Banks Suffering From Unintended Consequences of Their Own Design

Barry Ritholtz has a good piece up this morning about how the problem with the banks is that we have no idea what they are worth – which is exactly how they wanted it – and that’s impeding potential buyers from stepping in to buy shares.  As Ritholtz puts it simply: “they all have something in common: Their balance sheets are opaque.”  Back in 2008, banks successfully lobbied to have mark-to-market accounting (where their positions are marked to market prices) abandoned, and now we are left staring at a proverbial black box that we can’t value.

Ritholtz concludes:

“The bottom line is this: Investors do not really have a clear idea of how healthy any of these banks truly are. We do not know the state of their balance sheets. We do not know what their exposures are to mortgages, to Europe, to Greece, etc. They could all be technically insolvent, as far as any investor can tell.

And that is exactly how the bankers wanted it.

But given the trouble in Europe, and the likely problems in housing if the US goes into a recession, Investors have decided they cannot take the risk of a holding an opaque, possibly under-capitalized probably over-leveraged financial firm blindly. They are telling the banks no thanks, we are not interested, we are going to be prudent and we have to assume the worst. Hence, for the second half of 2011, they have been selling off their holdings in these opaque, potentially insolvent too big to succeed entities.

Bankers, enjoy your beds. You made them, now lay in them . . .”

Click over to read the whole piece.


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