A little while back I wrote about how the new mark-to-model accounting rules, which allowed banks to inflate the value of their assets to whatever sum they desired, had caused a huge glut of foreclosed properties not being put on the market and artificially inflated banks’ worth. It seems that this is finally making some lawmakers and investors a little nervous, and they’ve prodded the FDIC into half-assed action. Today, the FDIC released a love letter to the banking industry, recognizing that the whole mark-to-model accounting is an “incredibly imprecise” mess and begging banks to be more honest—you know, because it’ll be good for all of us. The banks simply ignored this pathetic whining.
The letter reminds industry that loan-loss allowances “should be reflective of credit conditions that impact their portfolios,” LaJuan Williams-Dickerson, an FDIC spokeswoman, said in an e-mail. “Recognizing those conditions allows lenders to make good decisions and work with their borrowers, based on realistic economic circumstances.”
Tom Kelly, a JPMorgan spokesman, and Scott Silvestri, a Bank of America spokesman, declined to comment. Mark Rodgers, a Citigroup spokesman, andKevin Waetke, a Wells Fargo spokesman, didn’t return messages seeking comment.
The FDIC is basically acknowledging the existence of a shadow inventory. The four largest mortgage dealers— JPMorgan, Wells Fargo, Citigroup and Bank of America—have about $450 billion in home-equity loans. With prices dropping by a minimum average of 30%, that comes out to at least $150 billion in unreported losses and means that another bailout could be just around the corner. It also shows how bogus the banks’ recent profits are.
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