Scott Hammer TOXIC
Well-Known Member
Just a little advise for my peeps here...long read but worth it. Y'all need to stay hunkered down for a while...and it may be a while before I see home again.
'Toxic' Assets Still Lurking at Banks
By: Michael Rapoport
Wall Street Journal, 2/7/2011 -- During the financial crisis, investors fretted over "toxic," hard-to-value assets that banks were carrying. Those fears have faded as bank profits have rebounded, loan delinquencies have declined, and bank stocks have soared 25% in the past five months.
But banks still hold plenty of the bad assets that once spooked investors: mortgage-backed securities, collateralized debt obligations and other risky instruments. Their potential impact concerns some accounting and banking observers.
In part due to those bad assets, the top 10 U.S.-owned banks had $13.8 billion in "unrealized losses" that have lasted at least a year in their investment portfolios as of Sept. 30, according to a Wall Street Journal analysis. Such losses are baked into banks' book value, but don't get counted against earnings as long as the banks believe the investments will later rebound. If those losses were assessed against earnings, it would have reduced the banks' pretax income for the first nine months of 2010 by 21%, according to the Journal analysis.
Unrealized losses are just one way in which the troubled assets obscure banks' true financial condition, accounting experts say. With the banking recovery well under way, they think the banks should no longer delay a reckoning and should count those losses against earnings.
Another problem: Even when banks do take real charges because of their securities losses, accounting rules allow them to keep some of those charges from hurting their bottom line.
Making the picture even murkier, the value of many risky assets are based solely on the banks' own estimates -- leaving valuations uncertain and, some critics say, overstated.
"They're still inflated because I don't think the bullet ever really got bitten," said Jack Ciesielski, publisher of the Analyst's Accounting Observer.
The banks say they mostly don't need to take charges for losses on their risky assets. They say they will ultimately realize the assets' full value by holding onto the securities and collecting the principal and interest payments associated with them.
One problem centers largely on "Level 3" securities, illiquid investments that can't be easily valued using market prices. According to the Journal analysis, as of Sept. 30, the top 10 banks had $360.7 billion in "Level 3" securities. That amounts to 42.6% of the banks' shareholder equity, a pile of assets whose value is hard to verify.
To be sure, banks aren't as exposed to bad assets as they used to be. At the top 10 banks, Level 3 securities have declined 24% in the past two years, while Level 1 and Level 2 securities, which are much easier to value, rose. The amount fell as banks sold some Level 3 assets, switched them to Levels 1 or 2, or wrote some down. Unrealized losses also have declined.
Bank of New York Mellon Corp., for example, took a $4.8 billion charge against earnings in 2009, much of it related to mortgage-backed securities, to reduce its balance-sheet risk. The bank subsequently sold some of its lowest-quality securities. Chief Executive Bob Kelly said on a conference call at the time that "we're putting our investment securities issues behind us" and "we want to sell the securities where we think there is just no value there."
Many banks haven't been that conservative.
"In a lot of cases banks are probably deluding themselves" about the future value of those securities, and whether they will ultimately recover as much from those securities as they contend they will, said Bert Ely, an independent banking consultant.
Often, the impact of these assets isn't easily visible. Much of the information about risky assets is only in the banks' regulatory filings, not in their earnings releases. Though major banks have announced their fourth-quarter earnings, investors won't be able to see how much in risky assets the banks are currently holding until they file their annual reports with the Securities and Exchange Commission in about a month.
Citigroup Inc., for instance, didn't mention its high level of Level 3 securities when it announced fourth-quarter earnings. As of Sept. 30, the bank held $79.1 billion of Level 3 assets -- equal to 48% of its book value. That includes billions in credit derivatives, asset-backed securities and some subprime-mortgage-backed securities.
Jon Diat, a Citi spokesman, said the bank is "comfortable with its treatment of Level 3 assets," provides extensive disclosure
Zions Bancorp had $905.1 million in one-year-or-more unrealized losses as of Sept. 30, which would have made its nine-month 2010 loss of $306.7 million worse if counted against earnings.
"We have detailed disclosures regarding how we value and determine credit impairment on these securities, and we believe that our valuations are reasonable," said Doyle Arnold, Zions's chief financial officer.
PNC Financial Services Group Inc. had $1.6 billion in year-plus unrealized losses as of Sept. 30, or 55% of pretax income for the first nine months of 2010. Spokesman Fred Solomon said PNC is "very comfortable with our ability to recover these amounts."
Another avoidance method: As long as banks say they don't expect to sell a security, they are allowed to put some of the security's losses into a balance-sheet line known as "other comprehensive income," where they don't affect net income or regulatory capital. Banks were given this leeway in 2009, when the Financial Accounting Standards Board gave in to pressure from Congress and softened the rules on writing down assets. A FASB spokesman declined to comment.
State Street Corp., for instance, had $420 million in non-credit impairment losses in 2010, which would have cut its pretax income by 20% if they were counted against earnings.
Carolyn Cichon, a State Street spokeswoman, said the bank's asset-impairment charges have declined, and the bank's accounting "continues to reflect our position that we have the ability and intent to hold the securities to maturity."
