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The Washington Independent
The Washington Independent

Cash in on History

Elisa Mueller
Last updated: Jul 31, 2020 | May 19, 2008

One of the lessons from Japan’s long economic crisis in the 1990s was supposed to be that ignoring bank losses and delaying any action to correct them only prolongs the pain. Japan spent almost a decade dealing with a deflated economy as it tried to recover from the bursting of its stock and property bubbles in late 1989. Banks hid losses and regulators looked the other way, which only added to the length of the slowdown. Japan’s experience often is cited as an example of how not to handle a financial crisis.

But that history lesson seems to be lost on America’s financial sector. Bloomberg reports today that U.S. banks and securities firms are hiding at least $35 billion in writedowns stemming from the mortgage market’s collapse. Citigroup, Merrill Lynch, and Washington Mutual are among the firms failing to acknowledge the losses on their income statements, Bloomberg said.

Here’s why this matters, from Bloomberg:

Keeping those markdowns off income statements just delays the realization of the losses, according to Brad Hintz, a New York- based analyst at Sanford C. Bernstein & Co.

“The banks that have taken advantage of this accounting approach are going to have a price to pay later,” said Hintz, the third-highest ranked securities analyst in an Institutional Investor magazine survey. “You don’t avoid the price. Those that have taken it all in their income statements will come out with clean balance sheets and move on.”

Another analyst, Michael Holland, told Bloomberg that there are “still billions of dollars of crap out there that hasn’t worked itself through the system.”

If this is sounding familiar, it should. Some banks and securities firms seem to have short memories. But if  they keep up this sort of thing up, they’ll soon enough be reminded of Japan’s wrenching experience.

Elisa Mueller | Elisa Mueller was born in Kansas City, Missouri, to a mother who taught reading and a father who taught film. As a result, she spent an excessive amount of her childhood reading books and watching movies. She went to the University of Kansas for college, where she earned bachelor's degrees in English and journalism. She moved to New York City and worked for Entertainment Weekly magazine for ten years, visiting film sets all over the world.


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