Follow Up -- Banks' Magical Accounting
Short follow up to Banking and Money piece.
The Wall Street Journal has a scoop — boy if you relied on investing money from the Journal’s reporting you’d continually be a day late and doll short. The piece is titled, “As Interest Rates Rose, Banks Did Balance-Sheet Switcheroo.”
“(The Banks) declared that they intended to hold on to large portions of their money-losing bonds until they matured rather than selling them, and they then changed the bonds’ accounting labels accordingly. From then on, the bonds would be frozen in time, no matter how far their values fell in the market.”
The Journal’s being dishonest, the Fed is the banks’ only real market at this point.
“The Wall Street Journal identified six large U.S. banks including Charles Schwab Corp. and PNC Financial Services Group Inc. that together switched the classifications on more than $500 billion of their bond investments last year. For some banks, excluding the unrealized losses from their balance sheets allowed them to report robust levels of capital when in reality their assets were worth much less.”
The Journal continues,
“The banks’ held-to-maturity bonds had a combined $1.14 trillion balance-sheet value as of Dec. 31, up from $681 billion a year earlier. The increase was mainly due to the reclassifications.”
The Journal doesn’t go into detail on the make-up of these bonds, if they’re all Treasuries, which are the foundation of the dollar. A bank crisis instigated by Treasury values would be orders of magnitude greater than any other.
Now in theory, this reclassification would contract liquidity, — “the capacity to trade quickly at quoted prices” — but these banks jumped the gun, with the Fed two weeks ago insuring the bonds could be swapped at anytime with no losses — infinite liquidity.
“The $1.14 trillion figure was $118 billion, or 12%, higher than the bonds’ fair-market values, disclosed in footnotes to the banks’ financial statements. The $118 billion was equivalent to 18% of the banks’ total equity, which is the difference between assets and liabilities.”
What a world, what a world.
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