The new guidelines which will go into effect in the second-quarter will allow banks to value assets on their balance sheets at what they could fetch in an “orderly” sale, versus a forced or distressed sale. Provided that there are no willing bidders for these hard-to-value assets, banks will now have more discretion in setting values for certain mortgages and loans under FAS-157e. Although the changes cannot be applied retroactively, this decision is still a big win for banks which have been forced to incur exorbitant write-downs on certain securities on their books that are tied to subprime mortgages.
Some of the immediate winners in the banking sector that emerged from this ruling were Bank of America (BAC), Citigroup (C) and Wells Fargo (WFC). Their common stocks notched respective gains of 2.7%, 2.2% and 5.9% yesterday.
While this decision may prove to be a win for the banks, it could end up throwing a wrench into the plans of the Treasury Department. Last week, Treasury Secretary, Timothy Geithner, unveiled a plan to partner with private investors to help banks rid their balance sheets of these investments that have gone sour.
The plan was to initially take $50 to $100 billion from the government’s Troubled Asset Relief Program and augment that amount with another $400 billion in private investments and loans from the FDIC and the Fed. This sum was then going to be used to buy up the toxic assets that banks have previously been forced to take heft write-downs on. Geithner envisioned these purchases eventually totaling as high as $1 trillion or roughly one-half the value of toxic assets presently sitting on bank balance sheets.
It might be too early to tell how FASB’s ruling will impact the Treasury Department’s toxic asset plan that was aimed at stimulating the flow of credit. It would seem that the ruling would now give banks more of an incentive to maintain these assets on their balance sheets in hopes that the value of their original investments will ultimately be recouped.
Analyst, Oxbury Research
Disclosure: no positions