Outstanding Loans in US Commercial Banks Jump by $420 Billion in One Week

OilPrice.com ^ | 13/04/2010 | Dave Forest

[Faketan]

I thought I was seeing things yesterday.

The Federal Reserve released its weekly numbers on U.S. bank lending. And it looked like there had been some kind of mistake.

Outstanding loans and leases at U.S. commercial banks jumped by a staggering $420 billion in the week ended March 31. An unprecedented leap.

US Bank Loans and Credit – Chart

As it turns out, there's a reasonable explanation. It's not that Americans suddenly rushed to take out loans.

The jump was caused by "Financial Accounting Statements No. 166". This new set of rules deals with the way U.S. banks must handle off-balance-sheet vehicles (OBSVs).

Prior to the financial crisis, OBSVs were common. When banks acquired particularly risky assets such as sub-prime mortgages, they would create a special holding company to take possession of these instruments. Full article at: Outstanding Loans

[Kimberly GG]

Wish I weren’t so clueless....this is all ‘french’ to me.

[CodeToad]

Seems like the banks were cooking the books. Half a trillion in potentionally bad loans.

[Clock King]

Definitely cooking the books. Just like AIG.

[hoosier hick]

Banks were using accounting standard loopholes to hide non-performing assets— about 6.8% of the total, and probably the worst 6.8%. A bank could report non-performing assets of 1% (and commonly did), while keeping the rest of the bad loans somewhere else. Reality was that they were running close to 8+% as non-performing....

hh

[erikm88]

Kimberly, Investment banks and commercial banks created subsidiary companies that would buy securities (i.e. stocks, bonds, but mostly bonds) that were backed (supported by) pools of residential mortgages. As we all know, a good deal of these mortgages were undertaken by people who had no ability to pay (subprime mortgages). These banks would keep these worthless securities off their balance sheets (that are to be disclosed to the SEC and the public).

The Financial Accounting Standards Board (FASB) released a statement that requires these banks to account for these investment "vehicles" (the subsidiary companies created by the banks, described above) on their balance sheet. Basically, if the bank was financially healthy before the FASB required this accounting rule, they are pretty mcuh going to be in trouble now, since these bad assets (securities) are performing badly (i.e. losing value).

This type of covering up, and bad accounting is exactly what Sarbanes-Oxley (SOX) legislation of 2002(?) was supposed to stop. Government intervention at its finest!

[yefragetuwrabrumuy]

The reason banks did this was to appear more financially solid than they were. Otherwise, they would be put on the “at risk bank list”, which is a red alert warning that they are in danger of collapse, and could cause their stock price to crash.

Here is the current (unofficial) at risk bank list (682 banks):

http://calculatedriskimages.blogspot.com/2010/04/unofficial-problem-bank-list-april-9.html

Here is the list of banks that have failed since Oct 1, 2000

http://www.fdic.gov/bank/individual/failed/banklist.html

And, since late 2006, 381 mortgage lenders have failed:

http://ml-implode.com/

So, with this new accounting requirement, that forces banks to include their bad loans, there is a good chance that the first link, of “at risk banks”, is soon going to increase in size.

[truthbetold11]

There running from the real law coming

[stylin_geek]

If it was only half a trillion, it wouldn’t be a problem.

I believe the current thinking is that banks are holding between 1.5 and 3 trillion worth of garbage loans right now.

[stylin_geek]

Oops, I should have read the article. The banks only moved unsecured debt, credit cards, onto their balance sheets.

Banks still have a lot of mortgages off balance sheet. That’s where I get the 1.5 to 3 trillion of bad loans.

[DOGHEAD]

Bernie Maddof is in Jail but Robert Rubin is not and Franklin Raines are not. Wonder why that is? Who benefited from cooking the books? Robert Rubin was so naive, we are to believe that he did not know that Citi had risky CDO’s
totaling tens of billions of dollars.. Wow and he was the top guy too! They must not be very smart over at Citi if he was the top man over there. Oh he left and made $126 Million for his efforts. Then the Fed gave Citi $45 Billion in loans to cover what he did. Wow. That’s nice work if you can get it. And nobody will go to jail either. Also trace where the Dems got their financing from..

[CodeToad]

I totally understand. Banks also have CRE they are not reporting and that market is crashing, too.

[CodeToad]

P.S. Off hand I believe the CRE was $4+ T and half, $2.2T, was underwater.

[stylin_geek]

Honestly, I have no idea how everything hasn’t yet imploded.

The only thing I can figure is that as bad as the US is, the US isn’t the only country in deep financial trouble, and, from a banking standpoint, the US is still relatively transparent.

[Faketan]

They’re all at it - GE are being looked at now.

[CodeToad]

I think the same thing many times. Bankers must have really bad days at work shuffling things around hoping to outpace the collapse.

[Mister Muggles]

Denninger thinks $420 billion of the money may have been passed under the IMF table to bailout Greece...interesting idea.

[politicket]

Denninger thinks $420 billion of the money may have been passed under the IMF table to bailout Greece...interesting idea.

Denninger's completely wrong.

[Mister Muggles]

I’m open to your opinion...have any actual details as to why he may be wrong to support your statement, link(s)?

[politicket]

have any actual details as to why he may be wrong to support your statement, link(s)?

FASB just implemented two new rules that required banks to bring $400 billion+ of their "off balance sheet" items back on.

This had the effect of making it look like over $400 billion of new loans were created when no such thing took place. It was just an accounting move.

Even Denninger admitted this when others pointed it out to him.