Big Sh-tpile Is Still Very...

...shitty. I don't see how the economy will substantively improve without getting rid of the zombie banks--those banks that are insolvent, that have more debts than assets. Since they are unable to make loans, they're essentially non-functioning banks. The federal government for the first time since the banking crisis erupted has decided to make banks report on a quarterly basis how much their loan portfolios are actually worth. Not the original value of the loans, but how much the underlying properties could be sold for:

Check out the footnotes to Regions Financial Corp.'s latest quarterly report, and you'll see a remarkable disclosure. There, in an easy-to-read chart, the company divulged that the loans on its books as of June 30 were worth $22.8 billion less than what its balance sheet said. The Birmingham, Alabama-based bank's shareholder equity, by comparison, was just $18.7 billion.

So, if it weren't for the inflated loan values, Regions' equity would be less than zero. Meanwhile, the government continues to classify Regions as "well capitalized."

While disclosures of this sort aren't new, their frequency is. This summer's round of interim financial reports marked the first time U.S. companies had to publish the fair market values of all their financial instruments on a quarterly basis. Before, such disclosures had been required only annually under the Financial Accounting Standards Board's rules.

The timing of the revelations is uncanny. Last month, in a move that has the banking lobby fuming, the FASB said it would proceed with a plan to expand the use of fair-value accounting for financial instruments. In short, all financial assets and most financial liabilities would have to be recorded at market values on the balance sheet each quarter, although not all fluctuations in their values would count in net income. A formal proposal could be released by year's end.

Recognizing Loan Losses

The biggest change would be to the treatment of loans. The FASB's current rules let lenders carry most of the loans on their books at historical cost, by labeling them as held-to- maturity or held-for-investment. Generally, this means loan losses get recognized only when management deems them probable, which may be long after they are foreseeable. Using fair-value accounting would speed up the recognition of loan losses, resulting in lower earnings and reduced book values.

While Regions may be an extreme example of inflated loan values, it's not unique. Bank of America Corp. said its loans as of June 30 were worth $64.4 billion less than its balance sheet said. The difference represented 58 percent of the company's Tier 1 common equity, a measure of capital used by regulators that excludes preferred stock and many intangible assets, such as goodwill accumulated through acquisitions of other companies.

Wells Fargo & Co. said the fair value of its loans was $34.3 billion less than their book value as of June 30. The bank's Tier 1 common equity, by comparison, was $47.1 billion.

I don't see how the economy can substantially improve (which is different from not deteriorating) until banks are forced to admit how deep in the hole they are. Yes, that means someeven more banks will go under, and even more will have to be temporarily nationalized (we currently nationalize anywhere from one to six banks every week). It's going to take a while, and until Big Shitpile is correctly valued, lots of banks (which know how little they're worth, even if no one else does) aren't going to lend money to businesses. I know several small business owners who are still afloat in Boston, and they've had their credit lines cut because banks are retrenching.

Birthers and deathers notwithstanding, this problem isn't really being dealt with yet.