Wednesday, October 7, 2009

"Extend and pretend"

In today's WSJ, we see that the Federal Reserve is fretting over the banks CRE exposure:

Banks in the U.S. "are slow" to take losses on their commercial real-estate loans being battered by slumping property values and rental payments, according to a Federal Reserve presentation to banking regulators last month...

In another sign that many U.S. financial institutions are inadequately protected against potential losses on commercial real-estate loans, banks with heavy exposure to such loans set aside just 38 cents in reserves during the second quarter for every $1 in bad loans, according to an analysis of regulatory filings by The Wall Street Journal. That is a sharp decline from $1.58 in reserves for every $1 in bad loans from the beginning of 2007...

These days, many U.S. banks have adopted a policy of extending loans when they come due even if they wouldn't make those loans now. In some cases, values of the underlying property have fallen below the amount of the loan.

"There's been an extend-and-pretend philosophy by banks to forestall hits to their balance sheets that might occur," says Patrick Phillips, new chief executive of the Urban Land Institute, a real-estate industry group.

Part of the worry is office rates, which fell 8.5% in Q3 versus a year ago, with a vacancy rate of 16.5%.

All the banks have to do is just adopt Spain's accounting treatment. Spain has an unemployment equivalent to our U-6 rate--17%, yet their banks don't seem to have any losses. Probably because the banks own the appraisal companies, and they use "extend and pretend" accounting also.

Remember this trick? Or this? Or this?

But why worry?

Today Banco Santander, is spinning off their Brazilian division in an IPO with the symbol BSBR, the first beneficiary of Obama's whiff on the Olympics. Their raise? $8 billion.

Which shows that Wall Street is always different from Main Street. Because here they are buying what STD is selling.

Even if the symbol of their parent is what the banks are really carrying on their books!

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