Banks In "Utter Chaos" Dealing WIth Off-Balance Sheet Assets (WFC, PNC)

[AllentownJake]

Reading through the Qs for this quarter, a picture starts to emerge of utter chaos when it comes to how banks are implementing -- or not -- the changes by the FASB as to how organizations account for off balance sheet ("OBS") exposures. Let take two examples: Wells Fargo and PNC Financial.

In the case of WFC, the bank has taken the position that NONE of its conforming residential exposures should be brought on balance sheet despite the FASB rule change. As we discussed in The Institutional Risk Analyst this week, "Why? Because the loans inside these securitization vehicles are insured by FHA, so goes the thinking of WFC and its auditor, thus the bank has no liability to these entities or the securities they have issued to investors. Pretty neat trick, eh?"

Thus WFC is basically saying that none of the bank's $1.1 trillion in conforming OBS exposures need to be represented or reserved against. My problem with this is two-fold: First, the FHA and/or GSEs will return some portion of the securitized loans, so WFC should expplicitly disclose this cost and reserve against it. Second, it seems to be pretty arrogant for WFC to take such an aggressive positions with respect to these OBS vehicles, even with a third party guarantee, especially given the intent of the FASB rule change. BTW, WFC has another $0.6 trillion in non-conforming exposures we have yet to hear about. That is next quarter presumably.

http://www.businessinsider.com/banks-in-utter-chaos-dealing-with-off-balance-sheet-assets-2009-11

Looks to me like TARP failed, and the negative yield T-bills make a hell of a lot more sense.

[AllentownJake]

1. Kick

[galileoreloaded]

2. Jake, they don't want to hear it.......

they don't know what to do, how to change it, or if it can be changed.

Sorry man....

[AllentownJake]

3. I guess I should just spend my time talking about Sarah and Carrie than

Beauty Queen fundies seem to be something everyone agrees needs to be dealt with

:sarcasm:

[SpiralHawk]

4. Hey Jake - what's your take on what the 'utter chaos' is leading toward

I know little if anything about banking or finance, and would welcome your further commentary on the likely consequences of the chaos...

[AllentownJake]

5. Who really knows

They are dealing with an accounting rule change, that they lobbied not to happen. There was a reason why they did that. There are four accounting firms that are auditing the books and interpreting the rule. The accounting firms work for the banks, not the investing public, so the Partners at the accounting firms are looking for the minimum amount of disclosure they can make, and still be able to defend themselves in court if something bad happens.

The rule essentially brings transactions that were meant to never see the light of the day in financial disclosures into the light of day. This is a good thing, there is a reason they tried to do these things off their books in the first place, and that was to be able to keep less capital. Highly leveraged banks easily fail when something bad happens.

The problem is, if it is determined to be a liability, the bank has to have a reserve against it. Thus if they will have to keep more capital on their balance sheets to offset the new liabilities. That means they will have less money to lend.

The only conclusion I can come to is that they are going to have a shit load of fights with their auditors in the 4th quarter as this is ironed out and than they are going to have to revise their capital holdings in order to adjust to what their auditors say they need to have in order to be in compliance.

It will end up eating up some liquidity.

[SpiralHawk]

28. Thanks, Jake

eom

[jpak]

6. It's utter chaos I tell ya - President Obama signed the bad TARP law in 2008 and now it is a failure

Utter fucking CHAOS!!!111

Another Obama failure!!11

:rofl:

[AllentownJake]

7. Your losing it

No where in the post or responses was the President mentioned. I know you are obsessed with what I post, but you can chill out on this one...or maybe you can offer an intelligent discussion on accounting rule changes involving off balance sheet transactions and how bringing those transactions onto balance sheets will effect the financial market.

Stating TARP was a failure, is not stating the President is a failure, unless you want to equate the President's support for it when he was a member of the United States Senate.

[jpak]

8. Yes, because of TARP, the financial system collapsed and we are in the Greatest Depression

with 3d Quarter GDP at +3.4%

It's utter chaos and failure I tell ya!

And it's that Big Failure Obama's fault!!!111

[conscious evolution]

9. What a dumbfuck you are

you just got added to ignore.

[jpak]

11. So TARP caused the collapse of the US financial system and we're in a Great Depression?

Somehow, in my dumbfuck state I ignored these facts?

