If Banks Still Followed Mark-to-Market Rules, What Would Their Losses Look Like?

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Question: What is the actual amount that banks have “lost” if banks still had to follow mark-to-market rules? My understanding is that our large banks would be insolvent by almost a trillion dollars if they had to declare what they have lost in value on home loans, not to mention commercial real estate and credit card losses that are now occurring. Is this anywhere near accurate?

Paul Solman: This is, of course, what might once have been called the $64, and later the $64,000, question. And it’s the whole point of the stress tests, about which we have an explainer slated to run tonight: to determine how “underwater” the large banks are — i.e., how close to (or past the point of) insolvency, thus dictating how much more of a capital cushion they need.

But who’s to say what the losses are at the moment? What are commercial real estate loans worth right now, for example, with so many people out of work and thus not needing work space? Let me play this out and you’ll see, I hope, how difficult your question is to answer.

The economy has lost something like 6 million jobs since the Great Recession began. As Wellesley professor and real estate expert Karl Case of the Case-Shiller index pointed out to me the other day, the average worker occupies 175 square feet of commercial real estate. So YOU do the math. