The Banks, Again

I just finished reading Geithner's plan and the new mark to market modifications being proposed by FASB. Some thoughts on the new rules in light of the Geithner plan.

Positives for banks

- Illiquid assets can be considered just that, illiquid, rather than impaired.

- Losses from impairments can be written down over the life of the entire bond.

- Securitized mortgage inside a bond goes bust, house is foreclosed, bank takes a loss and it can write that loss down over the life of the bond assuming it holds the bond.

- Banks must include in definition of impairment their own estimates of what will be impaired in the coming 18 months, I believe, leaving them within existing guidelines.

Negatives for banks:

- This ends opacity -- the banks will have to specify what is impaired and by how much versus how much is illiquid. They can no longer hide impaired assets under the rubric of "illiquid assets."

- Geithner's plan, when implemented, theoretically ends all notions of illiquidity of RMBS once the first bid is accepted. Will that moot this new definition or will the banks be allowed to stretch the definition if illiquidity.

-The banks have to state that they will hold the security to maturity or for an extended period of time. This creates a potential clawback on earnings if they decide to sell the asset before it matures or in a too short a period of time.

The larger issue is where do the new rules fit with the Geithner plan and the stress tests. Before I read these documents, I assumed Treasury would queer the stress tests and make the banks look better than they are. Now I am not so sure -- the one thing all three initiatives have in common is a push towards transparency and although I don't believe on conspiracies I also do not believe in coincidences outside of a Dickens novel. The Geithner plan will identify who is selling assets and wt what price; the new mark to market rules will identify what is impaired, what is illiquid and create a situation for a bank holding illiquid assets where they have to defend not participating in auctions; the stress test will be able to be run against assets banks have declared impaired, not the bucket that includes illiquid assets, so the banks have no where to run and hide.

Interesting -- and this should give every person looking to short a bank -- not the sector -- more information over time to do so. The charts say the bank stocks could be nearing a top. With Citi more than a triple and BAC more than a double, they might be right.