:rofl:

not that you'll actually read this....

[AllentownJake]

12. Where did I state that?

If you have a program to restore order and faith to a system, and the program doesn't work, the program can be considered a failure, without the program itself being the cause of the problem.

I don't think someone should have to explain that to you.

[jpak]

14. Were not for TARP and Obama's Stimulus Package we would be in a Great Depression

Someone should explain that to you and the guy who called me a dumbfuck and put me on ignore.

:D

[AllentownJake]

15. Really?

How do you know that? That is about as much speculation as what I say.

Please explain to me which stimulus program prevented a second great depression. Let us have an intelligent conversation instead of calling each other names. Both of us might learn something.

[jpak]

17. Really - When Obama took office, GDP was declining at -6.4% and accelerating

US stock markets were in free-fall

Foreclosure rates were climbing rapidly.

The US economy was losing 658,000 jobs a month and accelerating.

TARP saved the US financial system from total collapse and Obama's Stimulus Bill turned the economy around at a crucial moment.

Because of that bad old failure Obama, the US economy is now GROWING at +3.4%, all US stock markets have rebounded, monthly job losses have been reduced by more than half and the housing sector has stabilized.

But according to the self-proclaimed "accountants" - all these are NOT signs that we have pulled back from the cliff and put the nation on the road to recovery.

nope nope nope

[AllentownJake]

18. We are nowhere out of the woods yet

and one quarter of GDP growth a recovery does not make. I'm willing to guess, looking at the October numbers, it isn't going to be 3.4% next year when the 4th quarter number comes out. You aren't going to have a cash for clunkers to boost GDP by 1.6% and October was not the month September was.

Christmas sales will be telling. The projection was a 1% decline from last year. If it is worse than that, the market is not going to be happy.

T-bills had a negative yield yesterday, that is the first time since December 2008. When people are willing to pay for security of their principle, there isn't much faith in the Financial Markets.

TARP delayed a collapse, things are still blowing up because it was not followed up with regulation. Handing a bunch of bankers money and asking them nicely to behave themselves isn't exactly working out that well, these people don't really have that many loyalties. See what is going on in the Credit Card market right now with the big boys. Part of it maybe new regulation, a lot of it is they don't like all those lines of credit out there. Oh, and the banks are not lending that much right now, unless they get an FHA guarantee, and some of the people that are being guaranteed is eye opening.

There is always he law of diminishing returns on job losses, eventually you run out of room to cut, people are obviously still finding some places, because the losses are continuing.

Of course, I'd be very happy to be wrong.

[jpak]

19. If idiots keep beating the Stupid Failure Drum we will never be out of the woods

Self-fulfil your prophesies much?

[AllentownJake]

20. I highly doubt that I can influence the financial health of the country

If I could I deserve a bigger house and a nicer car.

[jpak]

21. If one is Pep Squad for Defeatism - one contributes to Democratic defeat

just sayin'

[AllentownJake]

25. I'll keep that in mind when I'm knocking on doors next November

Just saying. The party is bigger than the President, even though I like him...and there is a race against my least favorite politician.

[sendero]

23. We are in a depression..

... it's just that a lot of dumb fucks haven't figured that out yet.

[Zynx]

24. The program was meant to bridge a short term gap in bank capital as it existed in the fall of 2008.

It was a short term confidence measure rather than some long term reform bill. Frankly, I think that they should have had a reform bill ready to go well before TARP was necessary because it was clear the financial system was wheezing starting in late 2007, even though it was not in the emergency room yet. TARP did achieve a short term aim, which was to get the banking system through the October 2008-early 2009 period. Banks were able to raise capital on their own this spring and summer in relatively large amounts as their stock prices recovered from their lows, which was impossible in the fall of last year. That short term goal was met. It may inevitably prove that it wasn't enough, but I would be strained to say that the financial system shows the same degree of strain that it did.

[jpak]

22. Only on DU can you defend our Democratic President and get called "dumbfuck"

yup!

[AllentownJake]

10. Here is a newsflash

I have a degree in accounting an article about banks going fucking crazy because they have to bring transactions that were off their financial statements for years onto their balance sheets is going to interest me.

