With billions of dollars poised to be transferred to the balance sheets of banks, Federal Deposit Insurance Corp. Chairman Sheila Bair stated she is looking at easing the migration of securities to the balance sheets of banks like Citigroup Inc. (NYSE:C) and J.P. Morgan Chase (NYSE:JPM), as there would be an immediate need to raise capital to support the billions of dollars represented by the action.
In an interview at Bloomberg News, Bair stated: “Giving some breathing room in terms of when they can transition in is acceptable to us.” There isn’t a consensus yet on whether this will happen, and so Bair is looking for a vote by the FDIC concerning the issue on December 15 at their next board meeting.
The question isn’t whether to bring the securities back on the balance sheets, as Bair has said before and reiterated the FDIC supports bringing them all back on, as ““It should have been on, frankly, all along.” The question is the pace that they should all be brought back on board, again, which would determine how quickly capital would need to be raised to support those securities. Most in the industry are hoping for capital requirements to be phased in rather than implemented all at once.
Many investors were rightly outraged after some of the $1.7 trillion in write-downs at the beginning of 2007 were not identifiable because they were part of these off-balance-sheet trusts, which didn’t have to be on the books.
This is important because investors have no way of knowing what the shape of the mortgages backing securities are if they aren’t on the balance sheet. These were hidden from investors because groups of loans were sold to these off-balance-sheet trusts, which would then repackage them and sell them to other off-balance-sheet trusts. This effectively concealed that the mortgages girding up the securities were a deck of cards ready to be blown over, with everything else collapsing on top of them, which is of course what happened.
Citigroup Inc. and J.P. Morgan Chase have been fighting to have the capital requirements phased in so they can better serve their customers. Citigroup has claimed that much of their lending would be seriously hampered by the immediate need to meet the capital requirements, while J.P. Morgan concurred that it would be the same with them concerning consumer lending especially.
The banks have said in the past that they’re hoping for a period of three years to be given them to raise the capital needed to compensate for the added assets and liabilities on their balance sheets.
