Saturday, 21 June 2008

The Art of Putting Lipstick on a Pig

We are now in the desperation stages for some financial institutions. The sad attemnpts to postpone the inevitable is showing up in all kinds of ways as outlined in yesterday's WSJ story Banks Find New Ways To Ease Pain of Bad Loans:

In January, Astoria Financial Corp. told investors that its pile of nonperforming loans had grown to about $106 million as of the end of last year. Three months later, the thrift holding company said the number was just $68 million.

How did Astoria do it? By changing its internal policy on when mortgages are classified on its books as troubled. The Lake Success, N.Y., company now counts home loans as nonperforming when the borrower misses at least three payments, instead of two.

At Wells Fargo & Co., the fourth-largest U.S. bank by stock-market value, investors and analysts are jittery about its $83.6 billion portfolio of home-equity loans, which is showing signs of stress as real-estate values tumble throughout much of the country.

Until recently, the San Francisco bank had written off home-equity loans -- essentially taking a charge to earnings in anticipation of borrowers' defaulting -- once borrowers fell 120 days behind on payments. But on April 1, the bank started waiting for up to 180 days.

BankAtlantic Bancorp Inc., which is based in Fort Lauderdale, Fla., earlier this year transferred about $100 million of troubled commercial-real-estate loans into a new subsidiary.

That essentially erased the loans from BankAtlantic's retail-banking unit. Since that unit is federally regulated, BankAtlantic eventually might have faced regulatory action if it didn't substantially beef up the unit's capital and reserve levels to cover the bad loans.

Because the BankAtlantic subsidiary that holds the bad loans isn't regulated, it doesn't face the same capital requirements. But the new structure won't insulate the parent company's profits -- or shareholders -- from losses if borrowers default on the loans, analysts said.

Alan Levan, BankAtlantic's chief executive, declined to comment on how much the loan transfer bolstered the regulated unit's capital levels. "The reason for doing it is to separate some of these problem loans out of the bank so that they can get special focus in an isolated subsidiary," he said.

The part in bold is just complete and utter jibberish and it's testament to the kind of nonsense that CEO's and CFO's are resorting to. Shifting bad loans from a regulated vehicle to non regualted vehicle doesn't allow for any extra attention, it's just a blatant attempt to dress mutton up as lamb and postpone the inevitable losses that are coming down the pike.

You can click on the link above for more examples of pathetic attempts to avoid reality by financial institutions. As noted here 6 months ago when all the talk was of a liquidity crunch, the bigger moore looming problem is one of solvency.

The desperate attempts to obfuscate the truth, dress-up balance sheets, and postpone the inevitable outlined in the WSJ article, is another sign that the environment in the financial services industry continues to deteriorate and that many firms are now just fighting for survival.

A steep rise in bankruptcies for financial institutions is just around the corner and will extend well into 2009 crushing any hopes of a turnaround in the US economy in the second half of 2008.