I'm sorry you get offended by a few things I post on here, but the fact is that Treasury yields were negative yesterday. That is a bad economic indicator. Mortgage delequincies were up in October and Foreclosures essentially flat, bad economic indicator. Housing starts were down in October bad economic indicator. Sales were up, but sales tax revenue was down in October (I still don't know how the fuck that happened).

Is the President responsible for these economic indicators, no he is not, but preaching mission accomplished after one quarter of GDP growth is a lot like declaring the war over in Iraq when Baghdad fell. He has made some good decisions and he has made some bad decisions, and he has been involved in his fair share of PR stunts. I have defended him when it was warranted. I defended him the other day on critcism of not going after the Bush tax cuts (they expire in 2010 no need to start a debate over something that goes away when you simply don't act).

If you are actually interested in learning something, why don't you look at the graphs from the Great Depression, give you a hint, things didn't move in a straight line. Are we headed for another depression, maybe, I don't know, Paul Krugman doesn't know, and Larry Summers certainly doesn't know (the man has never been right about anything in his life).

Generally when people respond intelligently, I listen and ask questions.

You might want to try that, instead of posting bile.

BTW thanks for the Kick.

[jpak]

13. Housing starts were down in October due to uncertainty over the extension

of the home buyer tax credit.

Not because of your self-proclaimed TARP failure and subsequent utter chaos.

Foreclosure rates have slowed and are now flat after a period of rapid increases earlier this year - and this is a bad economic sign?

Accounting indeed.

:rofl:

[AllentownJake]

16. Actually

Vacancies increased in October as well. The number of homes or dwelling that didn't have people living in them increased. Supply and Demand. When there is vacant housing on the market, housing starts should logically decrease. There are only so many people you can get to buy a new house for the first time, hence the opening up of the credit to existing homeowners in December. Pushing Demand forward. Any economic program that pushes demand forward will result in diminishing returns.

Foreclosures are flat, late payments are up. I know you think I'm a bad accountant but generally speaking, I think you can extrapolate that late payments lead to more foreclosures.

[Zynx]

26. Just for the sake of your own credibility among those who disagree with you

I would say you would be wise to present a more balanced approach. For example growth in industrial production the past four months is over 8% on an annualized basis, which is not bad by any measure. Regional manufacturing surveys indicate that growth in factory output will continue over the next six months and they expect orders to improve. Retail sales, while not stellar, have certainly stabilized. Jobless claims are clearly and undoubtedly on a downward trajectory. Credit spreads have narrowed to nearly normal levels, indicating that lending conditions may be starting to loosen up.

If you presented these against what you list as negative indicators and made the argument that the negative indicators outweigh the positive, then I think your argument would be more credible. However, when you piss, moan, and holler without giving so much as a shred of credence to the other side of the discussion, you are going to be dismissed out of hand by a lot of people.

[AllentownJake]

27. I'm sorry if I come off that way

Industrial production had to grow, the concern I have there and if I come off being negative is the NY Fed Survey on cash holdings and intended cash holdings. Of course there is no drill down on that data, the cash holding increases could be because they were near death and depleted, or it could be that firms are still spooked right now, it is hard to tell.

Retail sales are a mystery to me in October, sales were up, sales taxes were down. The only thing I can explain that with is that the purchases were in non-taxed items. That isn't necessarily a bad thing, people may have been spending more on food and clothing. In PA a new pair of shoes isn't a taxable item and I'm guessing certain items are not subject to the tax nation wide. It is just an odd stat that retail sales were up, sales taxes were down.

On Jobless claims, I think there is a law of diminishing returns. 658,000 jobless claims a month really isn't that sustainable. At the end of the day the country and every business has a minimum amount of employment to function. I think we are approaching that. 17.5% on the liberal measure is a pretty big number. 10.2% on the conservative measure is another. One economist I read speculates that the first number will fall and the other one will continue to rise (people who lost hope in finding a job have it so they move to number 2) When I see the first number falling I will celebrate.

On credit there is a lot of money sitting on the sidelines. Until that money moves back into the economy (and out of things like Gold and T-bills) the recovery is going to be slow, and of course you don't want that money to jump back in all at once.

If that came off the wrong way, I apologize. Looking to have a discussion and learn.