Banks Fight Higher Capital Requirements

Posted by Ray on October 27, 2009 under Main | Read the First Comment

According to a Bloomberg article the Too Big to Fail Banks are crying over higher capital requirements that would take effect next year. I am sure your hearts, like mine, go out to these institutions as they struggle to scratch out a living, it is tough when the industry can only payout some $140B in bonuses for 2009 when they wanted $150B, but hey, we are all sacrificing aren’t we? The institutions are requesting a 3 year period to phase in the new requirements instead of doing it all at once and, once again, they are putting the gun to America’s head threatening the economy and the, cough, cough, recovery if their wish is not granted.

The threat is that lending, as if there is any to begin with as banks are buying some $1.2T in US government debt, would cease as it would impact securitization of consumer debt. First, let me explain what is happening and why they are fighting these new regulations, then you will see what the real agenda is and why they are fighting for a phase in period. As many of you know, banks have off-balance sheet accounts called all sorts of things from SIV’s, Special Investment Vehicles to Qualifying Special Purpose Entities, these gems are where banks move their products of questionable quality to be sold or securitized. Now, the rule is past and the asses are coming on the boost, period. The question is how fast will the assets come on the books, now or over 3 years.

Lehman made them famous because they did the granddaddy of all accounting sleight of hand tricks and would sell their CDO’s to their SIV’s and then report the sale as a profit, not bad, huh? It works until the value of these things completely blows up, see September of 2008 for the results. Well, the FASB in conjunction with Fed and FDIC want to move these off balance sheet items to the balance sheet, finally! This way, you the investor, can value the bank properly because you can see the “assets” or lack thereof in the day light. Now do you understand why the banks are fighting this move?

The banks want a 3 year window for the assets to come onto their balance sheets, I think you know why, but I will tell you anyhow. If the assets came on all at once it might break their balance sheets and a portion f these banks could fail or require more government assistance, we know this. However, my feeling is so what? Let them fail, do we really need a Citi Group or Bank of America or any other too big to fail bank anyhow? No, we don’t as there are plenty of banks to fill their shoes. Frankly, these institutions should not exist anyhow and they are not really lending, sorry FHA loans do not really count as lending.

These new assets are a significant problem, I am not saying they are not, but this is what the industry did to itself. Wells Fargo claims that every $1B it brings on in new assets will crowd out $15B in new loans. This sounds an awful lot like last year when the industry put a gun to its head and said save us or we will pull the trigger and take you with us. I don’t like it and I don’t buy it, sorry. Let them go and do it now. Cram down the rule on them without a phase in period at all and while you’re at it reinstate mark-to-market so we can truly value the bank’s assets. I know the ramifications and I am willing to accept them as I am tired of this one industry that blew up the whole world still wielding all this power over us when they should be begging for forgiveness. Just to fuel the fire, here is what John Gerspach from Citigroup and JP Morgan wrote:

Citi:

“We do not plan to reduce lending in only those businesses specifically impacted by the incremental regulatory capital requirements,” Gerspach wrote.

JP Morgan:

The capital requirements “will have a significant and negative impact on the amount of consumer-conduit funding that will be made available by U.S. banks,” said the letter from JPMorgan, the New York-based bank that this week reported its biggest quarterly profit since the subprime-mortgage market collapsed in 2007.

“We strongly support a phase-in period for the rule changes,” according to JPMorgan’s letter, which was signed by Managing Director Adam Gilbert.

These statements sound like threats to me, don’t they? To me they sound like they are going to reduce lending to every business line, which is surprising since they are not really lending anyhow.  So, record profits are rolling in while they are clearly hiding huge losses offshore, which is what it looks like to me at least, but we will not know until we see what is there. However, if they are made to put these assets on their balance sheets all at once, they will bring down the house of cards all over again, how convenient.

Regardless of what happens the change will have to take effect for annual reports on November 15, 2009. Guess what I will be doing on that date? Hopefully the same thing you will be doing because this is a big deal.

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Expanded Mark-to-Market Rules May be Here Soon

Posted by Ray on August 13, 2009 under Main | Be the First to Comment

The FASB, or  Financial Accounting Standards Board, is considering expanding its mark-to-market rules with loans instead of only securities. I bet you thought this issue was dead n April when Congress forced the FASB to relax on this rule for securities, but this is an entirely new issue as they want loans priced to market instead of just securities. This is a major problem for banks, which oppose this rule.

The banks blame the mark-to-market rules for the financial crisis itself, when in fact it was their own bad decisions that caused the problem, not the rule, which is absurd. However I am not sure about this new proposed rule as it could cause a major problem within banks themselves. I am not sure what the FASB is really thinking, but it is safe to assume that they think that there is a problem with the way loans are currently valued.

I would more than likely have to agree with them, but still there has to be a happy medium between mark-to-market versus the current mark-to-dreamland that we currently have. If you haven’t noticed ever since the relaxing of mark-to-market rules went in place earnings for all banks have been fantastic. They simply buried the problem for a future date, but now if these new rules come in to play that future date is coming very fast albeit a different problem altogether.

It has always been my opinion that when an institution is against something then it is because they know there is a problem. Just like when they support something you know they will benefit from it in some way.  Therefore, go ahead and change the rules, it is AOK in my book as even the FASB said it would give investors a better look at the company and its balance sheet. Frankly, the FASB has problems, like all organizations, but they are a pretty straight group of people and only make changes if they think it will benefit investors.

Clearly, this change will benefit investors as they will then see it is just not toxic securities they need to worry about, but toxic loans on the books as well. In my opinion, accounting has offered banks some pretty neat loopholes and benefits which can make their balance sheet look better than it really is, but that does not benefit investors. This rule change would make us fully informed just how badly ran our banks are and, frankly, burying or using factious accounting does not make the problem go away, it makes it worse.

These new rules will help investors and while they are at it they should have to mark the securities to market so you can see the problems that may exist as they never really went away. Getting rid of shenanigans is a good thing and I cannot see why someone would oppose these new changes, unless they benefit in some way from not making these changes. We should keep an eye on this to see where it goes, it could be a game changer.

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