Subprime Readings: Banks & rules, BoA & Countrywide, Citi & Merrill write-downs
- NY Times: Banks Plead They Can’t Follow Rules
. . . now the banks are begging the accounting rule makers to allow them to ignore a rule that has been on the books for almost 15 years. They explain that they never had any idea that they would have to restructure a lot of home mortgages, and thus had no reason to develop systems to deal with the accounting for such restructurings.
The accounting rule in question, Financial Accounting Standard 114, was adopted in 1993. Lynn E. Turner, a former chief accountant of the Securities and Exchange Commission, recalls that it was enacted because of abuses by financial institutions during the savings and loan debacle. Under the old rule, banks could avoid reporting losses so long as they expected to get the principal back eventually, even if the borrower did not have to pay interest on the restructured loan. The rule put an end to that.
“There’s a tendency for people to underappreciate the risk of the housing market,” Shiller said. “I might have a lower valuation of Countrywide than Bank of America does.”
“When people see that their houses are worth a lot less than their mortgage balance, they have an incentive to default.”
- Calculated Risk: CNBC’s Gasparino: Citigroup Writedown Could be $24B
Charlie Gasparino reported on CNBC that sources inside the firm have told him the Citigroup write downs could be $24 billion when earnings are announced next Tuesday.
Usually I wouldn’t post every discussion of possible future write downs, but these whisper numbers are getting huge. Yesterday, the NY Times reported the Merrill write downs could be $15 billion.
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