What’s Inside America’s Banks?

Polecam wszystkim ten tekst (link) o amerykańskim systemie bankowym, zawierający spora ilość przykładów (głownie o Wells Fargo). Jest trochę przydługi, szczegółowy i wieloaspektowy - myślę, że warto poświęcić na niego kilkanaście minut.

Fragmenty na zachętę:

Some four years after the 2008 financial crisis, public trust in banks is as low as ever. Sophisticated investors describe big banks as “black boxes” that may still be concealing enormous risks—the sort that could again take down the economy. A close investigation of a supposedly conservative bank’s financial records uncovers the reason for these fears—and points the way toward urgent reforms.

Some bank analysts say these trading numbers are small relative to the bank’s overall revenue ($81 billion in 2011) and profit (again, $16 billion in 2011). Other observers don’t even bother to look at these details, because they assume Wells Fargo is protected from trading losses by its capital reserves of $148 billion. That number, assuming it is accurate, can make any particular loss appear minuscule. For example, buried at the bottom of page 164 of Wells Fargo’s annual report is the following statement: “In 2011, we incurred a $377 million loss on trading derivatives related to certain CDOs,” or collateralized debt obligations. Just a few years ago, a bank’s nine-figure loss on these sorts of complex financial instruments would have generated major headlines. Yet this one went unremarked‑upon in the media, even by top investors, analysts, and financial pundits. Perhaps they didn’t read all the way to page 164. Or perhaps they had become so numb from bigger bank losses that this one didn’t seem to matter. Whatever the reason, Wells Fargo’s massive CDO-derivatives loss was a multi-hundred-million-dollar tree falling silently in the financial forest. To paraphrase the late Senator Everett Dirksen, $377 million here and $377 million there, and pretty soon you’re talking about serious money.

Like other banks, Wells Fargo uses a three-level hierarchy to report the fair value of its securities. Level 1 includes securities traded in active, public markets; it isn’t too scary. At Level 1, fair valuesimply means the reported price of a security. If Wells Fargo owned a stock or bond traded on the New York Stock Exchange, fair value would be the closing price each day.

Level 2 is more worrisome. It includes some shadier characters, such as derivatives and mortgage-backed securities. There are no active, public markets for these investments—they are bought and sold privately, if at all, and are not listed on exchanges—so Wells Fargo uses other methods to figure out fair value, including what it calls “model-based valuation techniques, such as matrix pricing.” At Level 2, fair value is what accountants would charitably describe as an “estimate,” based on statistical computer models and what they call “observable” inputs, such as the prices of similar assets or other market data. At Level 2, fair value is more like an educated guess.

Level 3 is hair-raising. The bank’s Level 3 estimates are “generated primarily from model-based techniques that use significant assumptions not observable in the market.” In other words, not only are there no data about the prices at which these types of assets have recently traded, but there are no observable data to inform the assumptions one might use to generate prices. Level 3 contains the most-esoteric financial instruments—including the credit-default swaps and synthetic collateralized debt obligations that became so popular and prevalent at the height of the housing boom, filling the balance sheets of Bear Stearns, Merrill Lynch, Citigroup, and many other banks.

At Level 3, fair value is a guess based on statistical models, but with inputs that are “not observable.” Instead of basing estimates on market data, banks use their own assumptions and internal information. At Level 3, fair value is an uneducated guess.

Yet only a small fraction of Wells Fargo’s assets are on Level 1. Most of what the bank holds is on Level 2. And a whopping $53 billion—equivalent to more than a third of the bank’s capital reserves—is on Level 3. All three categories include risky assets that might lose value in the future.