Jonathan Weil over at Bloomberg is on to something, yesterday pointing out the dramatic disparity not only between Regions Financial (NYSE: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 (NYSE:WFC) - page 120: $34.3 billion
- Citi (NYSE:C) - page 162: $32.5 billion
- Bank of America (NYSE: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.