Banks Can Still Do Some Magic Tricks

Posted on June 21, 2009 and updated January 23, 2019 in Life Insurance Canada News 3 min read

Canadian DollarTV, Internet, newspapers, and discussion with neighbours – economic issues become everyday part of our lives. The main actors in this play are big financial institutions and national governments. The financial world has never been simple, but now it’s covered in thick fog.

The latest magic tricks have been uncovered by some experts like global investing expert Keith Fitz-Gerald. It’s important to say these “tricks” are not illegal or deliberately cloaked. Everything is legal and in line with legal rules, however, banks are not presenting them very proudly. You will understand why shortly.

Let me describe the situation to you. Few months ago, big banks didn’t survive the hard landing and simply – bankrupted. Wachovia Corp., Countrywide Financial Corp., National City Corp., Washington Mutual Inc. and some other. Some other big banks like JP Morgan, Bank of America or PNC have bought these decaying corpses for a very decent price (JP bought Washington Mutual for $1.9 billion).

Along with everything else, they also bought their toxic loans. And now the magician’s performance begins. They were allowed to mark these debts in the books to fair value during the purchase process. In JP’s case the value of toxic assets was cut down by 25%. This happened just a few months ago.

Now, the banks are ready to do just the opposite – as the economic situation calms down, debts are slowly being repaid. The difference between booked value and repaid money turns into profit. And since the book value has been kept very low, the profits are huge. And that’s not all – as bank see these debts can significantly appreciate in their lifetime (and they can), they are allowed to write up their (future) value in books no matter what the real situation is.

The result is simple. Just by changing few numbers on paper, banks are able to reap huge profits and make billion dollar changes on the balance sheet. However, the assets are exactly the same ones, marked as “toxic” a few months ago. So these profits and balance changes are just made up from thin air. This is what we saw at the beginning of the financial crisis – profits and asset values blown by skilled accountants. Now the banks are trying to overcome the current situation blowing the same bubble again.

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