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Quantifying The Cost Of FAS 166 And FAS 167: At Least $450 Billion Of Onboarded "Assets" With Citi #1 At $154 Billion
As lobbying attempts to eliminate or at least delay the implementation of FAS 166 and FAS 167 (as a reminder, these are the accounting rules that will force banks to onboard a lot of off-balance sheet assets) seem to have stalled, the next question becomes what the cost to banks will be as a result of this new change starting January 1. A research piece from Barclays attempts to do just that, and while presenting slightly improved results versus previous estimates, still provides a glimpse into why it has been so critical to pump up the stock prices of some of the most "at risk" financial companies. In a nutshell - the pain for the banks will be significant, to the tune of half a trillion dollars, with the usual suspects expected to take the bulk of the hit: Citi at $154 billion, followed by BAC $121 billion, JPM $100 billion and WFC at $48 billion.
As Barclays points out:
FAS 166 and FAS 167 remove the concept of a qualified special purpose entity from generally accepted accounting principles (GAAP) and alter the consolidation analysis for variable interest entities (VIEs). FAS 166 changes rules that must be followed in order to obtain sales treatment, while 167 changes the criteria to evaluate whether entities that have interests in a VIE should be considered the primary beneficiary (and, thus, consolidate the assets and liabilities). Because many sales of financial assets, particularly securitizations, were made to VIE's, FAS 167 will, along with 166, put of assets that were previously "off balance sheet" onto bank balance sheets.
Bottom-line, upon adoption, all existing QSPEs must be evaluated for consolidation. Entities expected to be impacted include credit card securitizations, certain mortgage securitization entities and bank-administered ABCP. We believe conforming residential mortgage loans involved in securitizations are not subject to consolidation, but nonconforming ones are. This will have the impact of increasing asset levels and possibly reduce retained earnings--both which adversely impact capital ratios. Note consolidation results in an increase in loans and leases, securities, short-term borrowings and long-term debt on the banks’ balance sheets. In addition, there could be a cumulative effect of adopting these new accounting standards resulting in a charge to retained earnings relating to the establishment of loan loss reserves and the reversal of residual interests held. Additionally, limiting banks ability to recognize securitized assets as off-balance sheet exposures could have further consequences on credit creation.
So what is the damage?
The pro forma impact of these impending changes on incremental GAAP assets and risk-weighted assets for those VIEs and former QSPEs that are currently expected to be consolidated as of January 1, 2010 (based on financial information as of Sept. 30) is shown in Figure 1. For the largest four banks under coverage, (BAC, C, JPM, WFC) we now expect roughly $443 billion of GAAP assets to come back on balance sheet, down from almost $550 billion last quarter. We believe the primary driver of the reduction is a view that more assets will be allowed to stay off-balance sheet, particularly at WFC. For our entire coverage we believe this figure could approach $450 billion.
C is expected to have the most assets coming back on balance sheet ($154B), followed by BAC ($121B), JPM ($100B) and WFC ($48B). These figures are smaller at BK ($7B), PNC ($6B), FITB ($2B) and STI ($1B). C was the only major bank to provide its expected retained earnings hit ($7.8B; $12.5B less $4.7B DTA), while we backed into BAC ($6.7B) and JPM ($3.5B) given they disclosed the expected capital impact and peg WFC in the sub-$1 billion area. With respect to tier 1 capital ratios, the anticipated reduction at C is 132bps (151bps w/ ABCP), followed by 63bps at BAC (67bps), 22bps at WFC (23bps), and 40bps at JPM (48bps).
