August COP Oversight Report: $658 Billion In Total Level 3 Assets, Small Banks Need "To Raise Significantly More Capital"

Tyler Durden's picture

The Congressional Oversight Panel has released its August report which contains some much more dire language about the prospects of the U.S. banking system than did the joke that was the Stress Test, especially in the small/middle bank sector.

The Panel‘s analysis of troubled whole loans suggests they pose a threat to the financial health of smaller banks ($600 million to $100 billion group). Using the same assumptions, it looks as if banks in the $600 million to $100 billion group will need to raise significantly more capital, as the estimated losses will outstrip the projected revenue and reserves. Under the "starting point" scenario, this second group of banks will need to raise $12-14 billion in capital to offset their losses, while in the "starting point + 20% scenario", non-stress-tested banks are expected to have to raise $21 billion in capital to offset their losses. The capital shortfall for those relatively smaller banks is primarily due to the lack of reserves, which on average account for only 25 percent of the expected loan losses.


Another useful data point is the disclosure on the total Level 3 Asset Exposure at March 31, 2009. Compliments of the FASB, over $650 billion in "assets" are being marked-to-model, and most likely overestimate the true worth of these assets by about 50%. That's $300 billion in hot air on the banks' balance sheets.

And as a tangent, in one of the better representations of "complex securities", the COP does a very good and succinct job in highlighting the tranching process of all those collateralized X obligations: maybe if Iceland had seen this 3 years ago it would not be bankrupt.

Full COP report here.

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texpat's picture

Time to take the water wings off the Titanic.

Anonymous's picture

LOL--exactly. Cue the violins and get Bernnanke in the Wheelhouse.

Anonymous's picture

Nah, all part of the plan boys. The big will consume the little at a discount.

BoeingSpaceliner797's picture

Feels like we've seen this somewhere before.  A long human life ago to be precise.

VegasBD's picture

It seemed hard for me to believe a lot of the CTs about the great depression, until I started seeing the same exact thing play out in front of me the last year or two.


All those juiced in with the NY Fed eat up all the ones who arent for pennies on the dollar.



slashex3's picture
slashex3 (not verified) VegasBD Aug 11, 2009 2:12 PM

But seeing as how no one buys and holds except for retail investors (that strategy is dead for now), it wouldn't matter anyway.

The Rich says"

good articles;

href="" target="_blank">hat tip to http://...

Anonymous's picture

Yep, concentration of wealth. Funny how JPM and company got TARP money for their, still on the books, toxic assets. Looks like the little fish are gonna get eaten. And if history repeats, we get 8 more years of misery and then a World War, even more profitable, to boot. Yippee, gotta love greed.

Anonymous's picture

We already have the most expensive, wealth destroying war in now appears that it will be permanent at the behest of the war industry. This is the straw that is breaking the camel's back, as evbery other government expenditure will be cut before this war... the downward spiral continues.

Miles Kendig's picture

AKA - The necessary process of consolidation in the banking sector.  When it is all said and done 8,500 banks will become 25 mega banks, all too big to fail.

Anonymous's picture

Yes, everything is proceeding according to plan.

When there are 5 banks left, they will tell us how much better it is for the consumer.

Anonymous's picture

Too funny!

Anonymous's picture

Ah, the sweet smell of Special Purpose Vehicles. Our country is doomed with all the fantasy accounting by banksters.

waterdog's picture

They are just getting ready for the Columbus Day banking holiday. A 5 day event wherein lock down will be the new media word.

Once the ceiling on the national debt is raised to $25 trillion in mid-September, all banks will be required to declare all assets.

waterdog's picture

Because it is in October, the beginning of the new federal fiscal year.

Also, Columbus was lost when he thought he discovered America. Similar to today's people thinking they have discovered the bottom.

Cindy_Dies_In_The_End's picture

oh geez, sorry, no coffee here yet, Duh!

zeropointfield's picture
zeropointfield (not verified) waterdog Aug 11, 2009 9:55 AM

togehter with geithner's answer in the appendix of the document and the fasb change this would make sense.

