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Mark to market is not the bottom
Our views on banks do not change following the FASB mark to market rule changes. Our core view is that banks will not bottom until nonperforming asset growth decelerates. All of the data points we track in 1Q point to acceleration.
Mark to market accounting changes provide banks with a little bit of Tier 1 capital relief, less earnings volatility from securities impairments (OTTI) as banks now estimate the credit loss rather than take the mark to market charge, and maybe more flexibility in putting assets into Level 3 and marking to model.
Against that, however, we note: (1) investors are not focused on Tier 1, (2) for securities, ultimately the losses are what the losses are and if the bank is wrong it will come at a later date, and (3) we believe investors will look through increases in tangible common at the expense of a big increase in Level 3 assets. Also, to the extent that banks do mark up risky securities it will make PPIP even harder to execute as banks will be marked further from the bid.
Richard's prediction is that until non-performing assets decelerate there is no bottoming in sight for banks. The math: bank assets are going bad at a 3% annual rate while the rate of pre-provision earning is 2.5% for the industry, that is loans are going bad faster than banks earn money.
Looks like the FASB just sold they souls for pennies on the dollar.