Banks, Lenders and Rating Agencies Hiding Losses
Posted on March 13th, 2008 in BREAKING NEWS!
Although lenders are acknowledging that housing markets in California and other areas are severely distressed, they are not marking down their portfolios to reflect the beliefs. Rating agencies are pulling a few or their own tricks as well. Are they hiding losses to slow the bleed or to save executive bacon?
By BankImplode.com staff
Late last month, Wells Fargo named nearly every California county a ?risky? or ?severely distressed market.? The declaration shuts the door on financing for any non-conforming loans over 75 percent LTV and shows how troubled the housing market has become.
Yet, Wells Fargo has not marked down any more of its California portfolio. This is a big deal because about 1/3 of Wells? $141 billion in real estate loans are California loans (notably, $24 billion of their portfolio is subprime as well).
Is the lender hiding losses or hoping to liquidate their bad loans before anyone realizes how much less they are really worth? Wells Fargo has already assembled some of the worst junk in its portfolio for liquidation: $11.9 billion of third-party-originated home equity loans. No word on any success there. The bank took a perfunctory write-down of $1.4 billion on this pile of loans. Out of $141 billion, 1/3 of it in ?distressed? California, and $24 billion subprime, is that all?
See ongoing coverage of Wells Fargo at BankImplode.com.
Wells is not alone. Others are doing their best to hide losses as well, now that the credit crisis is in full swing. Among them are government-sponsored entities Freddie Mac and Fannie Mae. In the fourth quarter, Fannie wrote down its $74 billion worth of subprime and Alt-A mortgage securities by a puny six percent and then (also) claimed that only $1.4 billion of the write down could be considered a ?permanent? impairment (this is the part that goes into the headline numbers).
The reality is that many of their subprime and Alt-A assets are worth less than 90 cents on the dollar, judging by foreclosures and REOs alone (market value for these securities, of course, is much, much worse). So Fannie is getting away with their ?creative? accounting by implicitly arguing that the losses are not long term and that the valuations will ultimately come back. This is clearly impossible given the fact that foreclosures are already too high for AAA level valuations in these pools. Freddie Mac is in a very similar position.
Rating Agencies Join the Club
Ratings agencies are the ringleaders of this scheme. Standard & Poor?s and Moody?s Investors Service have both been accused of hiding losses by deferring cuts on faltering AAA securities.
These securities are the bread and butter of bank and insurance company investments. Unfortunately, none of the 80 AAA securities in indexes that track subprime bonds meet the criteria the rating agencies had before enacting new, tighter standards. Nevertheless, the bonds have managed to keep their AAA rating ? magic!
An example of this was pointed out by Bloomberg recently: a Deutsche Bank AG bond sold in May of 2006 has maintained its AAA status at both companies despite the fact that nearly half of the underlying mortgages are delinquent.
The reason the rating agencies are doing their best to defer cuts centers on the banks. If S&P and Moody?s stuck to the established rules, at least $120 billion in bonds would lose their AAA status. Banks would then be forced to bolster capital reserves to protect against losses?a scenario that would dramatically worsen the credit crunch.
Under global accounting rules (Basel II), banks would need to increase capital from $1.6 million to $16 million on $100 million worth of bonds if the bonds were downgraded from AAA.
FBI Checks Out Countrywide
Wells Fargo, S&P and Moody?s aren?t the only ones trying to cover their tracks. Countrywide, America?s biggest mortgage lender, is currently being investigated by the FBI for hiding losses. The FBI has declined to comment on the investigation, but it is believed that investigators are trying to determine whether or not Countrywide is lying to shareholders and regulators (among other things.)
A source told the Wall Street Journal the FBI is looking specifically for evidence that suggests Countrywide executives knew the company?s mortgage securities would default in much higher numbers than estimates made on paper.
Countrywide lost $1.2 billion in the third quarter of 2007 and nearly half a billion in the fourth quarter. The lender issued an estimated $100 billion in mortgage-back securities in the last three years.
The Countrywide investigation is part of a larger inquiry being made by the FBI into the dealing of 15 subprime mortgage lenders. A spokesperson for Countrywide claimed to be unaware of any such investigation.
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