06/08/09 Baltimore, Maryland Another potentially pivotal moment of this week: The Fed is expected to announce this week which banks are allowed to repay their TARP loans and the conditions of repayment. Goldman, JP Morgan, Amex, Morgan Stanley, State Street and U.S. Bancorp are on the short list to get the green light. Along with BB&T, each of those have requested to repay the loan… but of course, in America in 2009, it couldn’t possibly that easy. We’ll let you know the government’s proposal when it emerges.
“Don’t be fooled,” writes Chris Mayer, “banks are still in trouble. The thing to hide is debt. And our banks have mastered the art. The Financial Accounting Standards Board, or FASB – I’m sure its members are a blast at cocktail parties – is close to closing a loophole with some new rules. The new rules would require banks to bring some of their off-balance sheet assets back on their balance sheets.
“‘Off-balance sheet,’ is code for hiding in the footnotes. Banks during the boom created all kinds of special purpose vehicles to hide stuff. Well, the nerve of the FASB has the banking sector in an uproar. Bankers are writing pleading letters to Treasury Secretary Timothy Geithner to try to get FASB to play ball.
“That’s because they’ve got trillions of dollars of debt hidden off balance sheet. And if they brought these debts back on their balance sheets, they would need to raise a lot more capital. That would dilute their shareholders and kill their stock prices. It would also shatter any remaining confidence that these banks are in good shape.
“And the numbers we are talking about here are huge. According to Bloomberg, off-balance sheet assets just for the four biggest U.S. banks were about $5.2 trillion at the end of 2008. The rumor is that the new rule would force these banks to recognize only around $1 trillion of that. And though people say ‘off-balance sheet assets’ – what we are really talking about is more assets bought with very little equity.”
Ian Mathias
Ian Mathias is the managing editor of Agora Financial’s Income Franchise, where he writes and researches about retirement, dividend and fixed income investing. Much of his work is featured in The Daily Reckoning and Lifetime Income Report – Agora Financial’s flagship income investing advisory.
Previously, Ian managed The 5 Min. Forecast, a fun, fast-paced daily look into the future of global markets and macroeconomics. He’s also worked in public relations, where media outlets like Forbes, AP, Yahoo! and MSN Money have syndicated his writing. If he’s not at work, you’ll probably find Ian on a bicycle, racing up and down the “mountains” of Baltimore County. Ian has a BA from Loyola University in Maryland.
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