Bank Regulators Pull Out All the Stops

Two subtle accounting moves made by federal regulators last week illustrate the lengths to which the government is pulling out all the stops to boost capital at and confidence in the nation's largest banks.

The Federal Reserve said on Friday that financial holding companies would be allowed to include capital invested by the government, through its $250 billion plan to take preferred equity stakes in banks, in their Tier-1 capital ratios. Regulators on Monday said that warrants issued by banks to the Treasury, which are considered liabilities under generally accepted accounting principles, will also be considered capital.

Also late last week, federal bank regulatory agencies announced that institutions that took losses on Fannie Mae (FNM) and Freddie Mac (FRE) preferred shares as a result of the government's takeover of the two government-sponsored mortgage giants, would be allowed to write these losses against earnings. This will provide immediate tax benefits to many banks, boosting cash, since it means they won't have to carry the losses forward, hoping to use them to offset future gains.

JPMorgan Chase (JPM) announced $1 billion in third quarter losses on Fannie and Freddie preferred shares. At the top federal corporate tax rate of 35%, the accounting change provides an immediate tax benefit of $350 million.

Wells Fargo (WFC) announced third-quarter impairment charges of $480 million on investments in Fannie and Freddie. Citigroup (C) mentioned third quarter losses in GSE positions, but didn't specify the amounts. Bank of America(BAC) announced $350 million in losses on Fannie and Freddie preferred shares in the third quarter.