Toxic Asset Plan May Appeal Little to Banks, Insurers on Write-Down Rule

By Jody Shenn
Bloomberg News
March 27, 2009

March 27 (Bloomberg) -- Banks and insurers are unlikely to sell many mortgage securities as a result of U.S. Treasury Secretary Timothy Geithner's plan to bolster bids for the bonds to revive lending, in part because of a likely accounting change, Amherst Securities Group LP analysts said.

Under current rules, financial companies can typically avoid writing down many devalued investments until they see the bonds likely returning less than they paid. The assets must then generally be marked down to current prices.

The Financial Accounting Standards Board, pushed by lawmakers including Rep. Barney Frank to change rules to ease the credit crunch, said on March 16 it may allow the securities to be marked down only by expected losses, not to current prices, which partly reflect buyers seeking high returns. Frank, a Massachusetts Democrat, is chairman of the House Financial Services Committee.

The proposal "is quite important" in judging how much Geithner's program will be used, Amherst mortgage-bond analysts in New York led by Laurie Goodman wrote in a report yesterday.

"If the security is not already written down, the bank has no incentive to sell," they wrote. "Yes, they might be written down at some point, but postponing these losses allows time to build reserves through earnings."

Under Geithner's plan, announced March 23, banks and other mortgage-bond owners may be able to sell holdings at higher prices as the Treasury invests in public-private funds and offers loans along with the Federal Reserve to buyers. The initiative is part of worldwide government efforts to boost lending and thaw credit markets to thwart a global recession.

Hedge Funds

Off-loading mortgage bonds to government-financed buyers will be "most likely dominated by hedge-fund selling, with perhaps some selling by banks carrying legacy assets in their trading portfolios at market values," Amherst analysts wrote.

Current and former investment banks such as Goldman Sachs Group Inc. and Morgan Stanley are more likely to carry bonds in "trading" designations, which are regularly marked to market, according to their financial reports. Commercial banks and insurers such as Bank of America Corp. and MetLife Inc. usually hold them in "available-for-sale" portfolios, where value declines don't affect earnings unless losses are expected.

FASB, the U.S. accounting rulemaker, is set to vote on the proposal on the treatment of "other-than-temporary impairments" on April 2, after a comment period.

Amherst is a securities firm specializing in trading and advising investors on home-loan debt. Goodman is the former head of fixed-income research at UBS Securities LLC. Her team was top ranked for "non-agency" mortgage debt in a 2008 poll of investors by Institutional Investor magazine.

Analysts including those at Amherst say banks may be less likely to sell loans through a companion U.S. program also introduced this week for unsecuritized real-estate debt because of accounting rules for loans, which are typically carried at face value and reserved against when banks expect losses.

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