Bloomberg reports that FASB is likely to vote soon to require banks to own up to the vast bucks not currently on their balance sheets:
“The Financial Accounting Standards Board will approve rules on off-balance-sheet accounting by June, forcing banks to add billions of dollars of assets to their books, Chairman Robert Herz said. Rules that let companies keep assets and liabilities including mortgages and credit-card receivables off their balance sheets “were stretched,” Herz said today at an accounting conference at Baruch College in New York. The changes would take effect next year, he said.”
Noah Rosenblatt at UrbanDigs.com wants us to remember that as much or more than $5.2 trillion in assets are not on banks’ balance sheets, but rather, hidden in so called Special Purpose Entities (QSPE) and Variable Interest Entities (VIE).
“I believe Citigroup has about $1.1 Trillion in off-balance sheet assets as of late 2008. Who knows what the other megabanks have off balance sheet now that the toxic assets belonging to CountryWide, Wachovia, WaMu, Merrill Lynch, etc..have been merged with the acquiring holding company? FASB announced last June that it was delaying the vote on ‘off-balance’ sheet change for a year – after much opposition from Citigroup and other megabanks. Well, time is almost up.”
Rolfe Winkler points out FASB’s change will increase banks reported leverage and asks the question that inquiring minds everywhere want to know and that may make the stress test meaningful…or not:
“This will increase banks’ tangible assets by a large amount. That’s the numerator in the TCE calculation. Are bank examiners taking account of this during the stress tests?”
After all, the stress tests ARE supposed to be looking forward- right? Swamp Report thinks this FASB change will be ignored in the announcement s of Stress Test results on May 7th. But telling the world there’s no problem with banks and then admitting that assets have been allowed off-balance sheet due to the bankster lobby but which should have been on-balance sheet all along, will damage their credibility. As bank analyst Nancy Bush posts, after an inital market pop, the market will recognize papered over problems for what they are.
A followup on Minute Man’s post:
The Treasury has said that their conservative or “pessimistic” forecast, to which they assign no more than a 15% probability of occurance, includes an assumption that GDP growth will resume in the 3rd quarter of 2009. Floyd Norris of NYT observes that this recession is, according to coincident economic indicators, worse than all the post war recessions except the 1973-75 one. And… it is likely to exceed that benchmark soon.
Personal income is the one coinicident indicator (of four) that has performed this recession better than the others, but it is skewed by healthcare data that makes it appear much better than it really is. The leading economic indicators index declined again in March, and has not risen in the past nine months. The government’s propaganda that suggests GDP will begin rising in 3rd quarter is hogwash. There is a 100% probability that the pessimistic forecast used by the government will be exceeded in severity. The banks are experiencing for far more “stress” than the government wants us to know.
It’s a great quote and ominous too. Here’s Stephen King from HSBC to CNBC:
From WSJ:
Financial stocks also helped to inspire a late burst in the S&P 500-stock index, which advanced 8.37 points, or 1%, to 851.92. Credit-card issuer Capital One Financial soared 18%, and banks like Wells Fargo and PNC Financial Services, which rose 11% and 7.5%, respectively, also surged.
Swamp Report figures its the advance information Mr. Geithner gives to Goldman Sachs, which in turn trades for its own account… The information must be good, like, “the stress tests were really tough, but we think all the banks are in fine shape to withstand an economy that will rebound next quarter.”
CNBC cites “sources” who tell them that the bank stress tests will require banks to have risk adjusted Tangible Common Equity equal to 3% of assets. This of course “sounds nice”. If assets weren’t so subject to “funny accounting”, it would be meaningful.
According to Reuters, the government is going to reveal the bank stress test results soon.
“The Obama administration is drawing up plans to disclose the financial condition of the 19 biggest banks in the country, the New York Times said, citing senior administration officials.
While all of the banks are expected to pass the tests, some are expected to be graded more highly than others, according to the paper.
Officials have deliberately left murky just how much they intend to reveal – or will encourage the banks to reveal – about how well the banks would weather difficult economic conditions over the next two years, according to the paper.”
Even Rob Blackwell, writing in the American Banker, is skeptical about the stress tests. Read his honest answers to frequently asked questions.
George Soros is quoted in an interview with Tick Ticker as supportive of President Obama’s policies generally but not of his need to reach a consensus which costs valuable time in dealing with the banks:
“Essentially, Soros believes we should be following the so-called Swedish solution but fears we are heading down the same policy path as Japan. “We’re effectively keeping zombie banks alive,” he says.”
But… the bank stress tests say there’s no Zombie banks – they must be a figment of Soros’ and Simon Johnson’s imagination. Here’s the interview:
The NYT reports today that the results of the stress tests on banks are positive:
“For the last eight weeks, nearly 200 federal examiners have labored inside some of the nation’s biggest banks to determine how those institutions would hold up if the recession deepened.
What they are discovering may come as a relief to both the financial industry and the public: the banking industry, broadly speaking, seems to be in better shape than many people think, officials involved in the examinations say.”
So… did anyone expect any other result? Sure the officials say, the banks need a little more capital but it’s nothing to worry about:
“Regulators say all 19 banks undergoing the exams will pass them. Indeed, they say this is a test that a bank simply will not fail: if the examiners determine that a bank needs “exceptional assistance,” the government, that is, taxpayers, will provide it.”
What a joke… and the public seems to be falling for it, hook, line and sinker.
In a piece designed to contrast money center banks with regional banks, Institutional risk offers their opinion on the Fed’s thinking:
“No wonder that Fed Chairman Bernanke and Treasury Secretary Tim Geithner persist in their idiotic position that toxic subprime assets have true “values” of 80% of par. As we told the clients of IRA’s institutional advisory service earlier this week:
“Based on our projections and channel checks, we think that maybe the Fed staff got it wrong and put down the likely loss rate instead of the fanciful LT recovery rate embraced by Bernanke, Geithner and Summers. Truth is, the LT recovery or “Loss Given Default” (LGD) rate experience of 20-30% (which are the LT LGD rates used by Moody’s, S&P for internal loss rate projections) are holding true in this cycle as in previous economic downturns and may actually be optimistic compared with the actual realized loss.”
With most of the RES and CRE collateral we see in the channel trading in the 30s, it is only a matter of time before the markets force Bernanke, Geithner and Summers to abandon their desire to subsidize the large, insolvent banks and finally embrace liquidation. “
Bank bond holder should not come out of a bad bank unscathed. Jeremy Bulow at VOX submits a viable plan to deal with the banks:
A plan that isolates the bad liabilities rather than the bad assets of the banks, and pays the owners of those claims everything they legally deserve in liquidation but does not fully immunise them from losses, will achieve three major objectives.
- It will help unfreeze the credit markets by creating healthy banks able to lend.
- It will assure that depositors are paid in full, and all creditors are paid at least their entitlement.
- It will make the bailout cheaper for the government, increasing its flexibility.
VOX is on the right track. We believe, for any plan to work it must:
a. Make the bank bondholders pay before taxpayers do, and,
b. prevent CDS’s on bank bonds held by those without an insurable interest from spreading panic. We have previously discussed how this issue can be dealt with through taxation.
This is in line with VOX’s suggesion to focus on the liabilities and not assets.
David Brancaccio interviews Kenneth Rogoff, Harvard economics professor and former chief economist of the International Monetary Fund on NOW on PBS. Dr. Rogoff says we won’t be back to the same level of GDP as 2008 until after 2011 and that we have to take the big banks “through some form of” bankruptcy…
