Wednesday, August 12, 2009

Joke Of The Day "Well Capitalized......”

Stories like this explain my "GOLD addiction"........This Cartoon from Jesse ( see "The Emporer Has No Clothes, But Who Dares To Say It" ) nails it.....

U.a. dank solcher Geschichten bin ich ein großer Anhänger von GOLD...... Dieser Cartoon von Jesse ( siehe "The Emporer Has No Clothes, But Who Dares To Say It" ) ist spot on......

Next Bubble to Burst Is Banks’ Big Loan Values: Jonathan Weil
Aug. 13 (Bloomberg) -- It’s amazing what a little sunshine can accomplish.

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. ( see Regions Form 10-K via Zero Hedge)

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.”

> I must admit that i´m somewhat surprised to see that John Paulson purchased 35 million shares of Regions Financial Corp. He is one of the best Hedge Fund mangers out there...

> Ich muß gestehen das ich doch sehr "überrascht" bin das ausgerechnet einer der besten Hedgefondmanger überhaupt sich ausgerechnet in diese Aktie eingekauft hat ( siehe John Paulson purchased 35 million shares of Regions Financial Corp )

While disclosures of this sort aren’t new, their frequency is. This summer’s round of interim financial reports marked the first time U.S. companies had to publish the fair market values of all their financial instruments on a quarterly basis. Before, such disclosures had been required only annually under the Financial Accounting Standards Board’s rules.

The timing of the revelations is uncanny. Last month, in a move that has the banking lobby fuming, the FASB said it would proceed with a plan to expand the use of fair-value accounting for financial instruments. In short, all financial assets and most financial liabilities would have to be recorded at market values on the balance sheet each quarter, although not all fluctuations in their values would count in net income. A formal proposal could be released by year’s end.

Recognizing Loan Losses

The biggest change would be to the treatment of loans. The FASB’s current rules let lenders carry most of the loans on their books at historical cost, by labeling them as held-to- maturity or held-for-investment. Generally, this means loan losses get recognized only when management deems them probable, which may be long after they are foreseeable. Using fair-value accounting would speed up the recognition of loan losses, resulting in lower earnings and reduced book values.

While Regions may be an extreme example of inflated loan values, it’s not unique. 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, a measure of capital used by regulators that excludes preferred stock and many intangible assets, such as goodwill accumulated through acquisitions of other companies.

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.

Widening Gaps

The disparities in those banks’ loan values grew as the year progressed. Bank of America said the fair-value gap in its loans was $44.6 billion as of Dec. 31. Wells Fargo’s was just $14.2 billion at the end of 2008, less than half what it was six months later. At Regions, it had been $13.2 billion.

Other lenders with large divergences in their loan values included SunTrust Banks Inc. It showed a $13.6 billion gap as of June 30, which exceeded its $11.1 billion of Tier 1 common equity. KeyCorp said its loans were worth $8.6 billion less than their book value; its Tier 1 common was just $7.1 billion.

When a loan’s market value falls, it might be that the lender would charge higher borrowing costs for the same loan today. It also could be that outsiders perceive a greater chance of default than management is assuming. Perhaps the underlying collateral has collapsed in value, even if the borrower hasn’t missed a payment.

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.

> Unfortunately the same cannot be said about Citi’s dirty pool of assets .....

> Dummerweise gilt das bei City nicht wenn man sich die anderen Papiere ansieht ( siehe Citi’s dirty pool of assets .....

Arbitrary Accounting

If nothing else, today’s fair-value gaps highlight the arbitrariness of book values and regulatory capital. Banks already have the option to carry loans at fair value under the accounting rules. For the vast majority of loans, most banks elect not to, on the grounds that they intend to keep them until maturity and hope the cash rolls in.

Consequently, the difference between being well capitalized and woefully undercapitalized may come down to nothing more than some highly paid chief executive’s state of mind.

Fair-value estimates in the short-term can be a poor indicator of an asset’s eventual worth, especially when markets aren’t functioning smoothly.

The problem with relying on management’s intentions is that they may be even less reliable.

At least now we’re getting some real numbers, even if you have to dig through the footnotes to get them.



Elizabeth Warren "We Have A Real Problem Coming" via Zero Hedge

William Black goes in depth on the biggest theft in world history

Fun commercial real estate figures and charts Agnes Crane/Reuters

Toxic Loans Topping 5% May Push 150 Banks to Point of No Return Bloomberg

Bad, Bad Assets Floyd Norris / NYT

America’s Japanese banks Rolfe Winkler

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Blogger jmf said...

CIT Bank agrees to strong Fed oversight

CIT entered into an agreement with the Federal Reserve to give the Fed strong oversight over the operations of CIT Bank, the Fed announced Thursday. The agreement requires CIT to present a recapitalization plan and to strengthen its management and operational controls. The agreement also requires the bank to submit plans to the Fed covering compensation, risk management and loan losses. CIT staved off bankruptcy last month with an emergency infusion of $3 billion from a group of bondholders after the federal government refused to bail it out.

7:07 AM  
Blogger jmf said...

Some very interesting tables & charts....

For credit investors at least, ‘the worst is over’
FT Alphaville

11:40 AM  
Blogger jmf said...

Teetering on Failure, but Meeting Standards
Floyd Norris

If Colonial does fail, it will call into question both the effectiveness of the regulation of rapidly growing banks, and of the capital standards regulators use. Even now, Colonial claims to be adequately capitalized. As recently as March, it met the criteria for being “well capitalized,” the highest designation.

How could a bank be well capitalized and facing government orders to find more capital? One reason is that the government’s rules allow banks to ignore the declines in market value of many loans and other assets in computing how much capital they have. Had Colonial been forced to count the losses it had already acknowledged, its capital situation would have appeared dire earlier than it did.

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