Banks may need to write down another $1,000 billion, and this is already widely hinted in the markets. I would rather not take this as a negative but a positive. Additional capital will not be lost, its to boost the balance sheets. US regulators may force Bank of America, Citigroup and at least a dozen of the nation’s biggest financial institutions to write down as much as $1 trillion in loans, twice what they’ve already recorded, based on past Federal Deposit Insurance Corp. Assets sold under the Legacy Loans Program may be worth an average of 56.3 cents on the dollar, based on the results of FDIC auctions at failed banks over the past 15 months. In view of the potential losses, reports emerge of banks trying to game the system by bidding each other's asset prices up.
- GoldmanSachs and Mike Mayo report in their analysis that most banks carry unsecuritized loans at 92-98 cents on the dollar on their books. Moreover, most of the assets in the PPIP are loans.
- Details of past FDIC distressed assets auctions: The FDIC’s average auction value of 56.3 cents on the dollar for residential and commercial loans is based on 312 sales worth $1.1 billion since Jan. 1, 2008, according to the FDIC. The average for 348 commercial loans for which borrowers stopped paying was 32 cents on the dollar. Auction prices ranged from 0.02 cent to 101.2 cents on the dollar, according to the FDIC.
- Writedowns would total $1 trillion if the program buys $500 billion in loans at 32 cents on the dollar, the average for non- performing commercial loans in the FDIC sales.
- Banks failing Federal Reserve evaluations of loans this month may be ordered to make sales worth as little as 32 cents on the dollar, according to FDIC data. That would be less than half of the 84 cents on the dollar the Treasury Department suggested was a possible purchase price. Some of the bank- insurance agency’s auctions brought 0.02 cent on the dollar.
- The FDIC would auction assets after the Office of the Comptroller of the Currency, Office of Thrift Supervision or the Fed signals that a bank is in danger of failing.
- Treasury spokesman Isaac Baker said in an e-mail that the program is voluntary. "Past auctions cannot reliably predict asset prices in the Public Private Investment Program, as we are creating a new market that has not previously existed to help value these assets, and offering financing to help investors purchase them."
- The FDIC is considering allowing banks to share in future profits on loans sold to public-private partnerships to encourage healthier lenders to participate. The regulator is seeking comments through April 10 on the program.
- Banks have almost $4.7 trillion of mortgages and $3 trillion of other loans that aren’t packaged into bonds, according to the Fed. The vast majority are carried at full value because they don’t need to be written down until they default.
- While regulators don’t intend to publish the details of their stress tests, the results will effectively become known once banks announce how much capital they need to raise. Regulators will then give lenders six months to obtain funds from investors or taxpayers as a last resort.
- The government’s toxic assets plan will force banks such as Citigroup, Bank of America and Wells Fargo to take large writedowns on their loans, requiring them to raise more capital from taxpayers or investors.
- Including TARP, the U.S. government and the Fed have spent, lent or guaranteed $12.8 trillion to combat the financial collapse and a recession that began in December 2007. The amount approaches the $14.2 trillion U.S. gross domestic product last year.
p/s photos: Nancy Wu Ding Yan