Summary
The article is right on target in pointing out the various issues around bank reporting their losses todate. 1. Allowable accounting standards. 2. Permanent versus Temporary Losses 3. Capital Requirments The article goes on to highlight the various issues around soveriegn wealth funds, capital levels and loan leverage. The article ends with a list of "hidden losses" by various financial institutions. The interesting part of the article is the acknowledgement of an additional $35 B to be taken by the banks. The bigger issue is the losses to be taken by the investors.
Analysis
The loss of an additional $35 B by these financial institutions raises issues of which you report and the hidden reasons to report certain ways.
1. Would the loss if taken put the company over the edge based on other results?
2. The hope for some kind of bailout to reduce the losses?
3. As some analysts put it, "transparency is important" and "smart institutions are getting the losses on the table".
The concern I have is if the financials have taken $300 B plus and have $35 B to go, who is reporting the other losses? The current plans of Fannie, Freddie and FHA saving 1,000,000 homes with an 85% ltv to new appraised price raises the issue of a 40% loss severity on a million homes. Given the averages that is another $80 B in direct charge off in addition to the other 1,000,000 loans in default that will also take hits. That potential $160 B has to belong to someone!
That brings us to reality. The investor community owns a lot of these loans. We know from loss mitigation efforts that many short sales (same as what was proposed in the house and senate) are not being done because investors are deferring charge-offs to REO liguidation and meanwhile keeping the monthly scheduled interest payments going. The real question is then how big is the exposure to these investors, and how severe will the actual write downs be to them? There are many retirement/pension funds tied into these mortgage investments. What will their write downs do to current and future retirees?
