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Banks Squealing Over Volcker Rule Exposing Their Dirty Laundry. Will Regulators Capitulate?

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By George Bailey, who has worked in senior compliance roles at Big Firms You’ve Heard Of and is also a member of Occupy the SEC

The first few legs in the in the Volcker Rule repeal relay race are now under way. The reporting of losses at Zion’s Bank, which management blames on the Volcker Rule (when the losses had long existed but remarkably cooperative auditors had apparently agreed with management’s decision not to mention them), was the opening shot.

In the bankers’ lane, the baton containing Zion Banks “unexpected losses” on their underwater CDO portfolio has been handed off to the industry associations who are running full bore to hand it off to potentially still-bank-friendly regulators who are expected to neatly dispose of it at the end of the race.

In the other lane, the Agencies’ baton is loaded with tough and reasonably unambiguous regulatory language, supported by extensive discussion and commentary in the rule that refutes the complaint that Zion and the community banks are unwitting casualties of an unintended result of the rulemaking.

Lining the edge of the track are bank-friendly Congresspersons poised to stick their legs into the Agencies’ lane, while the spectators are distracted by the mainstream financial press misdirection.

It’s hard to tell who’s winning.

The regulators appear to be in the lead according to Bloomberg

U.S. banking regulators provided advice on how banks should treat certain securities in a document quickly panned by industry groups for failing to address their concerns that the newly finalized Volcker Rule will force banks to take losses on the securities

In other words, the regulators basically reiterated the rule and its commentary and failed to “address the bankers concerns” by modifying the rule. The New York Times’ Dealbook, on the other hand, apparently misread, and consequently misreported the memo, declaring a victory for the banks while confirming the Agencies said nothing new.

However, the Regulators may not have their best runners in this race, and this is a cause for concern.

Bloomberg’s Matt Levine reported that the critical clause that snared “Volcker’s First Victim” was buried in footnote 1856. In very brief form, Zions was still a large holder of so-called TruPS CDOs, which were very attractive to banks due to the way there were treated for regulatory and capital purposes. Zions’ “victimhood” was more the result of poor accounting of these seriously underwater positions as Yves and Bloomberg’s Jonathon Weil, among others, have already clarified.

But Levine does raise one good point in his piece.

Always read the footnotes is the lesson here, and everywhere

As it happens, I have read a few of the footnotes (at least 284 of them). And one of them reveals that the Agencies chose to punt on an issue that is at the heart of the reporting of losses at Zions:

This commenter also argued that an important metric that is missing is a Liquidity Gap Risk metric that estimates the price change that occurs following a sudden disruption in liquidity for a product, arguing that there needs to be an industry-wide effort to more accurately measure and account for the significant effect that liquidity and changes in its prevailing level have on the valuation of each asset .suggested that entity-wide inflation risk assessments be produced on a daily basis. 2786

It is extremely curious that the Agencies chose to wave away the issue of liquidity risk as not worth bothering about and further stated that the commenter had recommended it be done to contend with inflation risk. Occupy the SEC was the source of that comment and did not mention or even imply that inflation risk was a serious concern, so the footnote looks to be either a remarkable misreading or straw manning.

Moreover, anyone who regularly read the financial press during the crisis could readily cite cases where liquidity dried up, to the degree that it created serious, even systemic, risk at institutions and in markets. For starters: asset backed commercial paper, auction rate securities, subprime mortgage backed securities, and CDOs. (Remember also that “illiquidity” does not necessarily mean there are no buyers, but what the buyers are willing to pay would lead to current owners realizing such large losses that few to no trades take place).

It is precisely this disruption in the liquidity of the TruPS CDO product that is causing Zions, due to its vastly outsized position relative to its peers, such immediate pain. The risk of an overly large position relative to normal trading activity is, or should be, well known to regulators; it was the cause of the demise of Long Term Capital Management (which astonishingly had interest rate swaps positions equal to roughly 1/10th of the total market) and the hedge fund Amranth, and was the reason the London Whale position was so costly to unwind.

