Banks NOW Getting HAMMERED; WTF Will They Do When M2M Under FASB Is Re-Enacted?

Discussion in 'Wall St. News' started by ByLoSellHi, Aug 26, 2009.

  1. I can only imagine how much worse it's going to be for banks when they ultimately have to deal with the toxic cesspool of bad assets they have on their books, but haven't yet been forced to deal with, and for which the government is losing the will and ability to help purge them of...

    "...The FDIC board, meeting in a public session Wednesday, is expected to ease restrictions proposed for private equity firms early last month, people familiar with the issue say. They spoke on condition of anonymity because the rules haven't been made public in final form yet.

    The move would follow the stream of recent developments. In July, when bondholders rescued commercial lender CIT Group Inc., it marked the first time since the crisis erupted last fall that private investors had saved a big financial firm without federal aid or oversight.

    Rising loan defaults, fed by tumbling home prices and worsening unemployment, have hammered banks. Eighty-one have failed so far this year. The closings have drained billions from the FDIC deposit insurance fund, which insures regular bank accounts up to $250,000 and is financed with fees paid by U.S. banks.

    The FDIC estimates bank failures will cost the fund around $70 billion through 2013. The fund stood at $13 billion — its lowest level since 1993 — at the end of March. It's slipped to 0.27 percent of insured deposits, below a congressionally mandated minimum of 1.15 percent.

    The FDIC seizes failed banks and seeks buyers for their branches, deposits and soured loans. Under the crush of failures, the agency says private equity can inject vitally needed capital into the system, especially with fewer healthy banks looking to acquire failed institutions.

    "There's an enormous need for private money to do this," said Josh Lerner, a professor of finance at Harvard Business School. "There's the sense that you have a lot of money which is currently sitting on the sidelines."
  2. Investors should seriously look into Canadian banks. Mark to market is still in effect in Canada and always has been. Banks here are <b>reporting increased profits over last year as well as reducing provisions for loan losses</b>. For those interested, check out Bank of Montreal's (BMO.TO) Q3 earnings report from yesterday.
  3. Excellent point. I've said all along that Canadian banks were much better run and transparent than their U.S. or U.K. counterparts, though I was cribbing from the hard work and research of others (obviously).
  4. Your topic heading suggests M2M is going to be re-enacted. Do you have any evidence that this is going to occur?
  5. Yes.

    You have to be a subscriber to access the article, though.

    It has to do with Congressional hearings that were quite heated, held two and half weeks ago -

    Linex Legal (subscription) - &#8206;Aug 4, 2009&#8206;
    Bachus (R-AL): Q: Are you concerned of changes to FASB accounting rules and how it may impact securitization markets? A: The SEC is interested in ...

    Here's another great link and article:

    The Financial Accounting Standards Board (FASB) is, in fact, considering a reversal from its April change in policy which suspended mark-to-market accounting. Specifically, FASB is considering vastly tightening mark-to-market requirements to include virtually all securities on a bank's balance sheet.

    Most financial analysts had considered FASB's reinstatement of mark-to-market unlikely. But Merton and Scholes' very public advocacy for mark-to-market may have just changed the odds.

    Tell Landis and whomever else I send my love.
  6. Appreciate the article. What does the Landis comment mean?
  7. It was in jest, in case you were carrying water for Landis.

    Do you think M2M should be reenacted, by the way?
  8. I have nothing to do with Landis.

    As for M2M, I absolutely think it should be re-enacted. I am in corporate finance, and the thought of allowing banks to mark ANYthing on their books to more than what it is worth pisses me off to no end. When we report earnings to Wall Street, I cannot change the numbers by marking down depreciation expense because I want an asset to be worth more. I can't look at my bad debt and say "oh yeah, we'll collect on that, even though the company we lent to has been out of business for 6 months". I have to write it off as bad debt.

    It's a bunch of horseshit.
  9. I agree 100%.

    The suspension of M2M for banks and financial institutions represented a massive fraud on U.S. taxpayers, particularly at a time when hundreds of billions (trillions?) of taxpayer dollars were being funneled to these very same institutions, to help them recapitalize their balance sheets.

    Doing so only delays the pain of recognizing losses, amplifies those losses, and puts those taxpayer rescue dollars at even greater risk.

    The U.S. Taxpayer has become the true lender of last resort, by force.
  10. TGregg


    I'm in the biz as well. There are two arguments against M2M. Don't know if I buy them or not, but here they are.

    1. If you have some structure and you can show it's value is higher than the market says, why not carry it at the higher value? Imagine a slice of loans. The market doesn't know those loans very well, but you do. As a bank, you are in a better position to say how much that group of loans really is worth.

    A problem with this argument is all the assumptions and other behind-the-scenes stuff. Fraud becomes virtually assured, IMO. On one hand, the bank is in a position to properly value this thing. OTOH, it is also in a position to benefit from exaggeration.

    2. Market fluctuations would make cap requirements very difficult to manage since they would change dramatically as the markets moved. This would also make pricing the bank very difficult.

    And #3 on my list of 2 :D is some markets are too thin to properly value some structures. If BAC has some weird thing and they are the only ones who have it, how can it be M2Med?

    As a capitalist, I like the idea of using market prices. But there are some problems. Perhaps they can be addressed.
    #10     Aug 26, 2009