'Toxic' Assets Still Lurking at Banks
By: Michael Rapoport
Wall Street Journal, 2/7/2011 -- During the financial crisis, investors fretted over "toxic," hard-to-value assets that banks were carrying. Those fears have faded as bank profits have rebounded, loan delinquencies have declined, and bank stocks have soared 25% in the past five months.
But banks still hold plenty of the bad assets that once spooked investors: mortgage-backed securities, collateralized debt obligations and other risky instruments. Their potential impact concerns some accounting and banking observers.
In part due to those bad assets, the top 10 U.S.-owned banks had $13.8 billion in "unrealized losses" that have lasted at least a year in their investment portfolios as of Sept. 30, according to a Wall Street Journal analysis. Such losses are baked into banks' book value, but don't get counted against earnings as long as the banks believe the investments will later rebound. If those losses were assessed against earnings, it would have reduced the banks' pretax income for the first nine months of 2010 by 21%, according to the Journal analysis.
Unrealized losses are just one way in which the troubled assets obscure banks' true financial condition, accounting experts say. With the banking recovery well under way, they think the banks should no longer delay a reckoning and should count those losses against earnings.
Another problem: Even when banks do take real charges because of their securities losses, accounting rules allow them to keep some of those charges from hurting their bottom line.
Making the picture even murkier, the value of many risky assets are based solely on the banks' own estimates -- leaving valuations uncertain and, some critics say, overstated.
"They're still inflated because I don't think the bullet ever really got bitten," said Jack Ciesielski, publisher of the Analyst's Accounting Observer.
The banks say they mostly don't need to take charges for losses on their risky assets. They say they will ultimately realize the assets' full value by holding onto the securities and collecting the principal and interest payments associated with them.
One problem centers largely on "Level 3" securities, illiquid investments that can't be easily valued using market prices. According to the Journal analysis, as of Sept. 30, the top 10 banks had $360.7 billion in "Level 3" securities. That amounts to 42.6% of the banks' shareholder equity, a pile of assets whose value is hard to verify.
To be sure, banks aren't as exposed to bad assets as they used to be. At the top 10 banks, Level 3 securities have declined 24% in the past two years, while Level 1 and Level 2 securities, which are much easier to value, rose. The amount fell as banks sold some Level 3 assets, switched them to Levels 1 or 2, or wrote some down. Unrealized losses also have declined.
Bank of New York Mellon Corp., for example, took a $4.8 billion charge against earnings in 2009, much of it related to mortgage-backed securities, to reduce its balance-sheet risk. The bank subsequently sold some of its lowest-quality securities. Chief Executive Bob Kelly said on a conference call at the time that "we're putting our investment securities issues behind us" and "we want to sell the securities where we think there is just no value there."
Many banks haven't been that conservative.
"In a lot of cases banks are probably deluding themselves" about the future value of those securities, and whether they will ultimately recover as much from those securities as they contend they will, said Bert Ely, an independent banking consultant.
Often, the impact of these assets isn't easily visible. Much of the information about risky assets is only in the banks' regulatory filings, not in their earnings releases. Though major banks have announced their fourth-quarter earnings, investors won't be able to see how much in risky assets the banks are currently holding until they file their annual reports with the Securities and Exchange Commission in about a month.
Citigroup Inc., for instance, didn't mention its high level of Level 3 securities when it announced fourth-quarter earnings. As of Sept. 30, the bank held $79.1 billion of Level 3 assets -- equal to 48% of its book value. That includes billions in credit derivatives, asset-backed securities and some subprime-mortgage-backed securities.
Jon Diat, a Citi spokesman, said the bank is "comfortable with its treatment of Level 3 assets," provides extensive disclosure
Zions Bancorp had $905.1 million in one-year-or-more unrealized losses as of Sept. 30, which would have made its nine-month 2010 loss of $306.7 million worse if counted against earnings.
"We have detailed disclosures regarding how we value and determine credit impairment on these securities, and we believe that our valuations are reasonable," said Doyle Arnold, Zions's chief financial officer.
PNC Financial Services Group Inc. had $1.6 billion in year-plus unrealized losses as of Sept. 30, or 55% of pretax income for the first nine months of 2010. Spokesman Fred Solomon said PNC is "very comfortable with our ability to recover these amounts."
Another avoidance method: As long as banks say they don't expect to sell a security, they are allowed to put some of the security's losses into a balance-sheet line known as "other comprehensive income," where they don't affect net income or regulatory capital. Banks were given this leeway in 2009, when the Financial Accounting Standards Board gave in to pressure from Congress and softened the rules on writing down assets. A FASB spokesman declined to comment.
State Street Corp., for instance, had $420 million in non-credit impairment losses in 2010, which would have cut its pretax income by 20% if they were counted against earnings.
Carolyn Cichon, a State Street spokeswoman, said the bank's asset-impairment charges have declined, and the bank's accounting "continues to reflect our position that we have the ability and intent to hold the securities to maturity."