Indeed, only 3% of Us banking assets are invested in the product Zions is suddenly forced to disclosed losses on. Zions’ disproportionate share of the loss is not in itself a systemic concern and the political blowback and industry groups targeting of the underlying rule requirement are disingenuous. The real fear in the bankers’ team is that the rule is now applicable to positions the banks previously believed were safe from much scrutiny.

The commenter (Occupy the SEC) urged the regulators to require the banks to provide information that would alert them to risks such as Zions has now disclosed to avoid potentially systemically disruptive events.

Unfortunately, the Agencies response to this comment was:

After carefully considering the comments received, these and other proposed metrics have not been included as part of the final rule.

Given that the Agencies appear to be standing firm in their initial response, there is a great urgency NOW for them to rethink their position and require disclosure of the liquidity impacts from positions that will have to be unwound as a result of the final rule. The products that are at the greatest risk are discussed in more detail in this summary at Lexology. And it’s a potentially very large list.

It would be an appalling lapse on the part of the regulators to continue to choose to remain uninformed of the potential for large and sudden liquidity disruptions that may result from the implementation of the final rule. The additional surprise element resulting from the dubious accounting for these positions should alarm the regulators enough to rethink their requirement for a useful pre-emptive reporting metric. Given that the London Whale fiasco was the reason for late-in-the-game toughening of the final rule, this omission is remarkable, particularly since the regulators cite the requirement for robust and continuous reporting as a key element in an effective compliance regime.

Zions’ disclosure could be the tip of the iceberg of embedded losses, and the immediate and urgent response of anti-regulatory army is a clear signal there are losses lurking. It’s one thing to engage in forbearance when a regulator thinks disruption is temporary or an institution can earn its way out of trouble. It’s quite another to choose to ignore an all-too-frequent source of trading losses and thus put yourself in a position to be blindsided. Again as we saw with LTCM and the London Whale, institutions that have taken large losses too often take even bigger bets to try to claw their way back, and wind up compounding the damage. If the authorities continue to punt on this issue, it may be an early sign that the Volcker Rule is destined to be Potemkin regulation.

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26 comments

  1. Banger

    Great reporting, Yves. this is an interesting story because it is one of those cutting edge of politics issues. How much and how far does the Volker Rule go depends on the political situation of the moment as well as the actual liquidity risk you talk about. I don’t know enough about financial regulators to know how political they are though the few senior people I’ve known in regulatory agencies tended to be political but honest, by Washington standards.

    How the race turns out may not be just a function of Congress people tripping up regulators it may be also about Congress making sure the bankers behave–since it is not just bankers who pay campaign “contributions” to Congress–powerful lobbies in other sectors do not want a repeat of 2008. My political nose suspects that politics is drifting in a vaguely leftist direction (I see left and right as a away from or towards oligarchy) after 35 years of steady movement to the right–so maybe the regulators may choose not to punt.

  2. financial matters

    Great line! “Lining the edge of the track are bank-friendly Congresspersons poised to stick their legs into the Agencies’ lane, while the spectators are distracted by the mainstream financial press misdirection.”

    Thanks for keeping the spectators looking in the right direction.

  3. docg

    Very sadly, “Potemkin regulation” is likely to be the most we can expect, Yves. As I see it, the financial system is inherently beyond regulation — though certainly not beyond the illusion of regulation, as you imply. It’s not only because the banks are so powerful as to intimidate the regulators, no, the problem goes deeper than that. As I see it, this is a flaw (or as some might prefer to see it, a strength) of capitalism itself, and the very reason why the bankers so often argue for laissez faire: the system can work ONLY if permitted to regulate itself. Yet paradoxically, it is incapable of effectively regulating itself. In other words, capitalism is inherently self defeating — as Marx, of course, informed us some time ago.
    I wrote a short essay on this topic back in 2009 and I think it still applies: http://amoleintheground.blogspot.com/2009/05/stress-tests-regulatory-capture-and_12.html

    1. susan the other

      And as Bhide said in today’s post – but didn’t put too fine a point on it. I’m wondering if 400 million in write offs will be seriously damaging to Zions. JPM’s $8 billion whale didn’t seem to slow them down. Easy come easy go. So why don’t we just declare derivatives all null and void? The banks are just one big freaky pudding where everybody’s loss is also everybody’s gain. Then the “investment vehicles” (hilarious term) can be written down without all the hysteria.

