Loan Loss Reserves at Mega Banks Are Far from Where They Need to Be

Loan Loss Reserves at Mega Banks Are Far from Where They Need to Be By Pam Martens and Russ Martens for Wall Street on Parade

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It’s time to revisit that scene from the movie, The Big Short, where Steve Carell, playing Mark Baum, is sitting in the audience at the American Securitization Forum and interrupts the speaker on stage who has just stated that he expects subprime losses “will be contained at 5 percent.” Baum loudly asks: “Would you say that it is a possibility or a probability that subprime losses stop at 5 percent?” The speaker says: “I would say that it is a very strong probability, indeed.” Baum sits down but then begins to waive his arm in the air, forming a zero with his fingers. Baum then shouts out: “Zero! Zero! There is a zero percent chance that your subprime losses will stop at 5 percent.”

Loan Loss Reserve to Total Loans for All U.S. Commercial Banks

You can view the scene from the movie below.

That scene came to mind when we graphed the loan loss reserves at U.S. banks through the second quarter of this year, using data from the St. Louis Fed. (See above chart.)

Consider us on record as waving our arm in the air and shouting that there is zero, ZERO! chance that the megabanks in the U.S. are properly reserved for what comes next.

The reason that these publicly-traded mega banks, with CEOs making in the range of $25 million to $30 million a year, don’t want to properly reserve for potential losses is that it crimps quarterly earnings, which might crimp their stock awards, which might crimp their pursuit of becoming a billionaire like Sandy Weill did at Citigroup – not long before the bank began secretly receiving the largest bailout in history from the Federal Reserve Bank of New York, topping out at more than $2.5 trillion in cumulative loans according to a government audit released in 2011. Good quarterly earnings also provide a prop under the share price so that the guys in the corner offices can cash out their stock option grants at a fat profit.

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