Monday, March 31, 2008

Games Banks Play - Number Three

Over the next couple of years, many banks will fail and be taken over by the government or larger institutions. This will be an agonizing process that some banks will try to avoid at any cost. I will explain in a multi part series what to watch out for:

Held for Sale Account - When a bank intends to sell a loan, it puts it into an account called "held for sale." A bank may use this account to stuff poorly performing loans. Accounting rules say a charge to the Allowance for Loan and Lease Losses (ALLL) must be made at the time the loan is transferred if the loss is due to credit factors. If the decline is the result primarily from interest rate fluctuations or changes in foreign exchange rates, known as market factors, it should be recorded as a charge to a noninterest expense account. I suppose an unscrupulous bank management can hide losses by claiming a decline in value due to "market factors" rather than "credit factors."

Part One

Part Two

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