America needs bookkeeping we can believe in. This is what the Congressional Oversight Panel Chair said on Morning Joe in talking about the banks toxic assets.
COP's August report, The Continued Risk of Troubled Assets is trying to dig around in the dirt on those toxic assets held by financial institutions. Remember all of this? Wish it would all go away? It hasn't.
COP August Report
Ok, my notes, from The Report (large pdf), summed up in blogger speak.
Basically by the FASB relaxing mark-to-market accounting rules, our friendly neighborhood Zombie banks, otherwise known as TARP recipients, are sitting on a butt load of toxic assets that they do not want to expose because they would have to take the real losses on their books.
What's a butt load? Well, due to a lack of transparency, nobody really knows, but it's gobs. What's a gob? Well, it assuredly has a T attached to it. On page 28:
- $657.5 billion in Level 3 assets
- $132.9 billion in annualized loan losses
- $264.6 billion in past due loans
- $8.9 trillion in credit default sub-investment grade exposure.
Then, to make matters worse, (and this might explain why so many small banks are failing), small banks get no break on selling off their worthless loans because they are not securitized.
The nation‟s banks continue to hold on their books billions of dollars in assets about whose proper valuation there is a dispute and that are very difficult to sell without banks experiencing substantial write-downs that can trigger a return to financial instability.
Whatever values are assigned to these troubled assets for accounting purposes, their actual value and their potential impact on the solvency of the banks that hold them are uncertain and will likely remain so for some time; the degree of uncertainty is difficult for anyone to estimate confidently.
The report continues to show how TARP recipients could get themselves into further hot water under these conditions:
- Unemployment increases
- Lending doesn't increase
- Continued mortgage defaults
- Commercial Real Estate Market implodes
- Refusal to do any write downs on some toxic assets
What COP is recommending is another round of stress tests along with transparency and start paying attention to commercial real estate. These are bullet pointed on page 62.
This graph compared current unemployment numbers with the the ones used in the stress tests.
Src: Calculated Risk, click to enlarge
So, in spite of the positive showings in the economy, or at least the perception thereof, clearly there is a lot of risk that the financial implosion was just kicked down the road with a hell of a lot of money thrown at it.
The report also acknowledges Geithner has at least stabilized the mess and that appears to be quite true (much to my surprise!).