Posted on Tuesday, February 8, 2011
Despite healthy earnings reports, banks still hold the many of the same so-called "toxic" assets that sparked worry during the financial crisis.
The hard-to value assets, including mortgage-backed securities, collateralized debt obligations and other risky instruments are a growing concern, according to the Wall Street Journal.
The value of the risky assets are based on the banks' own estimates, and accounting rules allow banks to keep some of the charges from hurting their bottom line, according to the WSJ. Information about these risky investments is held in regulatory filings, not earning's releases.
Citi, for example, did not mention the $79.1 billion it held in Level 3 securities when it announced fourth-quarter earnings. The securities represent 48 percent of the banks' book value.
The WSJ found that banks made sure the losses didn't hurt their bottom lines:
"In part due to those bad assets, the top 10 U.S.-owned banks had $13.8 billion in 'unrealized losses' that have lasted at least a year in their investment portfolios as of Sept. 30, according to a Wall Street Journal analysis. Such losses are baked into banks' book value, but don't get counted against earnings as long as the banks believe the investments will later rebound. If those losses were assessed against earnings, it would have reduced the banks' pretax income for the first nine months of 2010 by 21%, according to the Journal analysis."
The paper points to "Level 3" securities, "illiquid investments that can't be easily valued using market prices" that amount to 42.6 percent of shareholder equity in the top 10 U.S. owned banks -- $360.7 billion. The WSJ points out that U.S. banks have, however, significantly backed away from bad assets, with Level 3 securities declining by 24 percent in the past two years.
On Friday, Bank of America announced a new unit created to handle toxic assets mostly acquired when the bank bought Countrywide Financial in 2008.
The Huffington Post Yepoka Yeebo