    2. F. Beard

      Once again, a government-backed banking cartel is fascist (government for the rich), not the free market or anything close to it.

  4. AA Bender

    With all due respect, the Zions Trups situation is nothing like the London Whale, Long Term Capital, an over-sized derivatives position, or any trading or hedging position issue. It is, for the most part, an unintended consequence situation. Implement the Volcker Rule by all means, but let’s give smaller bank victims their due. They didn’t get to lobby as extensively as JPM et al.

    As background, Trups (more accurately “Pooled Trups” in Zion’s case) are pools of 50+ bank holding company debt obligations all of which have a stated maturity, usually 30 years, and various levels of subordination. If Zions’ external auditors have deemed that “other than temporary impairment” DOES NOT exist, then the implication is that at maturity these bonds will pay 100 cents on the dollar. Thus these Pooled Trups are like any other “money good” bond or loan held on a US bank’s books– it is expected to pay 100% at maturity but may have a mark below or above market at any point in time. It is therefore held on the banks books at historical cost and not market. (Whether this makes sense or not is different discussion…)

    So applying the Volcker Rule to certain “held to maturity” bonds–CDOs like the Zion’s portfolio–is merely making commercial banks realize losses that they don’t need to realize and would not realize if they held the Trups until they matured and were paid in full. This Zions bellyaching is not about trying to peel back the Volcker Rule. It is about applying a rule to a situation which it wasn’t meant for.

    In my experience, the use of “held to maturity” is one of the few accounts scrutinized regularly and strictly by federal bank regulators. They rarely let banks have amounts of “held to maturity” securities that exceed the amount of the bank’s regulatory capital. Why? Because capital is the long-term funding of a bank that presumably most closely match funds the “held to maturity” securities. So Zions could presumably hold these and not worry about their liquidity.

    As important, most of these Pooled Trups do not trade under 100 because of poor credit issues. (Last I looked, the AAAs trade at about 70 or so) Bear in mind that the Pooled Trups trade under 100 because they are typically floating rate notes priced at a lowly Libor +.25% or so. Given the current interest rate environment, the discount is almost exclusively interest rate driven not credit driven.

    So think about it: Zions is now being forced to sell this portfolio to the market and take a loss that it doesn’t need to take. Some other market participant is going to buy those Pooled Trups at a discount and get paid 100% at maturity. If interest rates rise, the floating rate on these bonds will go up to 100% before maturity.

    What you will be seeing, if this happens, is essentially an unintended, direct wealth transfer from the regulated banking industry (Zions) to the unregulated shadow banking industry (Trups buyer). Is that the salutary effect everyone expected from the Volcker Rule?

    1. Yves Smith Post author

      I find your comment puzzling, since you provide a lot of technical detail which looks intended to cover up multiple straw men and dubious claims. George Bailey CLEARLY stated:

      1. Zions did not represent a case of systemic risk

      2. Banks are nevertheless (through friendly journalists and lobbyists) trying to use it and the likely exposure of other unrealized losses to build a case for “clarifying” as in weakening the Volcker Rule

      3. The reason not to consider giving ground on Zions is that the regulators already chose to punt on the liquidity risk issue. Even though Zions is a trivial case, it illustrates that it can be important on an institutional level and it has been systemically important multiple times in the past.

      In addition, your assertion that “the TruPS must be OK because their accountants signed off of them and the regulators waived then past” is simply bollocks. TruPS have long been known to be problematic, for instance, see this Wall Street Journal article from 2010:

      From 2000 to 2008, more than 1,500 small and regional banks issued about $50 billion in trust preferred securities, according to Red Pine Advisors LLC, a New York firm that helps small banks value illiquid investments. The banks favored the securities, a mixture of debt and equity, because they could be counted as capital for regulatory purposes. That gave the banks firmer footing to lend and boost earnings.

