Tracking Bad Loans Goes Way Off Balance Sheet

The WSJ article [subscription needed] describes how banks are ‘fixing’ their bad loan problems, partly by making it harder to be a bad loan. The cynic in me hopes one day to see a ‘badder loan’ section on a financial statement. Another tactic is to transfer bad [baddest?] loans to non-regulated subsidiaries in order to avoid capitalization issues.

The obvious results of these types of changes is to make the accuracy of the liability section of a balance sheet suspect. Only those who are prepared to go in-depth into the notes of a financial statement can have any sort of confidence about the entity’s financial condition.

Which makes me wonder if there isn’t an opportunity here to restate the financial statements for public companies to incorporate the contingent liabilities detailed in the Notes into a ‘real’ or ‘worst case’ liability section – i.e. what the regular balance sheet would look like if it were actually useful to independent 3rd parties. Online stock trading sites would seem to have the most incentive to produce something like that. To be followed up on.

About Jorge Costales

- Cuban Exile [veni] - Raised in Miami [vidi] - American Citizen [vici]
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