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Strategies & Market Trends : The Epic American Credit and Bond Bubble Laboratory
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To: valueguy8888 who wrote (64658)6/27/2006 2:51:28 PM
From: russwinter  Read Replies (4) of 110194
 
A really insightful comment was put up on my blog, in response to my notes on bank reserves:

Reserves are accounting entries made by the management of lenders to reduce the book value of loans they hold as assets. These charges reduce financial statement income for the period during which loans are "written down." Lenders use historic default experience to determine the impairment of their loan portfolio, not the trend-forecasted estimates of probably default. The FASB (Financial Accounting Standards Board) has been lobbied effectively by lenders to allow highly optimistic valuation. Why? It enables lending executives to grant themselves generous profit sharing and stock option bonuses while keeping their sinking ships above the water line.

Remember, non-performing loans reduce lender capital reserves dollar-for-dollar. When these accounting reserves are depleted, lenders are prohibited from additional lending. While public accounting firms may suggest higher reserves to present the likely impairment of these loans, management usually gets their way. CPAs rarely qualify their opinions of financial statements. This despite the Sarbanes-Oxley laws which address accounting systems of controls, not these valuation issues. What does this mean to lender solvency going forward?

1. Lenders are much weaker than reported. The most profligate will begin failing as economic growth falters; many more implode as the flimsy but essential faith in flat-earth central banking religious beliefs are challenged by global reality.

2. The tipping point is probably not "way down the road," but "right around the corner."
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