Anonymous's picture

who are your sources and what is the confidence
level of this happening as such? makes
perfect sense to me as i have been predicting
a september/october bank holdiday based upon my
publicly available sources.....

leveraging the columbus day holiday as one of the
five (i assume) makes some sense....

the fallout from this will be is
not that anyone has a choice given the insolvency
of the banks and the fed but my solution would
be to liquidate every single last insolvent bank should be merged....the
incompetent management should be barred for life
from ever doing anything with financial organizations
and indictments should be flying like feathers
in a grudge match with two angry hens....starting
with indictments against the management at ots,
fdic, federal reserve, et. al.

Dixie Normous's picture

So this is why that regional bank etf, KRE, was on such a tear.  "another goddam green shoooot."

economessed's picture

That's 658 billion reasons why Ben the Printer will continue to debase the currency.  The immediate pain of dealing with the problem in a sustainable way will not be considered.  Instead, Ben will just dump trillions of dollars of invented money into the system a few billion at a time -- stealthily eroding the American standard of living in order to protect 1/10 of 1% of the population who carry the title "masters of the universe."

Assetman's picture

These smaller banks are not going to be protected.

I have some exposure to a Federally chartered community bank in the Mountain States, and the regulators have already come in an mandated we fix our comercial loan portfolio in a hurry.  We've been told there will be no safety net.

Ironically, the TBTF banks will have the opportunity of a lifetime swallowing up their smaller breathern, if they play their cards right.  Just as ironic, is that so many of the TBTF's are still so poorly run, they may never get that chance.

I just can wait for mark to market to reappear...

Anonymous's picture

Here's a story on the type of loans small banks are exposed to. The Feds won't have any problem wiping out the stockholders of the small banks but Treasury is going to have to transfer a bunch of phantom dollars to the FDIC to cover the depositors.

Bob's picture

Capitalism 2.0 

God Bless America and those who continue to hold the faith.  May your witness never waver . . . Heaven awaits those who believe!


Anonymous's picture


"market-to-model" --> marked

Anonymous's picture

Also, overstatement by 50% would mean they are worth 66.7%, or ~$200b loss not $300b.

(Not a critic, just proofreading. I'm a stickler for accuracy)

Anonymous's picture

This is not a personal attack but would you kindly keep your anal opinions to yourself. I for one understand the meaning of what was published just leave it alone grammar police/fact checker. Just like that CRE article, jeesh you guys like to split c*nt hairs.

Anonymous's picture

In order to have a cogent argument, the facts must reflect it. Peer review.

Anonymous's picture

i agree....please continue to proof the numbers...

Anonymous's picture

I think it's a good turn of phrase as-is. Market-to-model accurately describes the rally.

madmax's picture

A $300 billion gift in Bernanke bucks will make this problem go away too.

After all, the $700 billion TARP funds fixed the big banks.

And the $785 Billion in stimulus funds ended the recession.

And don't forget the $8000 check for each house sold has fixed the housing industry.

And the $4500 check for each car sold has fixed the auto industry.

There doesn't seem to be any problem that can't be fixed by these magical Bernanke bucks.

gookempucky's picture

Let us not leave out the untold acres of vacant lots and subdivisions- would make great tent cities as the weeds would at least be controlled by many a tent city patron--another shush shush shoe to drop.

mo`le ru`it sua  it collapses from its own bigness


Anonymous's picture

I'll point out that the FASB board is discussing this issue (better valuation of toxic assets, reserve requirements) tomorrow and Thursday. They are looking to make the mark-to-fantasy much tougher.

I don't have the link but you can get the schedule and listen to the board meeting live.

Anonymous's picture

They are supposed to do it at the beginning of 2010, even Timmy G said so.
So the question on the floor is "will bank lobbyists succeed in scuttling FAS 140 one more time?"

deadhead's picture

32743 was referring to 157 it would seem to me and FASB is looking to bring back mark to market in a much "tougher", i.e. realistic fashion.

FASB 140 is the SPV/SIV back to the balance sheet issue already on the books for 2010 implementation, correct?

Anonymous's picture

"pose a threat to the financial health of smaller banks ($600 million to $100 billion group)."


