Saving the Banking System in Four Easy Steps

Those bank CEOs may have been, as my friend Larry Kudlow put it,  "dead men walking into a Soviet show trial," but something of use came out of it -- an idea on how to fix the banking system from Citigroup CEO Vikram Pandit. He wants bank mark-to-market losses to be realized over time rather than immediately.  Vinny Catalano tell us how that process might work:

1) Bank surrenders certain “toxic assets” to the PPIB

2) Bank declares such assets as a “loss” but does not record the entire loss to its income statement

3) Bank writes down a portion of the “loss” immediately and schedules to do same over the life of the asset

4) Bank retains the ability to revalue such assets over time via a note from PPIB In dollars and cents,

Here's how this works:

1) “Toxic assets” held on the books for $0.80 on the dollar are surrendered to PPIB at $0.30 on the dollar

2) PPIB (Treasury and investors) own the assets at $0.30 Bank lists a $0.50 off-balance sheet “loss” that is amortized at 10% per year, or $0.05 to the income statement (and then to the balance sheet)

3) Over time, markets become more normalized, the economy recovers and the “toxic assets” rise in value to $0.60, where they come due and cease to exist

4) Bank, which has written down the loss over several years, say $0.30 cents in total, now realizes a $0.10 gain ($0.60 cents final value, $0.50 amortized value still on the books, $0.10 gain)

Reader Comments Read all comments (7)

Add Your Thoughts

Comment Name State Select One AL AK AZ AR CA CO CT DE DC FL GA HI ID IL IN IA KS KY LA ME MD MA MI MN MS MO MT NE NV NH NJ NM NY NC ND OH OK OR PA RI SC SD TN TX UT VT VA WA WV WI WY International Email

Please enter the two words below into the text field underneath the image.

Incorrect please try again

Enter the words above: Enter the numbers you hear:

Your comment will be posted immediately, unless it is spam or contains profanity. For more information, please see our Comments FAQ.