      Many of the trust preferred securities were placed into pools of collateralized debt obligations. Rating downgrades have battered the value of many trust preferred securities, which trade infrequently. Still, lots of investors would rather hold them in hopes that the securities will rebound before they mature, instead of selling them back to the issuing bank at a loss.

      http://online.wsj.com/news/articles/SB10001424052748703455804575057510391065200

      The fact that Zions is recognizing a loss in moving them to the AFS portfolio says the impairment is indeed “other than temporary”. And please see Francine McKenna on how often accountants bend to clients’ wishes on far more material matters than this. The doctrine of secondary liability insulates them from liability to anyone other than the immediate client, so they have perilous little to lose from letting clients fudge now and again.

      As to your “oh you are enriching the [by implication evil] shadow banking industry to the detriment of [good honest banks], puhleeze. Jonathan Weil, Tracey Alloway and others have criticized Zions for its accounting, and these complaints are not new. This is management finally getting its comeuppance. If there are economic consequences, so be it. This is no different than a electronics retailer buying too many iPads and having to take a loss when he liquidates them after Christmas. But per your logic, oh, that would be terrible because the [virtuous brick and mortar retailer] was losing out to the [evil bottomfishing] liquidator.

      But even that [misleading] argument may not be germane. The Journal article also indicates that the buyers of TruPS are typically the issuing bank, not “shadow banks” as you claimed.

      1. George Bailey

        as to your point:

        ‘So applying the Volcker Rule to certain “held to maturity” bonds–CDOs like the Zion’s portfolio–is merely making commercial banks realize losses that they don’t need to realize and would not realize if they held the Trups until they matured and were paid in full.’

        The rule applies to all positions, not just to those in the Held to Maturity bucket. Indeed, the fact that these have been classified as such is the alarm bell OSEC is trying to ring to warn of additional liquidity surprises resulting from gaming the accounting rules to bury unrealized losses, as appears to be the case here.

        Hybrid CDOs like the Zion’s position which contain elements of debt and equity were clearly an intended target of the Volcker rule. That the banks took the gamble that the regulators were just kidding and that these and other hybrid CDOs would be exempt was a bad call.

        If the other community banks have been properly accounting for these investments, there should not be any earnings surprises now. They will merely sell their properly valued securities in the market at market prices.

        And why assume that selling Held to Maturity bonds always generate losses. Is that a banker Freudian slip. Held to Maturity should not mean Hide till Maturity. Those portfolios should contain valuable (and profitable) positions.

  5. AA Bender

    Yves and George Bailey:
    Let me see if I can take this in parts.

    Let me preface this by noting that I have read and agree with a lot of your stuff or I wouldn’t read it much less comment on it. I am sorry that you think my intention was “to cover up multiple straw men and dubious claims.” Actually what I am trying to do is bring out some banking facts, and point out that using Zions as the poster child for Volcker Rule whining is not as strong a case as you seem to think. There are a lot reasons that it is randomly punitive and as important, it gives bank associations a stick to hit back with. Now if you think Zions deserves to take on the chin for other reasons, I certainly can’t argue with you there.

    Anyway, first you note that this is important because the regulators passed on the liquidity issue; however holding bonds in a Held to Maturity (HTM) account already has regulatory safeguards as I mentioned earlier: the amount of such HTM securities are not typically allowed to exceed the bank’s capital so HTM securities are fully match funded.

    Second, I too have seen auditors in the pockets of their clients and perhaps Zion’s auditors have punted on the bank’s Pooled Trups valuation issue. However, Zions took some massive mark-to-market and “other than temporary impairment” (OTI) losses on its Trups/Pooled Trups HTM and Available for Sale (AFS) portfolio in the 2-3 years after the crisis. So given Zion’s large overall portfolio write offs, I find difficult to believe that Zions’ auditors slyly cooperated on the HTM but not on the AFS bond valuations.

    Third, I have indeed read the WSJ article on Trups with Red Pine (talking their book before they were sold) and most other published materials on Trups and Pooled Trups including the FDIC’s semi-brain-dead slam on Trups. I would just read you back your own caution about “friendly journalists” before concluding that what the WSJ says is gospel. Maybe we should just agree that the WSJ is like, well, The Apocrypha—seemingly divinely inspired but subject to a very great deal of skepticism and, in parts, just pure hokum.

