Mastery

'No Bank's Books Are Trusted': Bloomberg's Weil is Imagining Things

This is a case of glass half empty and glass half full. Weill is saying that GAAP accounting does not reflect market value of bank books and therefore cannot be trusted as an accurate reflection. This largely does not contradict Brown. The key fault in Tom Brown's logic however is found in the following conclusion that the devaluation of these cashflows is simply "the result of screwed-up market mechanics, not underlying deterioration in the cash flows the underlying assets generate." Here we have the rub. All else being equal then if these cash flows continue being generated then Brown is correct; however all else is not equal. The very mechanics of the market have and are of themselves creating substantial deterioration in the cash flows. For instance loans are to GM - a company essentially at bankruptcy point partly BECAUSE of the 'screwed up market mechanics'; many of the loans are to oil product 'pipeline' entities such as Semgroup - bankrupt because of the 'screwed up market'. Loans to SLM - a company whose existence depends on low cost of capital and funds to make student loans but whose secondary market debt shows market pricing on its borrowing cost at 13% - way above where it can realistically lend to students. Other loans are backed by commercial real estate - essentially underwater because of the 'screwed up market' which has reduced commercial real estate prices by as much as 50%. whilst the ability of such entities to continue to generate cash flow to sustain a par valuation of those loans on bank books must be extremely doubtful. Was it any coincidence that Basle II was in the midst of implementation at the time of the credit crash and therefore from a GAAP point of view removed (on paper anyway) substantial value, capital from bank books and created the market rush to deleverage?