zalo

Thinking the Impossible: Could Bank of America Go to Zero?

which means that the company accounting equity in reality is undervalued....


On Jan 29 02:05 AM zalo wrote:

> The first BIG issue to define is what is a "toxic" asset. A toxic
> asset is an asset whose expected losses makes its today´s market
> value severely below its book value in a specific institution. This
> has two important parts. First, that the value depends on EXPECTED
> losses, not realized losses. And second, that it depends on when
> and how it is being booked.
> So, a toxic asset depends on expectations and where it is sitting.
>
>
> So, saying that banks are insolvent is quite inexact because people
> are measuring balance sheets with EXPECTED losses and not realized
> losses. This is a massive accounting inconsistency. If you should
> account for EXPECTED losses, you should account also for EXPECTED
> income. If so, banks then should NPV their fees and financial margin
> and put that as equity. Some sort of similar value is generated when
> a company acquires another, mostly known as goodwill, which is the
> value of the ongoing company vs the assets and liabilities in the
> balance sheet of the acquired entity. Unfortunately, goodwill is
> not internally generated due to accounting rules.
> So, writing off expected losses should be done only if you could
> write up expected income. But that doesn´t happen.
>

Thinking the Impossible: Could Bank of America Go to Zero?

The first BIG issue to define is what is a "toxic" asset. A toxic asset is an asset whose expected losses makes its today´s market value severely below its book value in a specific institution. This has two important parts. First, that the value depends on EXPECTED losses, not realized losses. And second, that it depends on when and how it is being booked.
So, a toxic asset depends on expectations and where it is sitting.

So, saying that banks are insolvent is quite inexact because people are measuring balance sheets with EXPECTED losses and not realized losses. This is a massive accounting inconsistency. If you should account for EXPECTED losses, you should account also for EXPECTED income. If so, banks then should NPV their fees and financial margin and put that as equity. Some sort of similar value is generated when a company acquires another, mostly known as goodwill, which is the value of the ongoing company vs the assets and liabilities in the balance sheet of the acquired entity. Unfortunately, goodwill is not internally generated due to accounting rules.
So, writing off expected losses should be done only if you could write up expected income. But that doesn´t happen.

Banks: The Final Countdown?

What is a bad security? subprime MBS? prime MBS? commercial MBS? corporate debt? high yield? consumer loans? student loans? car loans?...

and if banks are cleaned from this securities...is the US government going to clean also the insurance companies, the pension funds, the hedge funds, etc. to stabilize this securities markets?.

Paulson/Bernanke: $700 Billion at 'Hold to Maturity' Pricing

Alternative 1) The government should buy the troubled assets but pay for them with 100 years, non tradeable, treasury bonds. In this way the taxpayer will not feel the pinch.

Alternative 2) The government provides 50 year loans to the banks at treasury plus a lot. This loans can be used as regulatory capital.