12 January 2011

When facing insolvency banks will always choose to delay and pray

Not that any more proof were needed, but here is ANOTHER article which points out how US banks are still playing tricks with their financial statements by delaying foreclosures and delaying the need to write down losses.

The commentator in this article (the estimable Messr Mish Shedlock) rightly points out that "Delays cost banks money and they know it". However, it is ALWAYS preferable to defer a loss until later if the alternative is to go bust today. The fact that a loss delayed may be greater later down the road than if it were addressed today is beside the point. When your only choice is to delay and pray or go bust immediately, the choice is clear.

If I were the executive at a bank that was facing insolvency if I took the write downs from all delinquent loans, I would ABSOLUTELY decide to delay forcelosure as long as possible, even if I knew the ultimate cost of delay was "higher". At least I can keep collecting a paycheque and bonuses until the bank finally collapses. And who knows, perhaps a miracle will happen and housing will recover making everything peachy again.


NOTE: Remember to tune into the Optimistic Bear weekly financial round-up every Tuesday at 9:00pm, Pacific Time. You can also listen to previous shows.

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