FASB Close on 'Off-Balance' Sheet Change
A: $5.2 Trillion - Remember that number! This could be a significantly under-estimated headline. Recall that banks placed a ton of toxic assets off their balance sheets, hidden in so called Special Purpose Entities (QSPE) and Variable Interest Entities (VIE). I believe Citigroup has about $1.1 Trillion in off-balance sheet assets as of late 2008. Who knows what the other megabanks have off balance sheet now that the toxic assets belonging to CountryWide, Wachovia, WaMu, Merrill Lynch, etc..have been merged with the acquiring holding company? FASB announced last June that it was delaying the vote on 'off-balance' sheet change for a year - after much opposition from Citigroup and other megabanks. Well, time is almost up.
Via Bloomberg, "FASB ‘Close’ on Off-Balance-Sheet Change, Herz Says":
The Financial Accounting Standards Board is “pretty close” to approving rules on off-balance- sheet accounting that will force banks to add billions of dollars of assets to their books, Chairman Robert Herz said.The estimate is for $900 Billion in off-balance sheet assets in 2010, as the rule takes effect. I think it would be safe to say that this estimate is highly conservative, as were most estimates of the depth of the writedowns since the beginning of this debt deflation episode. If Citigroup had over $1Trln of these assets placed off-balance sheet in mystery entities, what do you think the rest had? Understand, that banks probably used excessive leverage to finance these assets!Rules that let the companies keep assets and liabilities including mortgages and credit-card receivables off their balance sheets “were stretched,” Herz said today at an accounting conference at Baruch College in New York. The changes would take effect next year, he said.
U.S. bank regulators examining finances of 19 large banks calculated that the institutions would record $900 billion in off-balance-sheet assets in 2010, according to a Federal Reserve report released April 24 as part of the so-called stress tests. The Fed based its calculation on data provided by the banks.
How about $5.2 Trillion? Bloomberg's David Reilly discussed the threat in late March:
At the end of 2008, for example, off-balance-sheet assets at just the four biggest U.S. banks -- Bank of America Corp., Citigroup Inc., JPMorgan Chase & Co. and Wells Fargo & Co. -- were about $5.2 trillion, according to their 2008 annual filings.As Phil Rizzuto would say....HOLY COW!!Even if only a portion of those assets return to the banks - - as much as $1 trillion is one dark possibility -- it would take up lending capacity the government is trying to free. Whether these assets are "troubled" or "toxic," their return to bank balance sheets could slow efforts to get credit flowing again.
Comments (11)
Hi Noah,
Agreed that the QSPEs will be a big issue for the banks if FASB actually decides to tighten rules around off-balance sheet assets. Just had a couple of thoughts:
- in addition to the impact on capital requirements/ratios that you mention above, one of the biggest problems with bringing loans back on the B/S is that banks will have to provision for them, which they do not currently have to do. This will have huge income statement implications as banks will have to take large provision expenses at the time that the assets are brought back on the B/S.
- Wells Fargo, which we think anecdotally is REALLY trying to increase mortgage origination activity in NYC, will be one of the biggest hit banks. As of 2008, Wells had $2 trillion in total loans, with only $864B of that on the balance sheet. $1.2 trillion of that $2 trillion is residential mortgages. Of that $1.2 trillion in residential mortgages, only $284B is on the balance sheet.
On the mortgage origination front, we've noticed a lot of Wells activity in Manhattan lately - we even attended an open house where a Wells mortgage banker was present along with the seller's agents. Have you seen this at all?
-DT
http://downtowny.blogspot.com
Posted by Downtowny | May 1, 2009 10:23 AM
Downtownny - thanks for the comment..crazy isnt it?
I can tell you this. Wells was VERY active here in the boom times..in fact, a good amount of my deals went through wells as they tried to get a huge footprint here. they even saved a few deals in late 2006 - 2007 as we approached peak, when other banks failed to provide commitment letter so close to closing. Wells would come in and get a CL in 48 hours. It was insane.
Anyway, that was my experience with Wells. After that, they proved to be the go to lender for me and a bunch of my colleagues for a good few years. Im sure we are not alone. Most buyers ask for recomendations for lenders, so besides cost, as a broker you want a reputable bank that will provide good service and be there if things get bumpy. Wells was that lender, in my opinion.
If Manhattan continues its slide, I would expect Wells to have a big hit if defaults start to occur here. Time will tell, but something on radar. Has to be.
Posted by Noah | May 1, 2009 10:59 AM
I thought FASB caved into the Feds a while ago? Wouldn't this data contradict their earlier commitment to fraudulent accounting?
Posted by Anon | May 1, 2009 11:39 AM
FASB caved on mark-to-market accounting change (FAS 157) that allows banks to stop marking to market, and to continue to use models to price assets at what they believe their future value might be...not sure the exact rules applied by FASB.
What this post discusses is the enforcement of an off-balance sheet accounting change, FAS 47 I believe, where banks must put assets BACK ON TO BALANCE SHEET. So rules regarding what can go off-balance sheet get tighter. Banks lobbied successfully last June to DELAY this rule change so they can hide assets off balance sheet while credit crisis raged on.
Posted by Noah | May 1, 2009 11:46 AM
What do you think of the new Macroshares (based on real estate) ETFs. Not really sure how they are going to work though. It's interesting though. It'd be cool if they had products like that for specific markets. It would allow a family that believed the market was going down to stay in their home, and simply hedge the value of their home -- if, of course, the product worked properly.
Posted by RegularAnon | May 1, 2009 12:19 PM
well they are not launched yet and I think a Dutch style IPO is set for these..Metro has been declining, so use caution on how the ETF is structured to match the index. Im sure we have more declines in pipeline, actually Im positive, but pace of declines may start to slow and who knows how ETFS will react.
If I look at SRS, it seems real estate tripled in vale in past 3 months
Posted by Noah | May 1, 2009 1:21 PM
Noah,
I know what you mean. That's why I am saying that it'd be cool if you could buy a product that actually worked as a real hedge against a property in a particular city. It would allow someone to hedge against the apartment they own rather than sell it. That would be an awesome product if it worked properly. (clearly the product coming on the market will not work like this).
Posted by RegularAnon | May 1, 2009 2:20 PM
I think radar logic tried that but it didnt fly...not sure why. I know Jonathan Miller disconnected from that venture that was supposed to do that.
Posted by Noah | May 1, 2009 2:41 PM
This week is central banker week - RBA, Fed, BOE, BOC, ECB, and even the BOJ releasing some reports. And then the bank stress test results on Thurs (tentatively). I will not be short here.
Instead I have been looking to the skies (weather patterns) for trading clues and focusing on grains.
Posted by In Debt We Trust | May 4, 2009 4:24 PM
InDebt: mercury retrograde starts May 7th, maybe that is when astrological weirdness starts?
Posted by Noah | May 5, 2009 11:53 AM
There's an interesting post rolling up subsidiary foreclosure exposure to the parent at http://www.firstfederaledge.com/2009/05/11/a-look-at-off-balance-sheet-skeletons-hidden-foreclosures/
It looks like almost 50% of all exposure is hidden in the subsidiaries that you're talking about.
Posted by J | May 12, 2009 9:10 PM