IMF Says Red Ink at Banks to Continue
NEW YORK (
) -- 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.
When the Financial Accounting Standards Board voted to ease those rules last spring, it allowed banks like
Wells Fargo
(WFC) - Get Report
,
Bank of America
(BAC) - Get Report
,
JPMorgan Chase
(JPM) - Get Report
,
Citigroup
(C) - Get Report
,
Goldman Sachs
(GS) - Get Report
and
Morgan Stanley
(MS) - Get Report
to post much better results. For instance, in the first quarter alone, the easing of FAS-157 added $413 million to Citigroup's bottom line.
The IMF says its estimates are "subject to considerable uncertainty," in part because of what it calls "accounting nuances." The group can't predict how FAS-157 will be handled in the future and it also must homogenize data from banks across the world that maintain different reporting standards.
For what it's worth, the IMF report says U.S. banks have already accounted for 60% of their losses, but have another $420 billion to go. Firms in Western Europe and the U.K. have recognized 40%, with another $470 billion for those in the euro area like
Deutsche Bank
(DB) - Get Report
,
Credit Suisse
(CS) - Get Report
and
BNP Paribas
, and another $140 billion for British banks like
Barclays
(BCS) - Get Report
and
UBS
(UBS) - Get Report
. But the main take-away is that things have gotten better, something the market figured out somewhere along the line during its 50% climb since early March.
--
Written by Lauren Tara LaCapra in New York
