Lunchtime Links 8-13

August 13, 2009

Must Read–Next bubble to burst is banks’ big loan values ( Jonathan Weil, ht AK)  In their latest quarterly filings, banks were required to list the fair value of their loan books next to their carrying value.  No surprise, most banks are carrying loans at far above their fair value.  And the difference is enough to wipe out most of their capital.  I’d been working on a table of this data in conjunction with my own column, should be coming shortly.

The Forgotten (Doug Glanville)  Writing on the NYT op-ed page, former outfielder Doug Glanville writes about the plight of pro athletes trying to find a life after they fade from the spotlight.  Glanville is a fantastic writer.

Cap & Trade’s Unlikely Critics:  Its Creators (WSJ)  The economists who first envisioned a cap and trade system doubt that it will work on a global scale.  They argue a carbon tax would be a more efficient way to curb emissions.

Retail sales fall, jobless claims up (Reuters)  Retail sales fell slightly, even when you include the big boost from Cash 4 Clunkers.

Fastest Dying Cities meet for a lively talk (WSJ)

Bill Black on the bank crisis (GS666)  I’d missed this.  Thanks to Morgan for posting.

All you can fly for $599 (JetBlue)  Interesting promotion.  For $599, you can fly unlimited on JetBlue for a month.  I wonder how many people would actually take more than 4 flights in a single month to destinations JetBlue flies?  This is a great way to collect a lot of cash up front.

Great photo caption (

The half-million dollar wiener (Slate) How can New York City hot dog vendors afford a monthly rent of $53,558?  Unfortunately, the article doesn’t actually answer the question.   But it is interesting…

Teen sets self on fire to imitate YouTube clip (  Mom blames YouTube.

Does anyone know what this is?  (Update: reader Danny W. may have figured it out)



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The 2nd Great Depression…and there’s the US in the little red suv driven by Bernake and Obama drunk off their asses.

Posted by Jay Maehr | Report as abusive

Not a big fan of the fair value loan proposal. There’s already a quanitative system in place to account for credit risk called provision for loan loss, and no it’s not perfect. The lack of perfection does not mean there is a need for an more complex method of valuation that includes (as Region’s presentation notes) effects of interest rates, credit spreads, and most importantly liquidity. Liquidity should not be a factor for held to maturity items.

You’ll note that there’s even a $2.5B change on the fair value of the DEPOSITS. Does that add value to the 10Q? Does it make things clearer for an investor? I submit not. An investor with the savvy to properly consume this info doesn’t need it in the first place.

Further, if this is like the securities M2M, the fair value markdowns on held to maturity will NOT impact capital ratios, so it would not cause banks to fail, it would only muddy the waters.

Posted by Andrew | Report as abusive

Re: the photo –

I believe it is Chinese stimulus money hard at work.

Posted by Matt Stiles | Report as abusive

Good points Andrew. I guess my concern is whether banks are carrying non-performing loans at HTM values because they can. If capital isn’t being reduced, then banks are using fictitious capital to support lending, no?

Is your point that loan loss provisions run through net income and therefore reduce equity capital? That it’s already accounted for?

If so, what page would you point to in Regions’ Q to compare against the fair value disclosure table?

Posted by Rolfe Winkler | Report as abusive

It’s Bernanke’s maybach.

Posted by Joe | Report as abusive

Assuming your question is not a joke, I think that monster is a mining machine…the toothed wheel cuts into the rock and then conveyor belts behind it transport the broken rock back for further processing.

Alternative use: a secret weapon to destroy the space shuttle, the VAB and the launch pads all in one go.

Posted by CB | Report as abusive

Mining machine is correct. Used for surface coal mining.

Posted by Stephen | Report as abusive

The photo is from Germany and it depicts a machine which “eats” socalled “Braunkohle” I don’t know what’s the english word for “Braunkohl”is but it’s a source of energy in Germany. In this photo it’s moving from one pit to another pit. One could compare this stuff with coal only it has a lover energy content. Or compare it with the machines that is used to scoop up the tarsands in Canada.

Posted by Willy2 | Report as abusive

Well, a non performing loan would typically be fairly heavily provisioned and possibly partially or totally charged off depending on if it were unsecured consumer, secured consumer, or commercial. The fact that this provision is opaque to the public may make it SEEM as though its being held at historical value.

