Disparity in Bank Asset Valuations

The latest piece from Jonathan Weil of Bloomberg has been cited all over the blogosphere during the last few days. So, I am not going to re-hash the view of others. However, what did stand out most to me is that the discrepancy between the fair value of assets and the value on the balance sheet seems to be growing. I would have assumed that the rally in numerous markets and overall increase in liquidity would be pushing fair value closer to stated value. Apparently not though:

Bank of America Corp. (BAC) said its loans as of June 30 were worth $64.4 billion less than its balance sheet said… Wells Fargo & Co. (WFC) said the fair value of its loans was $34.3 billion less than their book value as of June 30. The bank’s Tier 1 common equity, by comparison, was $47.1 billion.

The disparities in those banks’ loan values grew as the year progressed. Bank of America said the fair-value gap in its loans was $44.6 billion as of Dec. 31. Wells Fargo’s was just $14.2 billion at the end of 2008, less than half what it was six months later.

This is a big problem, especially as the size of the discrepancy grows relative to tangible equity. Also, these banks are obviously marking similar assets at different values. Take Citigroup (C) for example. It is logical to assume that since Citi is basically owned by the government the management team has had to be much more aggressive on the marks.

The trend in banks’ loan values is not uniform. Twelve of the 24 companies in the KBW Bank Index (KBE), including Citigroup Inc., said their loans’ fair values were within 1 percent of their carrying amounts, more or less. Citigroup said the fair value of its loans was $601.3 billion, just $1.3 billion less than their book value. The gap had been $18.2 billion at the end of 2008.

Look how much C has closed the gap while WFC and BAC have gone the complete opposite direction. What this says to me is that some banks that are not under the government’s watchful eye are still marking assets at what look like fantastic values in relation to what they could be sold for. This is not stop-the-presses, breaking news. But, I fear that until we can understand the true nature of the assets these banks are holding there will continue to be a wholesale lack of confidence in the financial system as a whole.

When will we get a more realistic picture? Well, the FASB appears to be on the war path after being forced to acquiese to Congress earlier in the year. Maybe the transparency we all crave will come sooner rather than later.

Comments

[john s. gordon:]

more transparency would be wonderful.
> jack

Aug 16 10:48 AM

[RonB:]

It would be nice if people who wrote these articles understood bank accounting. This individual does not.

Aug 16 01:30 PM

[tommiegun:]

After the writer of this story stated that the gov't owns 100% of Citi vs. 34% that it actually does, I felt the value of the article was useless. Such wide disparities in value lead me to believe that other stated values would be greatly over or under stated as well.

Aug 16 08:20 PM

[mikeg3:]

If C is marked to market at the bottom, what happens during the recovery.?

When can C buy back the government shares?

Aug 17 05:01 AM

[The Inocula...:]

I'm going to take exception to that erroneous comment. Nowhere do I state that the government owns 100% of Citibank. However, I think it is very logical to argue that a 34% stake by the government provides a significant amount of control and input. I would appreciate it if readers would read the articles more carefully before posting inane negative comments.


On Aug 16 08:20 PM tommiegun wrote:

> After the writer of this story stated that the gov't owns 100% of
> Citi vs. 34% that it actually does, I felt the value of the article
> was useless. Such wide disparities in value lead me to believe that
> other stated values would be greatly over or under stated as well.

Aug 17 02:17 PM

[The Inocula...:]

I am also going to take exception to this baseless comment. I happen to have extensive experience in the regional banking sector and absolutely understand bank accounting. If I have made an error then please feel free to point it out. But to criticize the article without any examples or reasons says more about the credibility of the criticizer than it does about me.


On Aug 16 01:30 PM RonB wrote:

> It would be nice if people who wrote these articles understood bank
> accounting. This individual does not.

Aug 17 02:20 PM