"which on average account for only 25 percent of the expected loan losses."

That is a frightening gap, considering we can bet that rosy accounting treatments is low-balling it...

"looks as if banks in the $600 million to $100 billion group will need to raise significantly more capital, as the estimated losses will outstrip the projected revenue and reserves."

Translation: We need to print more money for the banks, since no rational investor is going to pump that much money into a bankrupted and opaque banking system.

PragmaticIdealist's picture

Whoops, forgot to log in.

Anonymous's picture

ITs small considering the US just issue over 2 trillion dollars worth of debt...and 500 billion will be chump change in 2 years when our deficit is 20 trillion

Anonymous's picture

No, $100 billion isn't classified as small. The small banks referenced in the report have assets of $600 million to $1 billion.

Joanito's picture

Green shoot....  Should be good for another 1.75% no volume rally in the S&P.  Or at least keep it comfortably above the pesky 1,000 mark.  Now I see why Cramer can't stop blathering on about the great deal the BAC represents.  They're the leader of the pack in terms of metrics that the markets love.  I should've backed up the truck and loaded up on whoever it is that supplies ink to the treasury. 

PragmaticIdealist's picture

That and the big players are going to get a lot more  business (and become even more Too-Big-To-Fail) once 90% of the lesser players dissapear.

Joanito's picture

Yep, the timing of this important info release seems to perfectly coincide with an as yet unannounced but soon to begin push by all of the bigger welfare recipient banks to "save the day" by buying all of the tiny, never to be bailed out, pipsqueaks whose disapearance would really get the lil' mainstreet guy out on the streets of mainstreet shouting obscenities, making those normally warm and fuzzy townhall meetings even more unsuitable for CNBC to cite as further evidence that the consumer is, in fact, alive and doin' just fine.  Yes, it'll be a public relations coup.  Obama will be re-annointed King of Chicago.  Geithner and heli-Ben will be the first ever Americans to be "knighted".  Rahm Emmanuel will get his other middle finger back.   

Anonymous's picture

FASB!! This is your chance. This is your shining moment to show the American people that you too, are not OWNED by the Wallstreet CROOKS.

Do the right thing for the children of America--we don't care how hard it is at this point. We need you to STOP this Madoff style accounting and stop it NOWWWWW.

NRGTDR's picture

I second that motion.

assumptionblindness's picture

Not only do we need FASB to grow a pair we also need to get IMMEDIATE IMPLEMENTATION.

Anonymous's picture

indeed...and the tie in is a bank holiday as
someone above opined....the radiation from an
immediate return to mark to market would be
devastating but long overdue and urgently

there is no way in the world anyone is investing
in banks at this point....they are speculating,
gambling, or jiving but they are not investing....
there is not a balance or income statement in
america worth the paper it is printed on because
of the crookedness of the accounting profession
and its famous mark to model, myth, or moonbeam....

Anonymous's picture

You guys worry too much where the money will come from to support all these phony asset prices...look the plan is to use your money.


The bank where Tony Blair is an adviser is the target of an unprecedented probe involving billions of pounds of customers’ funds, the Daily Mail can disclose.

JP Morgan Chase, whose chief executive Jamie Dimon last year recruited the former prime minister as an adviser, is being investigated by the City’s watchdog, the Financial Services Authority for allegedly failing to keep track of £8.5billion of clients’ money.

AnonymousMonetarist's picture

'Tis merely preparation for Round Two.

'The sham stress test is Round 1, the manufactured outcome is temporary and/or stealth nationalization. Round 2 will be absorption of smaller banks by the anointed few.Keep your eyes on the prize.'




Bob's picture

One can only hope that we continue to "nationalize" risks and losses of the TBTF crowd as they grow bigger.  Otherwise, we'll be in even deeper shit . . .

It will soon be time for us all to face the fact that they own us, plain and simple. 

It's been a coup d'etat, American Capitalist style. 

There's never been a more useful red herring than "socialism." 

Cindy_Dies_In_The_End's picture



Call me crazy, but in the Appendix, Geithner's July letter about Money Markets ought to be read and discussed, don't ya think?