    Fourth, part of my point is that Pooled Trups have been much maligned and misunderstood, mostly wrongly. Pooled Trups were constructed in an elegant way—they were considered as equity (Tier 1 capital up to a point) for regulatory purposes and debt for tax purposes (dividend deductibility). Individual issuers were pooled into a securitization trust to allow community and regional banks access to cheaper capital. Given the barriers to entry of capital of the US banking system, this was quite a useful invention that provided billions in capital to the industry some of which helped smaller banks (and probably Zions) to withstand the financial crisis without taxpayer help, a crisis, by the way, which for the most part was not of their making.

    Problem was that, because of the regulatory treatment, US banks bought other banks Pooled Trups. That defeated the purpose of the security. It didn’t get new capital into the banking system; it just moved capital around inside the industry. The question is: why would any regulator allow this (the OTS limited a bank’s holding to 10% of the securities portfolio but no other regulator did, others in fact they encouraged owning them)? And why would a bank buy these? So if you are saying that Zions deserves their comeuppance because they were stupid bank investors—then I think you have a point. As I noted earlier, they have had a lot of comeuppance since 2008 in relation to their investment portfolio but I am sure you can convince that they need more.

    Fifth, you and George Bailey are somewhat misinformed about the difference between AFS and Held to Maturity (HTM) treatment of bank securities. HTM are written down (but never up–lower of cost or market) ONLY for OTI. The accounting question asked for HTM is: “how much will this bond pay at maturity? If less than 100, then write it down to its maturity value.” AFS securities are written down (or up for temporary impairments or gains) for OTI AND for “ temporary impairments.” Temporary impairments include non-permanent liquidity preference changes, off-run issues, interest rate, lot size, alternate investor demand, lack of twins, light markets (like pre-holidays), preferred stock and convertible substitutes, etc. Alternatively, AFS asks both the HTM question above and asks “what is the current market price of this security or its nearest twin? Whatever that is, mark it to that higher or lower price.”

    Therefore it does not necessarily follow that ZIons losses on an OTI basis equal their losses on a mark-to-market basis, which is what you both imply in your reponses. A bond can trade at less than 100 in the market today and still pay 100 at maturity.

    It should be noted that all moves between AFS and HTM, either way, must be done at market prices. So Zions can legitimately hold its Pooled Trups at historical cost in their HTM portfolio and not take the $400 million loss. But if they move the securities out (to AFS, the Trading Account or to a third party in an outright sale), they must take the mark-to-market loss (or profit if that happens). Zion’s $400 million loss doesn’t in anyway imply that the bond will not pay 100 at maturity. It implies that the market will only pay $400 million less than what the portfolio is on Zions’ books for. As I noted earlier, AAA Pooled Trups currently trade around 70, are expected to pay 100 at maturity, and full interest almost exclusively because of the current interest rate environment. So Zions is perfectly capable of holding these bonds to maturity as they are funded by capital, would not expect to take a loss on them because they are “money good,” but now must sell them and take a loss because the Volcker Rule as written says so, even though that wasn’t the initial point of the Volcker Rule.

    This makes the Volcker Rule look clumsy and ineffective (which it generally isn’t) and more important gives the banking lobby ammunition to convince the powers that be to throw the baby out with the bathwater. Not that I like Zions, but as a matter of expedience, I would rather give Zions a pass and keep intact the rest of the Volcker Rule baby. But that’s just me.

    Two final notes.
    One for Yves:
    Zion’s Pooled Trups are not anything like a retailer’s overstock of iPads. Zions bought these securities and put them in HTM. That meant that Zions intended to hold them to maturity, not sell them. A retailer buys iPads with the intention of re-selling them and generating a profit.

    A better analogy would be an individual investor that put his life savings in a municipal revenue water bond intending to pass these on to his/her children and is then later informed that the law now prohibits individuals from owning municipal revenue water bonds and the holding must be divested. On the other side of the trade (which was never conceived of as a trade but an HTM), an institution—hedge fund or other pool of money—waits to lob in low ball bids because it is a forced liquidation, thus transferring wealth from the saver to the pool of money.

