[quote=patientrenter][quote=davelj]….
If mark-to-market accounting were required of most US citizens, a large percentage of them would be in “receivership” (re: bankrupt) as well. (That is, their liabilities are greater than their assets on a liquidation basis.)

To use an obvious example, consider just about every college student that graduates with a student loan…[/quote]

For the recent graduates with a student loan, their major asset is their future earnings. Hopefully, even a conservative estimate of those earnings far exceeds their debt. If not, then there is a bad debt issue.

For the banks, aren’t some of the future earnings capitalized, at least on a conservative basis? If not, it seems reasonable to do that. Why? To separate those that should be shut down from those that should be allowed to live, and in a transparent way that can be subjected to questioning. (It doesn’t have to be radical, just add and publish the calcs to the normal reports that don’t capitalize any future earnings.)[/quote]

The average valuation on the Big Banks over the last 20 years has been about 2.2x book value. Consequently, in “normal” times, the market has determined that the present value of these banks’ future cash flows was worth north of a 100% premium to their GAAP equity. The MARKET capitalizes earnings – the banks do not capitalize earnings (since the restrictions placed on Gain on Sale accounting several years back). The banks capitalize estimated cash flows of the individual assets on the balance sheet, however, in order to come up with an estimate of value, however there is a bias toward using the asset’s cost basis unless it has become impaired. This is a long-winded way of saying that there really isn’t much difference between our banking system today and a recent college graduate – the future earnings of both will, on average, lead to a positive equity position… over a long enough time horizon.

Again, a spread lender – almost no matter how bad its balance sheet is – can repair that balance sheet given enough time. The FDIC is in the process of shutting down those banks that it deems to have such bad balance sheets that, in effect, they will take “too long” to earn their way back to solvency. The Big Banks have been exempted from this exercise because they are, in fact, Too Big To Fail (according to the Powers That Be). But we are going to see 500 banks, or thereabouts, fail this cycle because the FDIC simply doesn’t have the patience for these banks to repair themselves (and justifiably so). So, they’re doing these “calcs” that you’re discussing, although it’s not a transparent process because shutting banks down is, by nature, a process that requires discretion and, well, secrecy.

One of the challenges, however, is that all of this business requires a lot of guesstimates about what’s going to happen in the future. It isn’t an exact science… hence the messy nature of the whole process…