Banks Find New Ways to Ease Pain

¶ … Banks Find New Ways to Ease Pain of Bad Loans describes the various ways banks holding large amounts of bad, or soon to be bad loans are, in effect, hiding these bad assets. For instance Astoria Financial Corp. extended the number of payments a customer had to miss before the loan would be listed as "nonperforming." By extending the number of missed payments from two to three, Astoria wiped close to $40 million off it's books. Well Fargo did a similar thing by extending the number of days a customer had to miss payments from 120 to 180 before writing these loans off. Bank Atlantic Bancorp tried something a bit different, they created an entirely new subsidiary and transferred $100 million of troubled loans to this new subsidiary. They managed to simply erase the bad loans from their books while avoiding federal regulators by creating a new subsidiary that was not regulated by the federal regulators. In the case of Colonial Bancgroup, they simply changed their charter from a federally regulated bank to a state regulated bank. This avoided federal regulators who were considered to be more antagonistic and switched regulatory responsibility to state regulators. While these financial maneuvers may have been legal under GAAP guidelines, it is likely that these financial institutions simply found loopholes in the regulations; and whether it was right or not will be decided by the company's stockholders.

The following financial institutions may have found a way to remove bad loans from their books, or even avoid federal regulators, but they did not solved the fundamental problems created by these loans. Redefining terms and running away from regulators will not pay off these loans, it will only hide them from stockholders and regulators. Even if one redefining the terms of a loan, it only delays the time when it is finally defaulted on, but it still comes eventually. While these institutions insist they are giving the customer more time, they are also just delaying the inevitable. Eventually everything will catch up and stockholders will discover that their belief in the company's solvency was just an illusion created by fancy bookkeeping. The company can establish a "reserve" of bad loans which may take them off their books and create the illusion of profit, but they are still responsible, and by extension the consumer, who will be forced to pay through higher fees and charges, higher interest rates, and other financial tricks.

Both Wells Fargo and Astoria Financial used financial tricks to hide their losses from their stockholders and create the illusion of success. According to governmental guidelines, these firms were supposed to be transparent with their accounting methods. And technically they were, however, accounting techniques are complicated and convoluted, and loopholes can be found. If there is to be real transparency, these firms will have to be fully open to regulators and stockholders, explaining everything and every aspect of their books. All subsidiaries will have to be made public and also be transparent. Stockholders have a right to know what the executives of their firms are doing, and how they are doing it. Ultimately it is up to the stockholders of these companies to insist upon a fuller explanation of company policies.