Banks in for Another Hit on Tuesday

Even if the bailout is approved this week, it will have already failed in what I believe to be its primary objective, the partial restoration of bank balance sheets.

Thanks to the mark-to-market accounting (now mark-to-panic), bank assets are in for another hit at the September 30 close for the third quarter. Falling home prices and higher default rates point to lower asset valuations. While the decline in mortgage security assets is very real, the requirement for banks to mark down these long-term assets every quarter is a relatively new.

Call it an unintended consequence of Sarbanes Oxley [SOX]. Major U.S. banks were able to survive the Latin American debt crisis in the 80s, largely in part to the fact that they were not forced to mark down their troubled loans. Now they do, and now they go under.

One solution is to see value where others do not. Meredith Whitney, Oppenheimer’s superstar bank analyst told CNBC this morning, “Wachovia (WB) has the worst math of all of them.” She also expressed caution on Citigroup (C), “They have a revenue paradigm that does not match their expenses.”

This process is still just beginning.

Disclosure: none

Correction: Our apologies to Wells Fargo (WFC), which was erroneously named instead of Wachovia in the Whitney quote in an earlier version of this article.

Comments

[mags:]

She said that WB had the worst math of all of them, not WFC.

www.cnbc.com/id/158402...

2008 Sep 29 03:57 PM

[Scott Snively:]

You are right. It was WB. Here's the link... online.wsj.com/mdc/pub...

"Wells which has been very skimpy on disclosure... Wachovia "has the worst math of all..."

2008 Sep 30 09:04 AM