Regions Financial: Sitting on a $22.8 Billion Sink Hole? 26 comments
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Jonathan Weil over at Bloomberg is on to something, yesterday pointing out the dramatic disparity not only between Regions Financial (RF) loan portfolio Carrying Value (at what value the firm has them marked on the balance sheet) as opposed to their disclosed Fair Value Estimate (i.e., what the real value of all those toxic loans is).
The math: the bank has overvalued its loan portfolio by $22.8 billion dollars: with a June 30 carrying value of $90.9 billion and an estimated fair value of $68.1 billion. Compare this real $22.8 billion shortfall between mark-to-myth and reality and the firm's $5.9 billion market cap, or to its disclosed June 30 shareholders' equity amount of $18.7 billion: by all measures RF should be either bankrupt or in conservatorship. From RF's recent 10-Q (page 37, click to enlarge):
More alarming is what caused the substantial drop in FV estimates for its loans in the past 6 months: RF's loan book has declined from $79.9 billion to $68.1 billion: a 15% drop, yet the market and all talking pundits are claiming the economy is in such better shape now than it was on December 31. Just who is handing out these infinite blue pills that the American population and investing public are ever so eager to gulp down in size each and every day? Just because Obama is willing to mortgage everyone's future in order to keep forms like BAC, C and RF alive today should be cause for celebration? Enough with the blindfolds already.
RF is not unique: all the major banks have comparable massive shortfalls between what the auditors allow them to mark their toxic loan portfolios at, and what the real worth of such portfolios is - feel free to check them out:
- Wells Fargo (WFC) - page 120: $34.3 billion
- Citi (C) - page 162: $32.5 billion
- Bank of America (BAC) - page 79: $64.4 billion
The obvious question arises: why on earth is Regions Financial still allowed to exist and sucker more investors into believing it is anything even remotely close to a viable entity. In fact, as Weil points out, the government continues to classify Regions as “well capitalized." Indeed, lax accounting rules keep propping this zombie alive compliments of the FASB, while some trigger happy joystick-mongers who only care about exchanging Tweets what their overcaffeinated, 19 year old friends and making sure that all end up on the same side of the trade (especially since the SEC is roughly 8 decades behind the curve and has no idea what this Twitter gizmo is) buy the stock.
Weil chimes in:
If nothing else, today’s fair-value gaps highlight the arbitrariness of book values and regulatory capital. Banks already have the option to carry loans at fair value under the accounting rules. For the vast majority of loans, most banks elect not to, on the grounds that they intend to keep them until maturity and hope the cash rolls in.
Consequently, the difference between being well capitalized and woefully undercapitalized may come down to nothing more than some highly paid chief executive’s state of mind.
Fair-value estimates in the short-term can be a poor indicator of an asset’s eventual worth, especially when markets aren’t functioning smoothly. The problem with relying on management’s intentions is that they may be even less reliable.
At the end of the day, Weil is correct that at least now these zombie financials make available the data that investors can use on a quarterly basis (if the latter were so inclined, of course) to uncover just how ugly the real picture below the surface for all these firms is.
But why care, when you have every major media outlet blasting soothing elevator music and Cramer's garbled and rasping monolog on how if Paulson is buying BAC, things are all good (last time we checked the balancing side of a relative value strategy, i.e., the not so long one or, heaven-forbid, something based in uber complex OTC products such as CDS, does not have to be disclosed, but why would that matter when one has a clearly defined agenda of nothing but spin).
One can only hope that the FASB doesn't get a call from Steve Rattner in the next few months (from whatever position he currently occupies somewhere/anywhere), and is forced to promptly change its mind on expanding the rule on Fair Value Accounting, which would force all these toxic zombie nightmares to converge on the massive difference between Fair and Carrying Value.
Of course, if that happens, looks for Obama to promptly start preparing the public for the inevitable and much needed round 2 of TARP. I, for one, can't wait.
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If John Mccain had won the election, and HE bailed out big business, bailed out Wall Street, bailed out GM, dishonored the debt structure, had a 787 billion dollar waste, a 1.8 trillion dollar budget gap and got forbid had a surge of troops sent to Afghanistan...
You'd see the same college kids and angry 40 year olds who protested Bush wearing their "impeach Mccain" shirts while they picket.
but Obama did it and he's cool... Bush made him do it.
The politicians and their banks are talking up the financials because they want the trillions on the sidelines to buy into them.
This way, they can quietly sell their shares at the higher value before they collapse again.
Peanuts! Get your peanuts here! Then..."Beer! Ice cold beer!". Oh man, that sounds good, gulp...gulp...gulp.