And as we’ve seen with GFG, if their is a sufficient reason to believe something CAN’T be held to maturity, the auditors will EVENTUALLY force the company to move it to held for sale.

Loan Loss provision does flow through the net income and does impact tier 1 ratios and common ratios. Banks are allowed to add loss provision back into their tier 2 (total risk based) ratios.

The M2M reqs for securities right now allow most of the value writedowns for HTM to flow to Accumulated Other Comprehensive Income and do NOT impact Tier 1 ratios because the amount is added back for computational purposes. This amount then amortizes back to the “fair value” over the remaining life of the investments, pending future writedowns. The “credit related” portion of a value writedown does have to flow through Net income and does impact Tier 1 (and can’t be added back to Tier 2), but this is exactly what Loan Loss Provision does already.

I don’t know what would be a good comparison to the fair value chart, since I’m not sure what value that brings to evaluating a business isn’t the generation and open market sale of whole loans. The discussion of credit loss provision (pages 46-51) may have something, though.

Posted by Andrew | Report as abusive

The english word for Braunkohle is Lignite. See also:

Posted by Willy2 | Report as abusive

“And as we’ve seen with GFG, if their is a sufficient reason to believe something CAN’T be held to maturity, the auditors will EVENTUALLY force the company to move it to held for sale.”

Without bailouts, wouldn’t you agree that none of the big banks would be able to hold their loans to maturity either?

If companies like GFG don’t get money and are forced to move assets to AFS, the big boys shouldn’t either. In which case we’re talking liquidation and all loans are for sale.

No, you don’t want the liquidation of all loans simultaneously. But the answer isn’t to let banks extend and pretend.

Seems to me the problem here is the zombification of American banks, no? Without more conservative accounting for loans (i.e. more aggressively negative marks), won’t these guys just suffer perpetual stagnation?

Posted by Rolfe Winkler | Report as abusive

I’m with you on the bailouts, although in GFG it was technically securities. We have no disagreement on the need to do away with Too Big To Fail.

However, this accounting change won’t have any impact on capital that Loan Loss Provision doesn’t already address. Nor would this method have prevented the bailouts.

Posted by Andrew | Report as abusive

What do you do then, about the problem of extend and pretend? How do we avoid the zombification of our banks?

Would seem that a more aggressive mark down of assets would help solve the “too big” part of TBTF, no?

Posted by Rolfe Winkler | Report as abusive

It’s only more aggressive/conservative (depending on view) if the markdown flows to Tier 1, which I don’t think is the case. I know its not the case with securities, I doubt its the case with the fair value loan proposal. As it stands its just an extra layer of arcana that Joe Public (and maybe Joe the Plumber) don’t understand. I mean, you don’t look at that 4% CD you got last year and think to yourself, “I paid $1,000 for that, but given changes in interest rates and liquidity I’m going to value that at $2,000 when I list my assets on a mortgage application.”

Not to mention I don’t see how it reflects any sort of reality since the sale of loans AS LOANS is a not an integral part of most banks business, outside operations generating mortgages for sale (but then they don’t get book as HTM).

You avoid zombification by avoiding TBTF. You avoid TBTF by limiting the size of institutions (sounds stupid, I know). It’s clear that the 10% deposit cap allows banks to become far too large and should be reduced to 2%. I’m also with you on treating CDS the same as other forms of insurance

Posted by Andrew | Report as abusive

Here’s another fine allocation of taxpayer money.  /12/2009-08-12_billionaire_feds_give_ou t_175m_to_aid_neediest_students_around_t he_state_its_fre.html

Posted by Jay Maehr | Report as abusive

Yes it is a bucket excavator…but specifically it is the one in the link above.

Posted by steak | Report as abusive

The photo is a giant machine for strip mining minerals

Posted by George | Report as abusive

That machine is Goldman Sach’s latest purchase with our taxpayer money. It serves two purposes.

1) It is creating an underground storage facility for all of the documents that link it to Paulson and Geithner and how their standard operating procedures for running .gov.

2) It is used to create underground storage for all of the oil they are buying so they can ramp it to $150 after they cause it to dump in the short term (since they will head fake all their clients and take their money first).


Posted by Goatmug | Report as abusive