Ugly Numbers on Toxic-Asset Prices Signal More Trouble

I’ve long called for more reporting on a critical question in the financial crisis: how much the toxic assets clogging up banks’ balance sheets are actually worth—and have been mostly disappointed in how little there’s been.

Now to my mind, an asset is worth what you can get for it. With the absence of much of a market (from all I can tell from the press), we’ve had an absence of pricing. So it’s with interest that I’ve noticed a couple of price points in the last few days.

First, National Mortgage News (h/t Naked Capitalism) broke the story that Wells Fargo unloaded a toxic mortgage portfolio for $600 million.

Now, that’s a lot of money, but it’s just thirty-five cents on the dollar of the original value. And that may have actually been a high price, as Paul Muolo reports: “One banker told me that the 35 cents on the dollar that Arch Bay reportedly paid was twice what some hedge fund bidders were offering.”

Muolo implies that Wells Fargo sold it on the private market to avoid setting a market price that could force the industry into writedowns:

The nice thing about the private nonperforming loan market is that none of these messy details have to see the light of day, including the price paid.


Today, Bloomberg columnist David Reilly also gets some numbers out there in a column about why Barney Frank and Chris Dodd are flip-flopping on mark-to-market accounting.

This is just nasty:

Many banks have marked down these loans only by 3 percent to 4 percent, said Paul Miller, bank analyst at Friedman Billings Ramsey & Co. These loans in many cases would likely fetch about 40 cents on the dollar if sold in today’s market.

So if Miller is correct, and he’s been right a lot in the last couple of years, banks are valuing assets at 96 or 97 percent that should be valued at 40 percent. Sounds like pure-D accounting fraud to me. Oh wait, the banks think the market is just in temporary upheaval, but will soon return to being “rational” and value these assets like they should be. Yeah, right.

The problem has always been the gulch between what vultures (and I mean that fondly) are willing to pay and what banks can take without exposing themselves as undercapitalized or worse.

Happily for the banks (but not for the rest of us), the last few months we’ve been in a sort of self-hypnosis, trying to convince ourselves that if we think things aren’t so bad, they won’t be so bad. So, why would banks sell these crappy assets at a 60 percent loss and have to take an equivalent writedown, when if they keep them, they can just write them down 3 percent and satisfy their regulators? That seems to be why the PPIP plan is going nowhere.

Or, shhhhh! They can try to unload junk assets secretly like Wells Fargo did and hope they don’t set off a chain reaction of writedowns.

As Edward Harrison says about the Wells Fargo deal over at Naked Capitalism:

To me, this explains very well why the PPIP program was a failure: if banks can sell distressed assets quietly over time to private bidders, they might be able to delay taking writedowns. But, the price discovery involved in the PPIP program would be a blood bath for banks already capital-constrained. This is why the program has failed.

Why there hasn’t been more aggressive reporting on this by the financial press is beyond me. So far none of the major business papers has picked this Wells news up and the Orange County Register’s terrific Mortgage Insider is the only outlet in the mainstream press I’ve found that’s written about it.

This Wells sale looks like a good peg for a story to me, biz journos.

Reilly of Bloomberg, for one, does use his prominent perch to push the broader story, (as does his colleague Jonathan Weil)—though not with the Wells numbers. For example, did you know this?

Congress this spring browbeat accounting rulemakers to make it easier for banks to ignore dour market prices for some holdings battered by the credit crisis. That was designed to help banks’ finances look better.

Without subsequent rule changes by the Financial Accounting Standards Board, earnings at 45 banks and financial companies would have been 42 percent lower than reported, according to a report last month by Jack Ciesielski, editor of The Analyst’s Accounting Observer.

Eight major banks would have had losses instead of gains if they weren’t engaged in wishful-thinking (to be kind) accounting. Papering over the problem is not going to make it go away.

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Ryan Chittum is a former Wall Street Journal reporter, and deputy editor of The Audit, CJR's business section. If you see notable business journalism, give him a heads-up at Follow him on Twitter at @ryanchittum.