Then the game ends and the people selling the peanuts and beer hand you a broom and trashcan and walk away counting your money.
I will side with the billionaire.
these banks are way to complicated for a casual glance at footnotes.
The Fair Value Estimates reported on banks balance sheets is based upon the interpretation by auditing firms of the Statement of Financial Accounting Standards No. 157 (see first note on the 10Q RF page in your post). The use of FAS 157 has caused a downward impact on valuations and on the cyclical nature of valuation and liquidity. In an environment where one bank, due to liquidity issues, is required to dispose assets at unnaturally low prices to improve liquidity in the short-term, other banks are subsequently required to impair their own securities to reflect the new lower price point set by the distressed bank. This circle of impairment is self-perpetuating, despite no change in the risk underlying the security. As asset pricing degrades, this impairs institutions’ ability to provide liquidity to the markets due to capital constraints. That lack of liquidity further erodes pricing, accelerating the decline in liquidity pricing, and around and around we go.
FAS 157 essentially validates the use of low quality price reference sources over fundamental economic valuation methods that have proven effective and reliable for many years. For example, if a loan to finance a car wash has been producing a steady stream of income for the past five years, with predictible annual increases, the "real" value is and has long been accurately developed by taking that income stream and capitalizing it at an appropriate rate of return based on existing interest rates to come up with the valuation. However, FAS 157 requires banks to value the loan based upon how much that loan would fetch in the secondary market today, even though the bank has no intention of selling the loan (why should they, since they are earning a steady stream of reliable income). When the secondary market is weak, the only banks selling similar loans are distressed banks who must sell. Of course they sell at much lower prices than the economic valuation determining by capitalizing the income stream. Now the good bank is required to write down its performing car wash loan and set aside a loan loss reserve even though this does not reflect a true impairment of value. In short, the banks are obliged to use price quotes that are supported by little market evidence, which lack prices reflective of actual transactions, or that include expectations of transactions with truly distressed sellers.
All of this reflects a fundamental misunderstanding of how banks operate. Paulson realizes this. He understands that these FAS 157 "Fair Value Estimates" are rubbish, and that the true value of these assets is much higher.
It's laughable that the market obediently follows BAC's cue to buy more RF.
On Aug 14 08:51 AM Tom Armistead wrote:
> Seems like Bank of America missed this article too, they raised RF
> to a buy with a target of 7.
I understand what you are saying, and I think it makes some intuitive sense. But do you see any problem with banks assuming that 100% of their historically performing loans will continue to perform as well into the future. Isn't there any reasonable adjustment that could/should be made for the increasing likelihood that some of those car washes and restaurants will not pay their loans as efficiently as they have to this point. The FVE is admittedly a worse case sell-now scenario. But why assume a best case scenario represents the actual value? Isn't the truth somewhere in between -- and more importantly isn't the risk of over valuing the asset worse than undervaluing it?
On Aug 14 12:35 PM Squares7 wrote:
> I disagree with your article. The "Fair Value Estimate" you cite
> does not equal what you call the "real value of all those toxic loans".
> In fact, the "Fair Value Estimate" substantially underestimates the
> value of the assets. Unfortunately, banks are required to manufacture
> and report these numbers because of ill-advised, improperly developed...
When Obama took office he had trillion dollar deficits as far as the eye could see.
It just shows how far our education system has slipped, we have a country full of lemmings, who can't think for themselves and spend all day listening to radio and TV, just entertainment for the weak minded.
yesterday. The first Alabama bank to fail since 1987 and the largest of 2009. The article is scary because the economy can and may get worse. The fact that CNB did not get more press was interesting? CNBC did not mention it while I was watching yesterday and that is also scary.
Perhaps BoA's interests are best served by raising their estimates on as many financial entities as they can get away with...
On Aug 14 08:51 AM Tom Armistead wrote:
> Seems like Bank of America missed this article too, they raised RF
> to a buy with a target of 7.
While I will follow this author hopefully forever for interesting content, I cannot take seriously the suggestion that following FAS157 results in more accurate valuations than the current system.
I have 1000 loans and 900 of them are performing. The remaining 100 non performing loans will likely result in a 50% loss. So I have to mark ALL the loans at 50% because the market is not willing to buy them off me for more?
Being able to mark assets at any value you like should be criminal. Actually it is!
But following FAS157 is so dumb that it too should be criminal. Unless of course, it automatically follows, that if 10% of my loans fail to perform then by definition so will EVERY SINGLE ONE of the others.