IMF Says Red Ink at Banks to Continue

NEW YORK (TheStreet) -- While the International Monetary Fund cut its bank loss prediction dramatically on Wednesday, its reasoning is a day late and a dollar short, while ignoring accounting "nuances" that were a huge factor in the scale of losses to begin with.

The IMF now estimates that banks have another $3.4 trillion in writedowns on assets held on balance sheets, down 15% from the $4 trillion it estimated five months ago. The global financial group cited a "substantial" reduction of systemic risk due to government intervention.

Though massive bailouts across the globe haven't been entirely good for banks, the IMF notes improved confidence that has helped ease strains in the financial markets and fostered "nascent signs of improvement" in the real economy.

The IMF projection is often cited as the standard figure for bank losses because it comes from a global group that represents the interest of the financial system, in a pseudo-regulatory role. But however careful its calculations, the IMF's $3.4 trillion estimate could just as well be taken with a grain of salt.

The losses that brought down financial titans like Bear Stearns and Lehman Brothers and banking behemoths like Washington Mutual were, of course, based on a decline in real estate values and a dislocation in the real economy. The losses are real; more people are out of work and fewer people are paying their loans on time, if at all.

Still, a big portion of those losses relate to FAS-157, an accounting rule that dictates how banks ought to value securities. When the markets seized up last year it was often impossible to sell assets that were linked to real estate, causing banks to mark loans far below their intrinsic value.