Next Bubble to Burst Is Banks’ Big Loan Values

[phantom power]

I am convinced that this is why banks have been so resistant to re-negotiating mortgages. They know they're trapped: if they re-negotiate all their overvalued mortgages, it forces them to admit they're insolvent.

Check out the footnotes to Regions Financial Corp.’s latest quarterly report, and you’ll see a remarkable disclosure. There, in an easy-to-read chart, the company divulged that the loans on its books as of June 30 were worth $22.8 billion less than what its balance sheet said. The Birmingham, Alabama-based bank’s shareholder equity, by comparison, was just $18.7 billion.

So, if it weren’t for the inflated loan values, Regions’ equity would be less than zero. Meanwhile, the government continues to classify Regions as “well capitalized.”

While disclosures of this sort aren’t new, their frequency is. This summer’s round of interim financial reports marked the first time U.S. companies had to publish the fair market values of all their financial instruments on a quarterly basis. Before, such disclosures had been required only annually under the Financial Accounting Standards Board’s rules.

The timing of the revelations is uncanny. Last month, in a move that has the banking lobby fuming, the FASB said it would proceed with a plan to expand the use of fair-value accounting for financial instruments. In short, all financial assets and most financial liabilities would have to be recorded at market values on the balance sheet each quarter, although not all fluctuations in their values would count in net income. A formal proposal could be released by year’s end.

http://www.bloomberg.com/apps/news?pid=20601039&sid=a04oVutXQybk

[unlawflcombatnt]

1. Excellent Article

It laid out in detail what the advantage is of not being forced to acknowledge the actual current market price for assets held by banks. As a corollary, it's not hard to see why banks are in no hurry to sell homes at foreclosure sales. As long as they can continue valuing them at mark-to-make believe prices, they can continue using their fake value as part of their required regulatory capital to make loans off of. Selling those homes at current market prices reduces the fake amount claimed, down to the real current price.