During the financial crisis, investors fretted over "toxic," hard-to-value assets that banks were carrying. Those fears have faded as bank profits have rebounded, loan delinquencies have declined, and bank stocks have soared 25% in the past five months.
Some banks have yet to reckon with all their "toxic" assets, among them mortgage-backed securities, whose values took a hit when the housing market cratered. Above, construction on a home in Phoenix.
But banks still hold plenty of the bad assets that once spooked investors: mortgage-backed securities, collateralized debt obligations and other risky instruments. Their potential impact concerns some accounting and banking observers.
In part due to those bad assets, the top 10 U.S.-owned banks had $13.8 billion in "unrealized losses" that have lasted at least a year in their investment portfolios as of Sept. 30, according to a Wall Street Journal analysis. Such losses are baked into banks' book value, but don't get counted against earnings as long as the banks believe the investments will later rebound. If those losses were assessed against earnings, it would have reduced the banks' pretax income for the first nine months of 2010 by 21%, according to the Journal analysis.
Unrealized losses are just one way in which the troubled assets obscure banks' true financial condition, accounting experts say. With the banking recovery well under way, they think the banks should no longer delay a reckoning and should count those losses against earnings.
Another problem: Even when banks do take real charges because of their securities losses, accounting rules allow them to keep some of those charges from hurting their bottom line.
Making the picture even murkier, the value of many risky assets are based solely on the banks' own estimates—leaving valuations uncertain and, some critics say, overstated.
"They're still inflated because I don't think the bullet ever really got bitten," said Jack Ciesielski, publisher of the Analyst's Accounting Observer.
rest at http://online.wsj.com/article/SB10001424052748704570104576124701144189910.html?mod=dist_smartbrief
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