The Great Debate

Investors have more than one reason to celebrate two new accounting rules. Besides forcing banks to fess up to the risks they are carrying on their books, new standards for off-balance sheet assets will make it harder for companies to inflate earnings artificially.

The new rules - FAS 166 and 167 - are desperately needed to prevent banks from hiding assets to increase leverage. Lending that isn't supported by capital is a main ingredient behind unsustainable credit bubbles, and banks' off-balance sheet games played a big role in the most recent one.

But another reason banks like off-balance sheet structures is that it enables them to manufacture profits.

Coming up to the end of a quarter, if a company is a bit short of its earnings target, it can package some assets together into a security and "sell" them to an off-balance sheet entity.

The entity is conjured out of thin air with a small equity investment by the company itself. The entity "buys" the securitized assets at a nice markup, enabling the company to book a profit on the sale.

President Barack Obama pledged on Monday "to put an end to the idea that some firms are 'too big to fail.'"  Though he outlined some worthy prescriptions, he failed to face up to the very size and power of the financial institutions that makes "too big to fail" possible.

For the big have gotten even bigger since the start of the financial crisis. At the end of 2007, the Big Four banks -- Citigroup, JPMorgan Chase, Bank of America and Wells Fargo -- held 32 percent of all deposits in FDIC-insured institutions. As of June 30th, it was 39 percent.

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In total, they had $3.8 trillion worth of deposits as of June 30th. Compare that figure to the FDIC's Deposit Insurance Fund, which showed a balance of just $10.4 billion on the same date.

A year after the government's seizure of Fannie Mae, Freddie Mac and AIG , not to mention the bankruptcy of Lehman Brothers that sent the global financial system into a tailspin, very little has changed to prevent debt from being sliced and diced, again and again.

This is a mistake. Although there were many factors contributing to the downfall of the global financial system, the repackaging of toxic debt into esoteric financial products was at the heart of the credit crisis when it erupted in 2007.

It's easy to forget, particularly when many are focused on anniversary tick-tock accounts of the last days of Lehman Brothers, how nasty CDOs -- or worse, CDO squareds -- became so incredibly popular in the first place.

– Wei Gu is a Reuters columnist. The opinions expressed are her own —

Chinese banks are like enthusiastic runners on an accelerating treadmill. The weakening economy means poor lending decisions are threatening to catch up with them, but the banks are sprinting ahead by expanding their loan books ever faster. They cannot keep this up for ever.

For now things still look fine. China Banking Regulatory Commission (CBRC) this week claimed that Chinese banks were managing credit risk sagely, pointing to record low non-performing loan ratios. Given the massive increase in the number of loans outstanding — up 24 percent since the start of the year — it’s not surprising that the proportion of them that are non-performing at large commercial banks, which accounts for 60 percent of the lending, has declined from 2.4 percent to 1.8 percent in the past six months.

Earlier today I wrote that Sheila Bair is one of the few financial regulators who gets it. And by getting it, I mean not sucking up to the banks and the big money interests on Wall Street. You know, the guys (and most of them are guys), who got us into this financial mess. Tim Geithner, on the other hand, is a regulator who just doesn't get it.

It's not that the Treasury secretary isn't smart--he is. And it's not that he's not up to job--he is. It's that Geithner is too much of a politician and his views have been molded by people who work on Wall Street.

So, that's why we have Geithner telling The Wall Street Journal today that Wall Street isn't reverting back to its old ways--even though everything indicates that's exactly what is going on. In Geithner's world, things are getting better and the banks are becoming better citizens:

– James Saft is a Reuters columnist. The opinions expressed are his own –

Rising pay in the finance sector in the wake of the global financial crisis is no surprise and is driven partly by the government’s bailout itself and the underwriting of banks that are too big to fail.

News that some financial firms benefitting from government largesse actually increased the share of revenue they pay their employees sparked a lot of outrage but more heat than light.

- Brendan Wood is Chairman of Brendan Wood International, a global intelligence advisory firm. Recently, BWI published the World’s TopGun CEOs as ranked by 2500 institutional investors, which provides insight into the executives in whom shareholders feel the greatest confidence. The opinions expressed are his own. -

Brendan Wood International tracks the competitive position of investment bankers in global and regional markets. It also compiles the confidence rankings of hundreds of global shareholders in corporate investments, including those in the world’s leading banks. As of mid-2009, the Brendan Wood Investor Panel found a mixture of sharp criticism, but also some occasional strong praise for these “newly refurbished” financial behemoths.

First, the bad news: while all the banks have by now somewhat improved their situation from what it was earlier in the year – repaying $68 billion in government assistance, raising new equity, and carrying out a number of boardroom shuffles – their improving news and modest profit reports have not led to any total absolution from the Brendan Wood Panel for the worst falls from grace when the credit crisis exploded.

-- Margaret Doyle and Paul Taylor are Reuters columnists. The opinions expressed are their own --

LONDON/PARIS, April 23 (Reuters) - Germany is to set up a system of bad banks before the summer recess to hold some 250 billion euros of toxic assets. Finance Minister Peer Steinbruek has assured taxpayers that his solution -- called "eine Bad Bank" (there is no German word for the concept) -- will not weigh on the budget.

He is fooling them, if not himself. If the rescue really were such a free ride for the taxpayer, some savvy commercial investor would have stepped in. Under the proposed scheme, the taxpayer will end up carrying the risk of "Schrottpapiere" (scrap paper).

– Jonathan Ford is a Reuters columnist. The views expressed are his own –

Goldman Sachs wants to do its duty by the American people and give them their TARP money back. Some spoilsports have urged the government simply to say no because allowing the investment bank to repay the cash would make other banks look bad.

But this seems rather un-American. Why shouldn’t taxpayers get their money back if Goldman really doesn’t need it? The point to insist upon is that they get all of it back — and on commercial terms.

– James Saft is a Reuters columnist. The opinions expressed are his own

Treasury Secretary Geithner is all but admitting that U.S. banks are suffering not from market failure but self-inflicted collateral damage.

The U.S. Treasury on Monday detailed an up to $1 trillion plan to buy up assets from banks in partnership with private investors, using financing bankrolled by the government, financing that is only secured by the value of the doubtful assets the fund buys.

One portion will be dedicated to buying complex securities from banks employing capital contributed by private investors and the government topped up with funds borrowed from the Federal Reserve. A second portion will buy older securities that are, or were, rated AAA, using, you guessed it, more non-recourse funding.