Here’s a fun accounting term to remember: accretable yield. That’s the difference between a loan’s value on a bank’s balance sheet and the expected cash flow from the loan. Bloomberg reports:
JPMorgan Chase & Co. stands to reap a $29 billion windfall thanks to an accounting rule that lets the second-biggest U.S. bank transform bad loans it purchased from Washington Mutual Inc. into income.
Wells Fargo & Co., Bank of America Corp. and PNC Financial Services Group Inc. are also poised to benefit from taking over home lenders Wachovia Corp., Countrywide Financial Corp. and National City Corp., regulatory filings show. The deals provide a combined $56 billion in so-called accretable yield, the difference between the value of the loans on the banks’ balance sheets and the cash flow they’re expected to produce.
There are a few interesting storylines embedded in the piece. One is that the $29 billion writedown on Washington Mutual’s loan portfolio may actually have been too small. Calculated Risk notes that the figures JPMorgan used to calculate expected losses corresponded to a much shallower recession than has actually been experienced. PNC, for example, has been more conservative than JPMorgan in estimating anticipated accretable yield income, based on lingering uncertainty in housing markets.
But the piece also touches on two other related, and important, issues.
Namely, the decision to seize WaMu and the impact of the resulting mood on subsequent banking transactions. There is a line of thought in the financial world, originating with John Hempton but receiving a vote of confidence from Felix Salmon today, which states that it was the WaMu collapse, rather than the Lehman failure, which did most of the damage during last autumn’s financial crisis. Both incidents involved significant pain for bank debtholders — the chill wind that froze the credit markets. But while Lehman’s demise was the bigger and more stunning of the two, WaMu’s takeover was the event that turned debtholder pain from a one-off into a trend — which said, basically, that bank creditors everywhere should be nervous (a message they heeded).
What seems indisputable is that if allowing Lehman to fail was a bad decision, the seizure of WaMu was an incredibly bad decision. Increasingly, WaMu stakeholders seem to have a sound case that they received a raw deal, but it also looks as though National City, Wachovia, and Merrill Lynch were handed over on terms far too generous to the buyers, all thanks to the climate of terror that prevailed on Wall Street in the wake of the September crisis. A reference point — Bank of America’s expected accretable yield on its Countrywide portfolio is far more anemic than its anticipated yield on its Merrill loans. The difference? The world wasn’t panicking when Bank of America bought Countrywide.
What this all points to is the desperate need for clear authorization and a clear procedure for the orderly nationalization of systemically important banks in a time of crisis. We broke the glass last year and found nothing available save an extinguisher meant for much smaller fires.