens VDO, EON/Erwerb von Kraftwerken in Russland+Italien usw ) ... Der nachfolgende Report von Disclosure Insights ( Dank an Zero Hedge ) ist Pflichtlektüre und geht der Frage nach warum gerade für die Bankenbranche der USA ( Europa hat mit den 50 Mrd € Abschreibungen der Royal Bank of Scotland, Fortis für den ABN Kauf , Hypo Real Estat / Depfa den Anfang gemacht, sicher kein Zufall das diese Institute de facto verstaatlicht sind..... ) anscheinend andere Gesetze gelten..... Muß wohl an den "starken" Bilanzen liegen.....

Thanks to Randy Glasbergen. This must see Cartoon from Jesse´s Cafe Americain is (unfortunately ) looking better on a daily basis.....

It appears banks are not adequately impairing their goodwill. While market value isn’t necessarily the sole trigger for a bank to impair its goodwill, it is a powerful one. Fully 72% (36 of 50) of the banks we analyzed trade below book with 58% (29 of 50) trading below tangible book. Based on the rules governing goodwill, we expected to find widespread goodwill impairments by banks. That didn’t happen.

Rather, our analysis shows that 70% (35 of 50) of the banks we analyzed did not impair goodwill in 2008. Despite a pop in the easy credit bubble, a period during which many acquisitions that generated the goodwill were made, only $21.5 billion (less than 10%) in total goodwill was written down by 15 of the banks in our study.

Bank of America – The poster child for goodwill desperately in need of impairment. Our analysis of Bank of America’s acquisitions of FleetBoston, MBNA, and LaSalle illustrate well why banks need to impair their goodwill more – far more – than they’ve done to date.

BAC paid a total of $102.8 billion for these three acquisitions. Using market comparables, one of the methods prescribed under FASB 142, we derived a current value for these acquisitions of $37.4 billion. BAC currently carries $64.7 billion in goodwill on its book for these three acquisitions, or twice our estimated value for what these acquisitions are now worth. As such, it strains credibility that Bank of America did not impair any goodwill.

Nice to hear that Ken Lewis is in the Press on a daily basis with the request to pay back TARP.....If you keep in mind that the goodwill is part of the Tier 1 Capital calculation the bragging from Lewis with a "strong" 10.1 ratio is one reason more to feel confident. No wonder this "measure" of health has come under some scrutiny ( UPDATE via Option Armageddon : Stress Test: Tangible Common Equity Will Be Critical Metric & Tutorial Tangible Common Equity… ).... His balance sheet is looking stronger day by day...... Go read the full report for much more! It will be interesting to see how long the auditors are ordered, i mean allowed to ignore the obvious.....

Besonders witzig in diesem Zusammenhang das der CEO der Bank of America so schnell wie möglich die TARP Mrd zurückzahlen möchte... Wenn man jetzt noch berücksichtigt das der Goodwill in die Berechnung des immer wieder zitierten Tier 1 Capital eingeht erscheinen Aussagen wie die vom CEO der BAC das deren Quote starke 10,1 beträgt noch vertrauenserweckender. Kein Wunder das diese Kennzahl die in nahezu jeder Veröffentlichung herausgestellt wird in letzter Zeit mehrmals ins Gerede gekommen ist.( UPDATE via Option Armageddon Stress Test : Tangible Common Equity Will Be Critical Metric sowie das dazugehörige Tutorial Tangible Common Equity… ) ...Bin gespannt wie lange die Wirtschaftsprüfer noch zugucken ( müssen) bis hier mal die Axt rausgeholt wird.....Zieht Euch den kompletten Report rein und die tagtäglichen Kommentare der Verantwortlichen ( Geithner usw ) wirken noch ein wenig verzweifelter und unglaubwürdiger als ohnehin schon.......

Banks - Disclosure Insight

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Blogger Thomas said...

In a way, it doesn't really matter if they impair their goodwill or not:

It's not admissible for solvency purposes, and anybody trying to do a fundamental valuation dismisses it anyway.

(Not that it makes much sense to even attempt a fundamental valuation of a distressed US bank under current circumstances...)

9:09 AM  
Blogger Thomas said...

Just noticed this sentence in your post: "keep in mind that the goodwill is part of the Tier 1 Capital calculation"

That statement is wrong. If you check your embedded link, it says that goodwill is deducted for the purpose of Tier 1 capital calculation.

9:14 AM  
Blogger jmf said...

Moin & thanks Thomas,

are you sure?

I have a different understanding.

Maybe it´s just semantics.

But when goodwill has to be adjusted to get to the final tier 1capital i think my comment is not wrong.

From the link

Adjustments to Tier 1 Capital:

7. RC-M 6.b.(2) LESS: All other identifiable intangible assets

8. RC-M 6.c. LESS: Goodwill

9. RC-M 6.e. PLUS: Intangible assets that have been grandfathered or are
otherwise qualifying for regulatory capital purposes

10. Line 6 minus lines 7 and 8plus line 9 = "Adjusted Gross" Tier 1 Capital

And if this "Adjusted Gross" is vital for the final calculation of Tier 1.....

20. Line 10 minus line 19 = Tier 1 Capital

"(Not that it makes much sense to even attempt a fundamental valuation of a distressed US bank under current circumstances...)"


9:55 AM  
Blogger Thomas said...

Moin jmf,

I suppose it's just semantics.

What I meant is:

When calculating tier 1 equity, you take the total equity and deduct the goodwill.

Therefore, a goodwill write-down does not affect tier 1 equity, because it lowers both goodwill and equity by the same amount.

11:26 AM  
Blogger jmf said...

Moin Thomas,

it´s still fascinating to see how the PR stunts almost on a daily basis have worked ( so far ).

But i assume when you have Goldman Sachs
on your side as some kind of a "shadow" treasury division .... :-)

Thank god i´m in Göteburg over the weekend so i´m not forced to see the stress test results aka the mother of all PR stunts....

9:09 PM  
Anonymous shtove said...

Immo, you're referring to Jesse with approval.

Are you now a goldbug?!

12:30 PM  
Blogger jmf said...

Moin Shtove,

"Are you now a goldbug?!"

I would describe me as a very big fan of gold.

But i´m not in the camp that is screaming "manipulation" or "conspiracy" when gold is falling or tumbling.

I like the way gold has perfromed during the past few years and find i sometimes "strange" that some of the more radical "goldbugs" are still not happy that gold has outperformed every other asset class worldwide during the past 5 years.

I think everybody should have part of their portfolio in gold. Not to speculate but as an insurance....

10:31 PM  
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