The American banking system might be primed for another implosion. American banks are still holding on to toxic assets. These assets include mortgage-backed securities, collateralized debt obligations and other risky instruments, all the stuff that spooked investors and caused the financial meltdown.
The worst part, according to The Wall Street Journal, is that these toxic assets and unrealized losses are hidden. They just don't show up in the banks' accounts. That would be a concern for everyone.
The WSJ's Michael Rapoport writes: "In part due to those bad assets, the top 10 US-owned banks had $13.8 billion in 'unrealized losses' that have lasted at least a year in their investment portfolios as of Sept. 30, according to a Wall Street Journal analysis. Such losses are baked into banks' book value, but don't get counted against earnings as long as the banks believe the investments will later rebound. If those losses were assessed against earnings, it would have reduced the banks' pretax income for the first nine months of 2010 by 21%, according to the Journal analysis."
The other problem is that accounting rules allow the value of these risky assets to be based solely on the banks' own estimates. So the bank takes a guess and the valuations are overstated.
So how much damage would there be? Rapoport tells us: "One problem centers largely on "Level 3" securities, illiquid investments that can't be easily valued using market prices. According to the Journal analysis, as of Sept. 30, the top 10 banks had $360.7 billion in "Level 3" securities. That amounts to 42.6% of the banks' shareholder equity, a pile of assets whose value is hard to verify."
Translated, that means each of the 10 biggest US banks stands to lose $36 billion! That's real money and could set off another crisis.
The banks are up to their old tricks. It's back to the shell game that nearly destroyed the market. As they did three years ago, they are still hiding toxic assets that could again threaten America's financial stability.
Nothing to do with that article! I just wanted let you know that am a huge fan of your blog! great articles!