Math Problems at the IMF?

IMF published their new Financial Stability Report, in which they claim that U.S. banks will have $250B drain on equity capital due to write-offs in the next two years. The simple math they go through is follows: total write-offs on loans and securities over the cycle for U.S. banks will be $1,050B. $500B of that has already been recognized, which leaves $550B remaining. They estimate after-tax pre-provision earnings in 2009-2010 at U.S. banks will be $300B. $550-300B=250B drag on capital. But what happened to applying a tax rate to write-downs, which would presumably reduce net write-down number to 360B, or result in only $60B drag? Pretty significant $200B delta, under which the capital ratios would look not so bad after all.

This not so well-thought out math only adds fuel to the fire burning the bank stocks and shaking the confidence in the system. Let's hope the Fed's stress test is more well-thought out, and somebody actually pays attention, rather than just saying 'they are all bankrupt, I don't care what numbers say', like many people seem to be prone to do these days.

Disclosure: Long BAC, Short USB

Comments

[Dave Wrixon:]

IMF report are for the clueless.

If you were weren't clueless before you started reading.......

Apr 22 08:05 AM

[ImPastU:]

GAAP requires recognition of the provision, but it isn't a tax loss for common equity capital purposes until the losses have been realized.

Apr 22 08:44 AM

[derryl:]

Once our faith in our banks is sufficiently shaken the IMF will save us by creating the world's new money, Special Drawing Rights. The same folks who run the big banks run the IMF. They're just reaching for a bigger platform from which to exercise their money-creating powers.

Apr 23 10:01 PM