Remember in prior emails and blog ( www.activerain.com/blogs/rconcepcion ) we had discussed that one of the key signs of recovery to watch for would be efforts to take bad assets off bank balance sheets in order to improve their financial health. This would in turn make it easier for them to lend out new money.
Two important new developments in the past week:
1) The Financial Accounting Standards Board (FASB) agreed to relax “mark-to-market” rules. Mark-to-market has up to now required that businesses value assets on their books at current market value. This has been very detrimental to banks because the market for many of the loans on their books has all but dried up. Therefore, they were forced to write down the value of these assets even if they had no intention of selling them.
This resulted in huge losses on paper and a need for enormous capital infusions (hence the TARP funds).
With the change in the ruling, there will now be more leeway in valuing these assets. For example, the majority of these assets are performing loans that are generating income and can be valued based on the net present value of those future cash flows.
2) Wells Fargo posted a record quarterly profit for the first quarter of 2009. The $3Billion profit was a 50% increase compared to the $2Billion recorded for the same quarter in 2008. Banks are able to borrow money at extremely low rates right now and are making a very healthy profit on the spread as they lend the money out at retail rates. This will help improve the balance sheets of the entire banking sector.
Both of the above will make banks stronger financially and hopefully result in further easing of credit. The stock market agreed with a rally fueled primarily by these announcements.
Obviously good news and another strong sign of potential recovery.
We continue to enjoy record low interest rates due partially to the governments intervention via continued purchases of mortgage backed securities and treasury bills. I believe this to be a temporary window of opportunity for probably the next 3-6 months. As the government backs away from these purchases, upward pressure on interest rates is likely to be seen.