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Strategies & Market Trends : The Epic American Credit and Bond Bubble Laboratory -- Ignore unavailable to you. Want to Upgrade?

To: Chispas who wrote (104567)	8/22/2009 4:39:57 AM
From: Madharry	Respond to of 110194

the fallacy in this is that it fails to account for all of the people who made tons of money by simply cashing out on their homes when the going was good and now that their mortgage is underwater have simply stopped paying it. i would assume that they are not paying real estate taxes either. why bother? this is probably resulting in huge unanticipated consumer cash flows that no one talks about. My guess is that most of that 36%interest on sub prime credit cards wont be paid back either. I expect that we will also be hearing about increased student loan defaults. People who dont have jobs dont repay loans. On my recent short vacation in Maine i would say that the beach complex i was in was about 99% full. I heard the reservation that person say that she had only 4 rooms available , two were very small and 2 were in the back building facing away from the ocean. The beaches were packed there were lengthy waits at most of the restaurants i ate it. one would not think there was a recession going on. We know that the fed is going to keep printing money. what else can they do?

To: Chispas who wrote (104567)	8/23/2009 11:14:05 AM
From: Chispas	6 Recommendations Read Replies (2) \| Respond to of 110194

The Lowell Sun - "Loan values: fact or fiction?" . 08/23/2009 06:35:53 NEW YORK -- It took the liquidation of Colonial Bank to reveal an ugly truth: the loans on its books were worth a third less than what the failed regional lender had declared them to be just weeks before. It's an ominous sign about weaknesses that may be lurking in other banks' loan portfolios. Regulations give banks wide latitude about whether to recognize potential loan losses on their balance sheets, so they remain largely out of view. This is exactly why many investors were up in arms when the Financial Accounting Standards Board, which sets U.S. accounting rules, seemingly buckled under pressure from Congress earlier this year. Its board backtracked from rules that forced banks to be more transparent about the true value of assets. Bank lobbyists and their congressional backers argued that it was needlessly destructive, in times of market disruptions when few buyers are available, to require lenders to base the value of assets on what they could be sold for at that time, using what is known as mark-to-market accounting. But those who support mark-to-market counter that present rules allow banks to just delay their day of reckoning by not being upfront about their assets' value. Take the case of a commercial real-estate loan for a near-empty Florida strip mall. Even though it may never be repaid in full, the bank can keep the loan on its books at the historical valuation as long as it says it is holding it until maturity or for investment. "We have plenty of banks holding loans at face value that they could never sell at face value," said Len Blum, managing partner at the investment-bank Westwood Capital. All this gives banks less incentive to modify loan terms, because doing so would force them to acknowledge lower valuations on balance sheets. Instead, they have reason to keep up the facade that they will get paid back, and hope that they can hold out until the economy improves and real estate prices rebound. For investors, the only bit of clarity comes in the footnotes to quarterly financial statements. That is where banks just began having to reveal what they believe is the fair value of their overall loan portfolio. A case like Colonial illustrates why even that backstop is of limited value for investors. Colonial specialized in real estate loans and operated in some of the areas hardest hit by the real-estate downturn. It has 354 branches in Florida, Alabama, Georgia, Nevada and Texas. The bank, a unit of Montgomery, Ala.-based Colonial BancGroup Inc., struggled for months to raise fresh capital from private investors or by tapping federal bailout funds. That process revealed alleged accounting irregularities, however, and led to investigations by the Justice Department and the Securities and Exchange Commission. Alabama regulators finally seized the bank on Aug. 14, making it the largest U.S. bank failure in 2009, and the Federal Deposit Insurance Corp. was left to clean up the mess. The FDIC approved the sale of Colonial's $20 billion in deposits and $21.8 billion of its assets to BB&T Corp. of Winston-Salem, N.C. The FDIC agreed to share losses with BB&T on $15 billion of the $22 billion in assets included in the deal. BB&T drove a hard bargain, winning a 37 percent discount for the $14.3 billion of Colonial's loans it acquired. The heaviest markdowns were for construction and commercial property loans, where values were reduced by 67 percent and 31 percent respectively. The $14.3 billion in loans that BB&T acquired matches what Colonial reported on July 31 in its second-quarter earnings release. The true value of Colonial's loans offer a sober message for bank investors. At a minimum, they suggest deep distress remains for banks heavily involved in commercial real estate and construction lending. In fact, some analysts think that this should be a wake up call for BB&T's shareholders, too, since it also competed with Colonial in some Sun Belt markets. The markdowns at Colonial show just how "pressured" that region is, according to a report by the independent research firm CreditSights. BB&T says that the quality of its portfolio is better than what was found at Colonial. In the second quarter, BB&T estimated the fair value of its loans at $95.7 billion, above the value of $95.2 billion found on its balance sheet, according to a footnote to its second-quarter earnings report. The case of Colonial should give the FASB more ammunition to proceed with a new proposal that would expand mark-to-market accounting. The FASB is considering a rule that would force banks to present all their financial instruments including loans at face value on their balance sheets. The bank lobby already is pushing back. In a letter to FASB Chairman Robert Herz dated Aug. 12, American Bankers Association senior vice president Donna Fisher said the group was concerned that the proposed changes would require "more capital for many existing banking activities, and more operational challenges to comply with these rules." They might not like the idea of more sunshine on bank balance sheets, but the public should. Colonial's recent blowup tells us exactly why. ......................................................................................................................................................... lowellsun.com