How long can banks 'delay and pray'?
Kai Ryssdal talks to Marketplace's Senior Business Correspondent Bob Moon about a risky strategy by banks to put off dealing with the toxic assets that mucked up the economy and are still on their balance sheets.
Bank crumbles (iStockPhoto)
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TEXT OF INTERVIEW
Kai Ryssdal: Last time we had our Senior Business Correspondent Bob Moon in here for a chat, he was telling us how the economy might not be as bad as it looks. Today he dropped by my office to say, y'know, Kai, it might actually be worse than it looks. So we've brought him back in front of the microphones to explain himself. Bob, can't have it both ways. What gives?
BOB MOON: Well, Kai, today in Washington the folks who guarantee our bank deposits were grappling with what could be the biggest hurdle yet really to genuine economic recovery. This was a meeting held by the FDIC.
Ryssdal: Federal Deposit Insurance Corporation.
MOON: That's right. Let me see if I can illustrate what the head of the FDIC, Sheila Bair, says is giving her heartburn. I was just over at my bank, I won't name it, but it's one of the country's very biggest, it starts with the letter C. And I've brought back some exclusive sound of what's been happening for several months now deep in the recesses of bank vaults across the country. See if you can tell what's going on here.
Ryssdal: I'm afraid to guess is frankly the truth.
MOON: Well, they keep playing kick the can. You hear that? All their toxic assets are just being kicked along, all these bad securities, distressed mortgages, business loans that we haven't been talking a lot about lately. And now the FDIC is asking how long should we let you bankers play this game of kick the can before you actually have to account for how much these bad debts are dragging down your bottom line. The banks say they're still not ready to, shall we say, cover their assets. This forbearance is known in the banking industry as delay and pray. And just to make it clear, here is how Harvard University banking professor Josh Lerner explained it to me.
JOSH LERNER: Rather than letting the bloodletting happen immediately, hope that the banks will have enough profitability that many of the issues that they are facing will be addressed naturally through the fact that they will be generating additional profits.
Ryssdal: Just to make sure we're clear here, what this strategy is, is hoping that these bad loans that are on the books will eventually be worth more money, and the banks can get their money back.
MOON: Delay and pray.
Ryssdal: Delay and pray, yes. Help me out though, Bob. Because bank failures are at a record level so far this year.
MOON: Yeah, 81 bank failures so far this year. Most of those failures happened, though, when time just ran out on a lot of these banks. They kicked the can as far as they could, and then they couldn't kick it anymore. What we're seeing in recent financial reports from Citigroup, Bank of America, Wells Fargo, right down to many smaller regional banks, are these footnotes divulging that their loans are actually worth considerably less -- tens of billions less, in some cases -- than their balance sheets actually indicate. Bank of America, for example, its latest interim financial report showed its loans were actually worth more than $64 billion less than its balance sheet shows.
Ryssdal: Not two sets of books, because that I think is a felony. But it's two sets of numbers.
MOON: That's right. Two sets of numbers. What the loans would be worth today, and what they might be worth someday. Something like what your home is worth today, and what you hope it's going to be worth when you have to sell it someday. Of course, not as many homeowners have been as successful at getting this kind of forbearance from their banks. But that's also part of this strategy, Kai. This delay and pray strategy is pushing back loans and hoping your customers will stay afloat and be able to make their payments.
Ryssdal: How much money are we talking about in loans here?
MOON: Well, by some estimates as much as a trillion dollars in shaky bank assets.
Ryssdal: Why don't the banks just deal with this now, Bob, and get it all out of the way, and then we can all move on?
MOON: Well, the question is when is the right time. The FDIC was talking about that today. These new accounting rules will require the banks to show this stuff in their bottom line next year. The FDIC might give the banks a break on how much of a cash cushion they'd be required to have on hand to cover their losses, once those rules take effect in January. The banks would like more time, but they're facing critics who say that just lets them goose their profit numbers and pay themselves bigger bonuses in the meantime.
Ryssdal: Our Senior Business Correspondent Bob Moon. Thanks, Bob.
MOON: Thanks, Kai.
Comments
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From Raleigh, NC, 08/30/2009
This is THE story that nobody in the media pays attention to. The problems have not been fixed; they have been buried with more borrowing and financial trickery.
Bernanke must protect the BIG banks at the expense of the SMALL banks at all costs. Here is why: The stock holders at the BIG banks are the big fish from nations such Saudi Arabia, China, and Japan (ie, sovereign wealth funds, etc). If those guys get ripped, they will cash in the Treasuries underwriting our National Debt, and then the Government is screwed. The stock holders of the SMALL banks are small fish comprised of senior citizens and small business owners and people like that. If those guys get ripped, no big deal. That's why we are seeing the dichotomy of too-big-to-fail and too-small-to-save.
When Bernanke began printing money, the strategy was to introduce artificial inflation back into the economy (ie, re-inflate the bubble) for purpose of raising home prices back towards their pre-crash levels, but just long enough for the BIG banks to unload their toxic assets on suckers who think the housing market has revived. Then he can contract the money supply back to normal size and allow things to take their normal deflationary course. There never was an "exit strategy". The sole objective was to protect the BIG banks and their stock holders.
From Sandwich, IL, 08/30/2009
Maybe if the banking community worked with their customers having cash flow problems they could recoup more of a percentage of their crumbling assets instead of taking a total loss. That would make the final blow less painful. 30% of something is better than 100% of nothing. Sounds like greed, short term thinking and instant gratification is alive and well in the banking business!
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