Banks and bad loans = denial

The FDIC has (scrapped its plan to rid banks of bad loans because it couldn’t persuade the banks to go along. It is possible that this reluctance can be attributed to the growing confidence of lenders that their crappy, underwater mortgage loans are about to leap out and fly, but I suspect it has more to do with their fear of acknowledging their fatally weakened position.

In a move that confirmed the suspicions of many analysts, the agency called off plans to start a $1 billion pilot program this month that was intended to help banks clean up their balance sheets and eventually sell off hundreds of billions of dollars worth of troubled mortgages and other loans.

Many banks have refused to sell their loans, in part because doing so would force them to mark down the value of those loans and book big losses. Even though the government was prepared to prop up prices by offering cheap financing to investors, the prices that banks were demanding have remained far higher than the prices that investors were willing to pay.

In a statement, the F.D.I.C. acknowledged that it had not been able to get banks interested in its so-called Legacy Loans Program. Scheduled to start later this month, the pilot program was aimed at selling off $1 billion in troubled home mortgages.

F.D.I.C. officials portrayed the change as a sign that banks were returning to health on their own.

“Banks have been able to raise capital without having to sell bad assets through the L.L.P., which reflects renewed investor confidence in our banking system,” said Sheila C. Bair, chairwoman of the F.D.I.C.

But some analysts said the banks’ reluctance to clean up their balance sheets meant they were merely postponing their day of reckoning. Indeed, some analysts said government policies had made it easier for banks to gloss over their bad loans.

“What’s happened is that the government’s programs have addressed the symptoms of the financial crisis, but not the cause,” said Frederick Cannon, chief equity strategist at Keefe, Bruyette & Woods, which analyzes the industry. “The patient feels better, but the underlying cause of the problem is still unaddressed.”

 

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3 responses to “Banks and bad loans = denial

  1. FlyAngler

    Chris:

    The Fed and Treasury are allowing the yield curve to steepen, even with Quantitative Easing in effect. Steep yield curves allow banks to make attractive profits taking in deposits at low rates and making loans at (now) higher rates. Thus, many banks may be earning their way out of insolvency. While simplistic and overly generalized, this is how the Feds saved Citibank way back when.

    Add in the money banks have taken in through TARP which has provided breathing room on the balance sheets.

    And consider the relaxation of FAS157 which, while pertaining mostly to mortgage securities rather than loans, takes much pressure off the banks balance sheets. Thus, if they don’t have to mark the securities down to the current destressed “market” levels, that may allow more flexibility elsewhere on the asset side (RE loans) to hang in there.

    Also, I looks like the “legacy loan” (read toxic) part of the PPIP/TALF is not going to be launched due to, are you ready for this, a lack of interest by both bank sellers and investment buyers. Thus, there may be little incentive to realize non-performing loans anytime soon.

    Considering all the above, you can see how banks may not feel anxious to acknowledge bad loans at this point. They feel they have seen the shot clock set back, if not stopped. Of course, this does not apply to all banks nor all borrowers. The FDIC expects to outlay $70Billion between now and the end of 2012 on bad bank closures. So, risk still abounds, just not as urgently in many cases.

    Chris, I appreciate that you and others anticipate a tsunami of foreclosed properties to hit the local market (see clusterstock item today), but I am not sure it is coming soon, or at least not in a huge wave. As Brother Gideon said last night, banks may see a way of waiting out this mess hoping (perhaps futilely) better times.

    I suspect that the reality, when looked back on in several years, will show that neither the most optimistic nor most pessimistic observers/participants turned out to be right. The outlying opinions are rarely correct, however, as we have all learned, the fat tails of the black swans are not imaginery.

    FA

  2. Shoeless

    Chris,

    The primary reason is with the banks levered at > 30:1, a 4 cent haircut equals insolvancy. Besides, why haircut when mark-to-market isn’t required anymore. Additionally, the amendment which wouldn’t allow the banks to be both buyers and sellers (which put the kabosh on gaming the system) was the death knell many weeks ago. It just took some time for the FDIC to admit what we already knew.

  3. pulled up in OG

    Diane Casey-Landry, chief operating officer for the American Bankers Association, said “What we would rather see is the market working.”

    And they haven’t forgotten how to work it . . .

    “Earlier this year, financial-services organizations put their lobbyists on the case. Thirty-one financial firms and trade groups formed a coalition and spent $27.6 million in the first quarter lobbying Washington about the rule and other issues, according to a Wall Street Journal analysis of public filings. They also directed campaign contributions totaling $286,000 to legislators on a key committee, many of whom pushed for the rule change, the filings indicate.”
    http://online.wsj.com/article/SB124396078596677535.html

    Next victim . . .

    “Now the group of financial organizations is trying to put the brakes on the off-balance-sheet accounting measure, which would force banks to bring hundreds of billions in assets back onto their balance sheets at the beginning of 2010, effectively forcing them to set aside more capital. Some accounting experts say they aren’t surprised by the banking industry’s latest effort. “Here we go again. They will get out their checkbooks and go to the Hill,” says Lynn Turner, the Securities and Exchange Commission’s former chief accountant.”
    http://online.wsj.com/article/SB124407146605483021.html