If 1 trillion of bad bank debt is 'cleared,' another trillion waits 'off books'

Discussion in 'Wall St. News' started by ByLoSellHi, Mar 25, 2009.

  1. Good luck to Geithner. Pity the U.S. taxpayer getting repeatedly anally raped.

    Banks’ Hidden Junk Menaces $1 Trillion Purge: David Reilly
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    Commentary by David Reilly

    March 25 (Bloomberg) --
    The U.S. government wants to clear as much as $1 trillion in soured loans and securities from bank balance sheets with its latest bailout plan.

    That might prove a short-term respite. No sooner might the Treasury Department mop up those assets than $1 trillion or more in new ones spring up to take their place.

    That is due to the potential return of assets held in so- called off-balance-sheet vehicles that banks may soon have to put back onto their books. The end result may be that banks are in no better shape to increase lending even after the government bailout.

    So investors betting for quick solutions to the financial crisis could be disappointed. The tangled web that banks wove over the years will take a long time to undo.

    At the end of 2008, for example, off-balance-sheet assets at just the four biggest U.S. banks -- Bank of America Corp., Citigroup Inc., JPMorgan Chase & Co. and Wells Fargo & Co. -- were about $5.2 trillion, according to their 2008 annual filings.

    Even if only a portion of those assets return to the banks - - as much as $1 trillion is one dark possibility -- it would take up lending capacity the government is trying to free.

    The hidden assets that may return to banks consist of mortgages, credit-card debts and auto loans, among others. Over the years, banks bundled them together and sold them to investors as securities.

    Whether these assets are “troubled” or “toxic,” their return to bank balance sheets could slow efforts to get credit flowing again. After all, banks shed the loans to make their balance sheets look smaller, allowing them to hold less capital to act as a buffer against losses. Until a couple of years ago, that boosted profits.

    Inflated the Bubble

    It also helped inflate the credit bubble, even as these accounting maneuvers made it harder for investors and regulators to see how much risk banks actually faced.

    Accounting rulemakers now want banks to bring some of those assets back onto their books. They are trying to crack down on transactions that banks used to sidestep rules inspired by the off-balance-sheet antics that led to Enron Corp.’s collapse. Of course, there is a danger that the rulemakers will backtrack, especially given recent congressional efforts to twist rules that will let banks polish their books.

    Investors have all but forgotten these out-of-sight assets. That’s a mistake.

    True, banks won’t have to repatriate all of them. Mortgages guaranteed by Fannie Mae and Freddie Mac, for example, may have to be booked by those two companies, rather than banks.

    Yet other assets will come back to banks. The tough part for investors is gauging how much. That is because the accounting- rules changes aren’t final, and their impact will depend on judgments by bank executives and auditors.

    Hundreds of Billions

    In its annual filing, JPMorgan said the rules change might lead it to bring back about $160 billion in assets. Citigroup estimated it may have to reclaim $179 billion.

    That would equal about 9 percent of year-end 2008 assets at Citigroup, and about 7 percent at JPMorgan.

    Neither Bank of America nor Wells Fargo provided such estimates. It’s possible, though, from JPMorgan and Citigroup’s disclosures and the thrust of the new accounting rules, to get some idea of what they might face.

    Both Citigroup and JPMorgan said most of the assets they expect to return will be securitized credit-card debt -- $92 billion at Citigroup and about $70 billion at JPMorgan. Bank of America disclosed it had about $114 billion in off-balance-sheet credit-card debt. So a portion of that may shift back onto its books. (A similar estimate wasn’t possible for Wells, based on the information it disclosed.)

    The return of credit-card debt may prove especially painful for banks, since delinquencies are soaring as unemployment increases. That might force banks to add to loss reserves, eating into profits.

    Loan Consolidation

    Banks may also have to consolidate securitized commercial loans. That could be an issue for Wells, which had securitized $355 billion of this kind of debt.

    And while mortgage-backed securities guaranteed by Fannie and Freddie likely wouldn’t have to be booked by banks, there are plenty of other mortgages out there.

    Bank of America, for example, disclosed that it had about $360 billion of securitized mortgage debt that wasn’t backed by Fannie or Freddie.

    Of the non-guaranteed debt, about $58 billion was subprime loans and about $138 billion was so-called Alt-A mortgages, according to Bank of America.

    All told, Bank of America and Wells Fargo have a combined $600 billion in assets that may be under consideration for possible consolidation. If just half these assets come back to the banks, that would equal almost 6 percent of Bank of America’s assets and about 14 percent at Wells.

    Granted, those are rough numbers. They underscore, though, that there is still a lot investors don’t know about banks and their books. That’s reason to worry.

    (David Reilly is a Bloomberg News columnist. The opinions expressed are his own.)

    To contact the writer of this column: David Reilly at dreilly14@bloomberg.net
    Last Updated: March 25, 2009 00:01 EDT
  2. I had an interesting conversation with a field rep for ________ yesterday who has been doing inspections for BAC. His company is servicing the loans for BAC, and making a shitload of $$$ for very little work. He said he spent last couple weeks working Baltimore, mostly just doing driveby's, following his GPS to the residences. He referred to the loans as "second trusts", more commonly known as second mortgages, so I'm guessing that a majority of them are Countrywide loans.

    I asked him how things were going. His response: For BAC, horrible. He looks at the loan specs, then looks at the property. Not sure about the percentages, but I got the impression that most were being charged off. Most of the homes looked like shit, plus values have crashed. So BAC is in no position as a second to try to recover anything. I don't thing we'll be seeing 125% home equity loans again for a LOOOOONG time.

    Throw in the credit cards losses that are mounting, and you got a continuation of the pain.
  3. How does this guy actually make money?
  4. When you have a loan, somebody has to service it, either by phone or on foot. BAC is paying the company that he works for outrageous fees to go out and physically confirm what they already know. The note payments are not being paid, and a 125% loan is underwater if the home only maintains 100% of value. Cut that value by 20-30%, throw in a flood of this crap, and you get a situation where somebody drives by, looks at a pile of crap, makes judgement to walk, or chargeoff.
  5. Sounds very interesting...

    How to enter into such a good business to service a loan?
  6. Where is that new accounting rule that requires the banks to bring their off-balance-sheet assets back to their balance sheets?

    Didn't the lawmakers actually want to ease the situation for the banks?

    I want to study into that accounting rule.
  7. nassau


    Have a question?

    Goldman and others are now looking at giving back the funds they received ....early.

    It is because they do not want any gov't involvement? or is it to not have to disclose as the gov't. will no longer be involved.

    I personally think, you received funds, you want to pay them back early fine; but we still have auspices over you. Don't let the manipulative bastards off the hook.

    Goldman is giving the funds back to cover their ass and all the internal frauds and bs.


  8. Can we just discuss this bad bank debt issue, instead of whining?
  9. Anastacia


    The government is purchasing the toxic assets using the Private Public Investment Program.

    What will the government do with the"TOXIC" assets?How will they be put to use?