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Bonds Are a 'Safe' Investment: A Big Lie Gets Even BiggerBloomberg News reports that banks have kept $35 billion worth of asset write-downs from making the leap from their balance sheets to their income statements. Accounting rules permit this but it delays the inevitable -- in which a write-down on the balance sheet flows to the income statement. The reason banks are using this delaying tactic is that they can't raise enough capital to close the gap. But until they do, others will be wary of dealing with them.
Here are some examples:
- Citigroup Inc. (NYSE: C) subtracted $2 billion from equity for the declining value of home-loan bonds in its May 2 10Q without mentioning the deduction in the earnings statement or conference call with investors that followed; and.
- ING Groep NV placed 3.6 billion euros ($5.6 billion) of negative valuations in its capital account, while disclosing only an 80 million-euro depletion to income
These examples of dodgy financial disclosure occur as banks suffer from a big -- $116 billion -- capital shortfall. Over 100 banks have written down and reported $344 billion worth of losses on their income statements. They've raised $263 billion from sovereign wealth funds, their own governments, and public investors to shore up capital.
The balance-sheet write downs also reduce equity, which needs to be replenished. Adding the $35 billion in as-yet-written-down assets leaves the banks with a $116 billion capital shortfall.
Bloomberg quotes Michael Holland who put it well: "The smart people are the ones who've identified the problems, put them out there in full transparency, and addressed them by raising more capital. There is still billions of dollars of crap out there that hasn't worked itself through the system. Banks need more capital to work that all out."
Peter Cohan is President of Peter S. Cohan & Associates. He also teaches management at Babson College and edits The Cohan Letter
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Reader Comments (Page 1 of 1)
5-20-2008 @ 7:20PM
william lindblad said...
Interesting. The 100 banks reporting probably account for the large ones and not necessarily U.S. only. The U.S. has a VERY large commercial bank system comprised of small and medium sized banks, not to mention that there are also S&L's and credit unions. The question that remains is just how many and how deep are these institutions involved, directly or indirectly, in the housing mess? Since the Fed is making money readily available via auction notes to this sector and the FDIC has already stated that they expect some failures, it would imply that not all is well there either. If this is the case, the 350 bil. figure is but the tip of the iceberg.
5-20-2008 @ 7:58PM
Nathan Young said...
I heard something very very interesting this morning on CNBC, albeit a matter or semantics. We didn't have housing bubble, we had a lending bubble. We all know these banks should never have been making some of these loans in the first place.