Saving the Banking System in Four Easy Steps

Citigroup's CEO has a fascinating idea.

By + More

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)


You Might Also Like