New reg lets banks ignore actual value of “underperforming” loans

It is only fitting that on Halloween the Federal government is increasing the number of zombies among us.

Federal bank regulators issued guidelines allowing banks to keep loans on their books as "performing" even if the value of the underlying properties have fallen below the loan amount.

Blog_Zombie_BankThe rationale?

While CRE (commercial real estate) borrowers may experience deterioration in their financial condition, many continue to be creditworthy customers who have the willingness and capacity to repay their debts. In such cases, financial institutions and borrowers may find it mutually beneficial to work constructively together.

Nothing inspires confience in me like the phrase “financial institutions and borrowers may find it mutually beneficial.” Especially since banks are not required to only apply this rule to “creditworthy customers who have the willingness and capacity to repay their debts.”

I really can’t top what Doug McIntyre wrote at DailyFinance.com:

The FDIC appears simply to be taking losses that would be incurred in the normal course of business and pushing the true accounting for them into the future. It is to the political benefit of Washington to make it appear that the banking sector is getting better. It also probably helps the FDIC, which is essentially insolvent, from having to come up with billions of dollars to insure deposits at failing banks.

Some can argue that this regulation just does for commercial real estate what had already been done for home mortgages. In April, the Financial Accounting Standards Board approved a new set of rules allowing financial firms to fiddle with how big their real-estate losses are. (New accounting rules let bankers set the value of their own toxic assets)

When I use a word," Humpty Dumpty said in rather a scornful tone, "it means just what I choose it to mean – neither more nor less.”

Bernanke consumer plan = selling sand to Saudi Arabia

My latest rant from BlownMortgage

How deaf is Ben Bernanke? With the US savings rate hitting a 14-year-high, the Fed unveils a $200B plan to “aimed at boosting the availability of credit to consumers and small businesses.” While I hope this will be of use to businesses in need of it, consumers have already made it clear they’re not interested.

As Morgan explains:

The government is trying to inject liquidity in to the ABS markets for ABS comprised of auto loans, student loans, credit card debt, home loans, etc. The idea being that investors have not bought these securities because they have been unable to secure financing to purchase them through the private sector. The government will make financing available to those investors that purchase AAA-rated ABS to try to reopen the market and make more credit available to main street USA.

I guess the theory is consumers will ignore EVERY SINGLE PIECE OF ECONOMIC INFORMATION AVAILABLE and decide to buy stuff because the credit is now available. At a moment when we are losing (conservatively) 600K jobs A MONTH, who in his or her right mind is going to buy a new car, house, or hot tub? ESPECIALLY when prices are being pulled toward terminal velocity. If consumers did this it would be so far past irrational as to call it “insane exuberance.”

Dear Ben, a lesson from Marketing 101: In order to be successful a product has to fill a need in the marketplace. Consumers don’t want debt! Not only do they not want debt, they’re not going to spend the money they already have. So there’s no way you’re going to get them to purchase stuff right now. Consumer behavior is now a lagging, not leading economic indicator. Consumers will start spending after — NOT BEFORE — the economy gets back on track.

Read more by going here …

Would you buy a used economic commentary from this man?

My latest over at BlownMortgage:

The Fed has announced it will now buy commercial paper from money market mutual funds and endorsed the idea of another economic stimulus package. Far be it from me to turn up my nose at free money. I could use a handout … I mean stimulus check as much if not more than most of Wall Street. But I am disturbed that these efforts continue are in keeping with previous Bush Administration policy to never have a clue how something – like a war or a however many bailouts there will be – will be paid for.

Click for more of this and my paen to William Proxmire.