DENIAL in the banking industry — known in the trade as “extend and pretend” — is a powerful thing. But it works for only so long.
2nd Loans, 2nd Wave of Losses
HAVE you heard the good news? Big banks are making more money than we thought.
On Thursday, JPMorgan Chase said it earned $5.4 billion during the second quarter. On Friday, Citigroup said it earned $3.3 billion.
Despite such happy tidings, many banks face a daunting challenge, and one federal regulators want to know more about: the potential costs associated with home loans that banks made during the great credit mania.
Still to be dealt with are potentially large legal bills — and settlements — related to accusations that many banks acted improperly, first in bundling all those loans into mortgage securities, and later in foreclosing on homeowners.
Under pressure from the Securities and Exchange Commission, banks have been estimating the potential damage in their financial filings. Last October, the S.E.C. warned them to be scrupulous in detailing risks associated with demands that they buy back soured loans or securities, as well as about possible defects in securitizations and foreclosures.
But while the S.E.C. has been pressing banks to make comprehensive disclosures about these potential pitfalls, regulators have been quiet on another worry for investors: how banks are valuing their vast holdings of home equity lines of credit, also known as second liens.
Check out the rest from the NY Times here…