    One for George Bailey:
    Of course, HTM securities involve losses and profits. Today for example, fixed rate bonds in HTM typically show profits and floaters show losses. Pooled Trups were generally floaters so they almost all involve losses. And just to beat a dead horse, the statement “If the other community banks have been properly accounting for these investments, there should not be any earnings surprises now” belies an understanding of the accounting rules for HTM securities discussed above. HTM securities are typically a one-time election (usually at purchase) and are booked at historical cost. If any community bank take its bonds out of HTM there is more likely than not losses or gains, and they would necessarily result in “earnings surprises.” That is how the accounting at banks works.

  6. Conscience of a Conservative

    I think regulators are uncomfortable with being seen as causing banks to report bad earnings and overlook the fact that the initial position to take on exposure to those credits were taken on by the banks themselves.

  7. allcoppedout

    There’s a useful article for those not familiar with TRuPS here – http://www.businessweek.com/magazine/content/10_25/b4183040401304.htm – they have been in the news sometime. Riverside is held to have collapsed because of them. TRuPS were pooled into CDOs, which for some of us makes them a very old story. They could be listed as Tier 1 capital. Banks could be held to be propping each other up with them, so there are Ponzi issues.

    My low-level take is this is really about trying to visit assets in a liquidation. We have little idea the £2 million claimed for a bit of plant is a real asset or a £50K liability for scrap removal. It was known three years ago TRuPS would not be allowed as Tier 1 by issuing banks from Jan 2013 and phased out after three years. Over 400 institutions stopped paying interest on them. In these circumstances marking them to maturity looks like hiding losses. Some related CDOs have already collapsed. The regulators can hardly be chastised for interfering with mark to maturity when investors had already realised they had been sold (yet another) pup.

    We can only speculate on whether regulators have more than sharpened mangoes to face down the banksters. We aren’t hearing anything about the Plan B needed if they are going to open up the banks’ debt-laden balance sheets rather than continue to transfer toxic matter to public debt.

  8. numbers question

    I do not believe that 3% of US banking assets are invested in TRUPS CDOs–I do not believe it is anywhere close to that–if it did, we’d be talking about trillions of dollars in TRUPS CDOs.

    Where does this # come from? (“3% of Us banking assets are invested in the product Zions is suddenly forced to disclosed losses on.”)

        1. Greg R

          Did you misread this?
          “Zions owned $1.23 billion of bank-issued trust-preferred CDOs as of Sept. 30, the most among all U.S. banks, according to analysts at Sterne Agee & Leach Inc. About 3 percent of U.S. banks held similar CDOs and a sudden sale by Zions could roil the market, Sterne Agee said.”

    1. George Bailey

      My mistake.

      The sentence should read,.. less than 3% of US banks are invested in TRUUps-CDOs,
      NOT
      …3% of US banking assets.
      Thanks

  9. George Bailey

    I’ll start with the last question first.(and your fifth point as well)
    Any impairment adjustment to HTM assets are included in an adjustment to Other Comprehensive Income (OCI), OCI is a component of Shareholders Equity. Profit and Loss is also a component of Shareholders Equity.
    The Profit and Loss Account is the headline number that draws the most attention.However, the changes in Shareholders Equity are also disclosed the financials.
    Therefore the only potential surprise to readers of financial statements such as regulators or investors is the difference between the valuations used for the HTM and the valuations used in the AFS category.They already are aware of the fair value of all the portfolios as a result of adjustments to Shareholders equity.
    As you explain in your accounting primer in the fifth point above, the differences should be due to temporary impairments.
    But Zion and its allies would have us believe that the headline profit and loss hit is the only relevant number, and worse that it is due solely to temporary impairments brought about by the Volcker rule. This is patently ridiculous and awfully duplicitous.
    In fact the number to be concerned about for purposes of assessing the Volcker impact is the profit and loss hit net of the previously disclosed OCI adjustments. So far the only number reported and the number that is being used in an attempt to suspend the rule is grossly misleading.
    Absent egregious accounting valuation procedures, the hit to the headline profit and loss number number resulting from the transfer of losses already recorded in the shareholders equity account should be a non event, unless the temporary impairments are large and truly temporary.
    In that case the impact on ZIon and the community banks from Volcker should be near zero.
    In Zions case they set themselves up for a short squeeze due to their poor concentration risk management. That’s a shame for them, but its hardly due to the Volcker Rule. Volcker may have facilitated the squeeze, but since Volcker aims to squeeze this kind of risk out of the backstopped banks. its hard to see how Zions problems merit reversing course.
    Its a ludicrous argument, that might be funny, if it weren’t so seriously and credulously repeated..
    It appears the regulators understand that the rule should have little effect on Zions better managed competitors. Those babys should have little to fear from the regulators. If theyve done their accounting right there should be little change to their entity values, even though it may screw up their capital calculations, in which case, the regulators would have done their job re safety and soundness and given a jab at the accounting industry in the bargain..

