It's Still Three Card Monte

Via Atrios, Bloomberg's Jonathan Weil points out some very obvious flaws in the notion that the financial crisis is over.

It’s amazing what a little sunshine can accomplish.

Check out the footnotes to Regions Financial Corp.’s latest quarterly report, and you’ll see a remarkable disclosure. There, in an easy-to-read chart, the company divulged that the loans on its books as of June 30 were worth $22.8 billion less than what its balance sheet said. The Birmingham, Alabama-based bank’s shareholder equity, by comparison, was just $18.7 billion.

So, if it weren’t for the inflated loan values, Regions’ equity would be less than zero. Meanwhile, the government continues to classify Regions as “well capitalized.”

While disclosures of this sort aren’t new, their frequency is. This summer’s round of interim financial reports marked the first time U.S. companies had to publish the fair market values of all their financial instruments on a quarterly basis. Before, such disclosures had been required only annually under the Financial Accounting Standards Board’s rules.

For those of you playing at home, it means Regions Financial is basically broke. It's pretending to be solvent with working capital and the ability to make loans. The reality is the bank's running on unicorn farts and broken taxpayer dreams. But Regions isn't the only one:

While Regions may be an extreme example of inflated loan values, it’s not unique. Bank of America Corp. said its loans as of June 30 were worth $64.4 billion less than its balance sheet said. The difference represented 58 percent of the company’s Tier 1 common equity, a measure of capital used by regulators that excludes preferred stock and many intangible assets, such as goodwill accumulated through acquisitions of other companies.

Wells Fargo & Co. said the fair value of its loans was $34.3 billion less than their book value as of June 30. The bank’s Tier 1 common equity, by comparison, was $47.1 billion.

So, the reality is despite the bank stress tests from earlier this year stating everything is fine, the reality is that America's banks are critically undercapitalized. Banks need hundreds of billions to continue to stay afloat here especially as the commercial real estate market falls apart and those loans start going bad. These accounting rule games that are allowing the banks to pretend they are profitable will not work for much longer. it's how we got into this mess in the first place.

Behind the scenes, the Fed has slammed trillions of dollars into the system above and beyond the TARP bailout funds in loan guarantees and monetary sleight of hand. We've in effect nationalized the banking system, without the government, we'd have gone under long ago. Helicopter Ben and Timmy are frantically trying to make sure people don't pry too much into the broken system.

The problem is that while the de facto nationalization has bought us time, that time has not been used to reform the system, rather it has been used to cover up the mess and leave it for the next time. Our banks are still largely insolvent. Our country is still largely insolvent. Our financial system is a sham, a game of three card monte. President Obama is the dealer. Find the red card, the red card, you too can win a stable economy!

It's a game where nobody wins in the end.