“It doesn't change anything fundamentally,” adds Miller. “You cannot continue to have non-performing assets grow at 50 percent a quarter. Losses will swamp earnings.”
Miller’s firm subscribes to the theory that there’s another wave of home foreclosures that will put further pressure on balance sheets.
Miller says banks’ hold-to-maturity assets are also troublesome. ”They bleed over time and will get worse quarter to quarter.”
“Our argument is that because we are not addressing the real problem in getting these toxic assets off their balance sheets we're just going to jump from crisis to crisis.
A seal of government approval—before or after need capital injections—will make it even less likely banks will participate in the government’s Public-Private Investment Partnership to move toxic assets.
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Banks indicated an unwillingness to participate from the outset. The government then lessened the incentive by making a subtle yet powerful change in the mark-to-market accounting rule.
“The only way to sell them is to get them to write them down,” says Robert Glauber, who supervised the Treasury Department’s efforts in the savings-and-loan rescue two decades ago. “The regulators have let the banks hold them.”
Some have suggested the stress tests—and the contingent government aid being offered—are a chance to get the banks to participate in the PPIP, even if doing so would create losses and increase the amount of capital they need.
“My theory is the stress tests will be government leverage to get firms to participate in the PPIP,” says Zach Pandl, an economist at Nomura Securities. “There’s not a lot of incentive to be the first bank to participate in the program. Most would prefer to wait and ride it out as prices go higher.”
Though the PPIP has already attracted dozens of would-be buyers, observers say don’t expect the government to strong arm sellers into the program.
“They don’t have the stomach to do it,” says Glauber.