Saturday, November 28, 2009

New Bank Accounting

"Banks are moving quickly to restructure commercial mortgages under new US guidelines that are more forgiving of battered property values and can help banks avoid bigger losses. ... The moves could help the banks absorb fewer losses on troubled real-estate loans and preserve capital. ... Matthew Anderson, partner at research firm Foresight Analytics, estimates that about two-thirds of the $800 billion in commercial real-estate loans held by banks that will mature between now and 2014 are underwater, meaning the loan amount exceeds the value of the property. ... The guidelines are controversial, with critics accusing the US government of prolonging the financial crisis by not forcing borrowers and lenders to confront inevitable problems. ... Regulators also suggested ways for banks and borrowers to restructure loans and avoid foreclosure even if the properties can't pay debt service. Banks can carve loans into one performing part and one nonperforming part. That would allow the bank to incur losses on only the nonperforming part, not the entire loan", Lingling Wei and Peter Grant at the WSJ, 11 November 2009, link:

What can I say? Uncle Sam supports bad bank accounting. In effect, the banks will create post hoc loan tranches. Amazing. Is this MLEC 4.0?