Why Financials Really Are in Trouble

Written By Brian Hicks

Posted November 18, 2009

An end to our woes is as premature as Jim Cramer calling an end to the depression fears. Unemployment will continue to climb. Consumer spending will suffer. And housing is only expected to worsen, as more resets rear their ugly heads.

Just ask Meredith Whitney. . .

She believes that financials still sizable headwinds, as the banking sector is “not adequately capitalized today.” She’s even calling for a double dip recession.

Cramer, of course, thinks she’s dead wrong… writing at least three articles pointing out her errors. But if he spent more time doing research and less time criticizing, he’d realize she was right… (We wouldn’t want to remind Cramer of his “brilliant” Bear Stearns call, would we? Too soon?)

Financials really are in trouble, especially this January 1, 2010.

That’s when FAS 167, or the Federal Accounting Standards 167, effective January 1, 2010, will take effect. It’ll basically force financials to bring bad, off-balance sheet asset back to the books… which could trigger substantial Street disasters, comparable to that of Lehman.

In June 2009, the Financial Accounting Standards Board issued an amendment to the accounting standards for transfers of financial assets (SFAS 166) and an amendment to the accounting standards on consolidation of variable interest entities (SFAS 167). Both amendments are effective and will be applied prospectively by the company on January 1, 2010 … Under these accounting standards, the company will record the underlying mortgage loans in these single-family PC trusts and some of its Structured Transactions on its balance sheet. These mortgage loans have an outstanding unpaid principal balance of approximately $1.8 trillion as of September 30, 2009… While Freddie Mac continues to evaluate the impacts of adoption, the company expects that the adoption could have a significant negative impact on its net worth.”

Worse, check out what Wells Fargo had to say recently on FAS:

This comes from Wells Fargo’s Q3 report:

I want to update you on our most recent analysis of the impact of the application of FAS 166 and 167, which is expected to result in the consolidation of certain off-balance sheet assets currently not included in our financial statements. We provided a preliminary analysis in our second-quarter 10-Q. Based on our continued refinement of this analysis, we now expect approximately $55 billion in incremental GAAP assets to be brought on balance sheet, representing approximately $28 billion in incremental risk-weighted assets.”

And they’re probably not the only ones with this hanging over their heads. 

Long story short, financials and our consumer cash-strapped society, are in trouble… big trouble.

We’ll look to short some of the big names in Options Trading Pit as we near January 2010.

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