Bair: Toxic Assets 'Worth More Than Current Valuations'... Duh

by: Tom Brown

Did you see what Sheila Bair told NPR last week about banks’ “toxic” assets?

Well, I think they will certainly be worth more than the current valuations. I think that is the assumption. And I think that's true. I mean, at the FDIC we sell troubled bank assets all the time, . . . so we're pretty familiar with the market right now. So we think that that is absolutely true that the assets are worth more than the current market conditions assign to them. And so that, yes, over time there will be significant profits from these. [Emph. added]

Wait a minute. Sheila Bair doesn’t run a hedge fund. She runs the FDIC. So when she admits, as she seems to be doing here, that mark-to-market accounting has indeed caused the value certain assets to be systematically understated on banks’ balance sheets, one would hope she’d view the situation with somewhat more alarm than she conveyed to NPR. Regulators ought to want banks’ financial statements to describe their finances as accurately as possible, right? And if loopy accounting rules have caused those financial statements to become distorted, then presumably regulators like Bair should adjust their regulatory approach to take account of that fact. One thing she might do now, for instance, is affirm that the only three capital ratios that matter to her agency are the same three that have always mattered: Tier 1, Total Capital, and Leverage. And in particular, she should discourage investors’ growing emphasis on simple tangible capital, which includes these temporary markdowns on securities that she now seems to be saying have been overdone.