Asset-Valuation Games Exist In England Too
Courtesy of Karl Denninger at The Market Ticker
Britain’s taxpayer-owned banks are selling repossessed property assets to their own subsidiaries to avoid billions of pounds of losses that would be incurred by selling them in the open market.
Royal Bank of Scotland (RBS), which is part-owned by the Government, has set up West Register to buy properties taken over by RBS after borrowers had fallen into default.
Lloyds Banking Group, which inherited billions of pounds of commercial property loans when it took over HBOS, is understood to have a similar subsidiary that buys assets from its owner.
See how this works? You buy the "asset" from yourself (in your subsidiary) at vastly more than anyone would pay for it in a free market and by doing so you avoid taking the mark-to-market loss.
This means you don’t have to show that loss on your balance sheet, nor do you have to count it against your capital reserves.
I’m rich! All I have to do to recognize "fair value" is pass assets from one captive entity to another! Heh, that’s a free-market sale and "establishes a market price", right?
Didn’t our S&Ls pull this same crap as they were trying to avoid marking to the market and ultimately failing? I think they did! Indeed, while it was BETWEEN S&Ls in that case it was the same game – "I’ll buy this defaulted loan at par from you, you buy that defaulted loan from me at par! See – Market price!"
William Newsom, head of valuation at Savills, the property group, said: “Banks sell the property but, rather than selling into the market, they go into a workout vehicle. It is a model that we saw in the last downturn. The subsidiary pays what the property would fetch on the open market. It has to be a fair value.”
Riiiight. "Fair Value" eh?
So why not sell it in the open market? It wouldn’t be because there are no bids at the asked price in the open market, would it?
An industry source familiar with the practice said: “This is a legitimate strategy that was pursued at the end of the previous recession. It means that the bank is able to avoid crystallising the loss, although it is still on the balance sheet.
"Crystallising" eh?
Ah, that’s a fancy word.
I think it means to avoid taking it against capital, no?
This is legal over in England? You have to be kidding me.
Yet our Fed issues swap lines into those nations……
Unbelievable.