And some direct adverse implications as per Barclays:
Also, FAS 166 & 167 could result in the loss of GAAP sales treatment in certain securitization transactions, which could be meaningful under the FDIC's securitization rule. Specifically, under the FDIC's securitization rule, so long as a securitization is accounted for as a sale for GAAP purposes, the FDIC, when taking over a failed bank, will treat the transferred assets as sold and thus surrender its rights to reclaim the assets. With 166/7, GAAP sales treatment will be eliminated in certain securitizations, thus potentially putting securitized assets at risk of seizure by the FDIC. Last week, the FDIC board voted to approve an interim rule, through March 31, 2010, that continues safe-harbor treatment for transfers of financial assets made in connection with participations and securitizations issued prior to FASB's announcement of changes to GAAP that prevents most securitizations from being treated as off-balance sheet for accounting purposes. We understand the FDIC is working on how to deal with on balance-sheet securities following the transition period, to be discussed at the December 15th board meeting. Also with companies required to retain securitized assets on balance sheet, changes could reduce borrowing capacity or increase borrowing costs.
If nothing else, this rule will provide some much needed transparency into bank's still infinitely opaque and mismarked balance sheets. The biggest danger though, in our read, is that onboarding QSPEs and VIEs will make the re-launch of securitization that much more problematic. And keep in mind: without a fully functioning securitization market around the end of 2010/early 2011 when hundreds of billions in debt need to be rolled, this entire Fed-staged exercise in "financial stability" will have been for nothing.
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So how do they do it?
This bank owned Detroit home is selling for $10 because GM is going to be hugely profitable next year.(Jobs for errbody in Detroit)
http://www.realtor.com/realestateandhomes-detail/19429-Albany-St_Detroit...
This house was damaged by fire so the bank collected the insurance, also the house is on the banks books reflecting it's 2005 sale price of $189,000.
So with that in mind I think Citi is worth a whole lot more than stated.
The house listing warning sums up Michigan's economy: "enter at your own risk".
As lobbying attempts to eliminate or at least delay the implementation of FAS 166 and FAS 167 (as a reminder, these are the accounting rules that will force banks to onboard a lot of off-balance sheet assets) seem to have stalled,
Firstly, this has already been delayed. It was supposed to take effect on November 15, 2008 for fiscal quarters commencing after that period but was delayed one year due to bank lobbying.
I believe that the new rule became effective yesteday, November 15, 2009.
However.....
1. The FDIC will rule shortly (don't know exactly when but I think public comment period is over, i.e. that's where the CFO of COF and peers whined about the world ending and that they would take their lending ball home and not play anymore) on how to address the necessary capital increases that would be necessary (in a real world at least, i.e. not one of mark to menagerie per the FASB 157 gutting). Want a prediction? Two words. Capital Forebearance. (we know what they got in THEIR wallet).
Yes, if the lobbyists can't eliminate 6/7 successfully, they will most certainly get a delay. But the real pressure in all this is the time bomb that is ticking away as banks furiously try to hoard capital and always needing much, much more to get honest.
These projected capitalization needs are already 46 days old in a worsening universe of toxic assets.
I just can't see FDIC taking a firm stand on capital demands. Sheila can't be seen as pooping on the budding recovery shoots planted by Team Obama. And she doesn't want to hear Timmy's cussing anymore. He is much more willing to cover the con with a Treasury check via FDIC's $ 500B line of credit. A back door stimulus.....hope half a trillion is enough.
They will call the FASB
chairman in the Congress
and order him to change the
rules to FAS 166-Fantacy
and FAS 167-Fantasy.
Any similarities to
real people or mark-to-market
events, are unintentional
and are for purposes
of illustration only.
So buy CITI now?
Here is that Whitney link:
http://www.cnbc.com/id/15840232?video=1332936523&play=1
no way they let this happen
It sounds bad but the beauty of this is they will be able to point and say "it's a one-time charge that has nothing to do with our operations" ie. it's not our fault.
Note that it's as of Jan. 1, 2010, so it doesn't hit the FYE 12/31/09 annual reports and all bonuses are coming home.... They'll dump this for the "tradeoff" for the $45 billion to FDIC, even though the money centers won't have to cough up their pro rata share (they'll just borrow it from the FED with that collateral that got CITI down from $1 trillion in mark-to-monkey to the $154 billion now). Have we hit the acceptance stage of grief for our Orwell world yet?