    1. AA Bender

      George Bailey:

      I don’t really follow.

      First, bank HTM securities are not put through OCI or reduced from balance sheet capital directly. HTM securities are subject only to OTI, i.e permanent impairment, and those charges/losses are made through the P/L which reduce the asset and the capital accounts. OTI on HTM bonds is an actual realized reduction in the value of an asset and the offseting entry is a loss in the income statement. So no to your first statement. Impairments to HTM bonds do not go through OCI on the balance sheet; they are written off as losses through the P/L.

      Further, AFS securities are also subject to OTI charges and that OTI is also written off through the P/L. But in addition, AFS securities are periodically marked-to-market. The mark-to-market differences (loss or gain) are the ones put through the OCI account in the equity section of a bank’s balance sheet. So only AFS securities gains and losses are recorded in the OCI account.

      Zions Bancorporation (the bank holding company for Zions National Bank and its seven or so bank subsidiaries) reported a net company OCI of -$387 million as of 9/30/13 in their 10-Q filing. Of that -$387 million, Zions reported OCI related to Trups (Pooled and otherwise) of about -$589 million And that amount was composed of $540 million of Trups AFS securities (which is in their OCI account on the balance sheet offset by gains on other securities) and about $58 million of HTM Trups. Zions announced sometime around 12/16 that the Volcker rule was going to cost them -$387 million because of the requirement to liquidate the Pooled Trups securities. (Under the category of Apocryphal journalism noted earlier, Bloomberg reported that Zions had recently moved these securities from HTM to AFS, but a review of Zions’ 2013 10-Qs and their year end 2012 10-K seems to mark “untrue” to that Bloomberg assertion.)

      So you are essentially raging on about “a ridiculous and duplicitous” -$58 million of Zions HTM Trups losses compared to the reported OCI of -$589 million already incorporated into the company’s equity accounts and bank capital ratios.

      And so what part of Zions disclosures are misleading to investors or regulators? Zions seems to have fully reported the mark-to-market differences in their public financials and hidden very little ($58 million) in the HTM category. And that $58 million was fully reported in all of the appropriate SEC filings.

      The point (yet again) is that OCI treatment was designed for banks to treat fluctuating mark-to-market differences as temporary. Prudently, regulatory guidelines required the banks to adjust their equity accounts down with OCI losses (but not up with gains) and required disclosure of AFS and HTM valuations in quarterly call reports and SEC filing. The Volker Rule in this small instance of bank CDOs is making a temporary and maybe unnecessary AFS loss permanent.

      The Rule is forcing Zions to realize a loss that might not otherwise need to be realized. Forcing ad hoc losses of previously approved security holdings is now construed as good public policy?

      1. George Bailey

        Thank you for making my point for me.
        You conclude:

        “So you are essentially raging on about “a ridiculous and duplicitous” -$58 million of Zions HTM Trups losses compared to the reported OCI of -$589 million already incorporated into the company’s equity accounts and bank capital ratios”

        That’s exactly what I’m raging on about! The marginal loss to Zion is a PIDDLING 58m, NOT 387m. We’re talking about losses that are 80% less than the mainstream press and bank lobbyists are using to attempt to bully the regulators.

        I don’t know about you, but I think very differently about things when I’m faced with losing 20 cents on the dollar than when I’m faced with losing 80 cents on the dollar. The regulators are looking at it from a 20 cents perspective and the bankers are trying to pretend we need to look at it from an 80 cents on the dollar apocalypse.

