As the banking business goes from bad to worse, some pummelled banks like Wells Fargo (WFC) are responding by changing the way they define “bad debt.” Others, such as Wachovia (WB) and Washington Mutual (WM) are cherry-picking rosy economic statistics. This makes the banks look better on paper. It doesn’t do diddly for their loan loss exposure.
- Change the definition of “non-performing loan”. Astoria Financial just shrank its bad loan balance to $68 million from $106 million by switching its categorization of home loans as “nonperforming” to when the borrower misses at least three payments, instead of two.
- Delay write-offs to make your loan portfolio look healthier. Wells Fargo (WFC) investors are worred about $83.6 billion of home-equity loans. So Wells stopped writing off loans that were 120 days behind and started waiting 180 days.
- Hide crappy loans in subsidiaries, to avoid wrecking your capital ratios. “BankAtlantic ansferred about $100 million of troubled commercial-real-estate loans into a new subsidiary. That essentially erased the loans from BankAtlantic’s retail-banking unit… Because the BankAtlantic subsidiary that holds the bad loans isn’t regulated, it doesn’t face the same capital requirements. But the new structure won’t insulate the parent company’s profits — or shareholders — from losses if borrowers default on the loans, analysts said.”
- Use positive economic statistics instead of negative ones. Wachovia (WB) and WaMu (WM) use data from the Office of Federal Housing Enterprise Oversight instead of the more pessimistic sources that other banks use.
- Switch your charter from federal to state so you are overseen by wimpier regulators. “Colonial Bankgroup changed its Colonial Bank unit from a nationally chartered bank to a state-chartered bank, effective immediately. That means the regional bank no longer will be regulated by the Office of the Comptroller of the Currency, which has become increasingly critical of banks such as Colonial with heavy concentrations of loans to finance real-estate construction projects.”
If only banks put as much effort into making intelligent loans.