        And no one is the mainstream is shouting “Bullshit”, or even thinking about shouting that. That’s my job. Thanks for making it easier.

  10. AA Bender

    Please. Or as Yves seems to like saying, “Puhleeze!” It is good for the gander too.

    I am really tired, and all I ask is that you please read to the end of my last post. You have only made your job harder by using abuse rather than fact.

    Let me make this point a third time: Temporary (i.e. NOT REAL LOSSES!!!) are being converted into real losses by the Volcker Rule as it relates to Zions.I love the Volcker Rule. But this makes no sense and will rally the Congressmen to beat up the regulators and dilute the Rule.

    And, it is not about $58 million versus $558 million. It is the difference between unrealized losses (which may be recovered in the future) and realized losses (which are gone forever).

    Zions is being made to write down mark-to-market losses that may not be real. For what purpose?

    And please don’t tell me what the regulators are looking at. I am more aware of that that you could possibly know.

    But you, by being incredibly misinformed and abusive about how banks, regulation, bank accounting, and bonds work, you really are not making your work or my work for that matter, any easier. You are making yourself seem like someone who is uninformed, angry, upset and frustrated by the abuses of the banking industry (which I agree with) but also as someone who obviously hasn’t done the homework to converse accurately about the problem in order to fix it.

    Who do think read this site????????

    In order to change this cesspool, you need to be as informed as those wallowing in the swamp of banking.

    You aren’t.

    And by being that way, you aren’t helping fix the problem.

  11. Kirabati

    The Volcker Rule does not go into effect until April 1, 2014, and even that deadline has been extended by the Fed until 2015. Even if the TRUPS would qualify as trading assets under the Volcker Rule, that qualification would not “accrue” until well into the future. What justification does Zion have to claim losses now?

    In fact isn’t it improper accounting to claim a loss based on a non-rule? (Again, there is no Volcker Rule until April 1, 2014).

    1. Yves Smith Post author

      No, they are in effect acknowledging that their prior accounting was improper. The timing of the change is triggered by moving the position from the “Hold to Maturity” category to “Available for Sale,” which is in management’s discretion.

  12. Nacpa

    The article seems to miss the point. The Banking world isn’t upset about having to “air their dirty laundry”, they are upset because a component of the Volcker rule is going to force them to liquidate securities at a loss, which might not exist if they weren’t being forced to sell the security early. Let’s say you go out and buy a 10 year treasury bond. 2 years from now interest rates finally increase, and now the fair value of your bond is worth less than when you purchased it. If you plan to hold the bond to maturity, this is no big deal, because you still expect to be repaid in full at the end of the bond. But, if at the end of year 2,the govt arbitrarily decides to pass a law which prohibits you from holding treasuries going forward, it suddenly becomes an issue, because now you have to sell the security while it is at a loss. To make matters worse, the market knows you have to sell, which likely further reduces the value you will get.

    Obviously pooled TRUPS contain significantly more risk than Treasuries, but they are generally rebounding in value as the banking sector improves. I think it’s reasonable to assume these values will continue to increase as more and more TRUPS are ending their payment deferrals and resuming making regular payments. To force Banks to liquidate these securities (which they already own) early does nothing to enhance the safety and soundness of banks, and in fact worsens their position without benefit.

    If this provision of the Volcker rule goes unchanged you will see a number of banks recognize OTTI losses in 2013. This has nothing to do with auditors being in bed with the banks, and everything to do with the fact that bank’s no longer can hold these securities to maturity. Because Bank’s can only legally carry these securities for a short amount of time, it obviously becomes harder to think they can regain their value before sale.

    I know Bank’s make an easy target based on their role in the most recent recession, but this component of the a Volcker rule seems unnecessary and counterproductive.

  13. George Bailey

    The onus is on you to demonstrate that these losses are temporary,

    Zion has apparently already conceded that the adjustment they reported is due to Other than temporary (read real and permanent) factors.

    Saying the losses ” might not exist if they weren’t being forced to sell the security early” doesn’t make it so, nor does it square with Zion’s disclosure of the other than temporary writedown it is anticipating.

    Pinning the blame for Zion’s losses on the Volcker rule is a red herring.

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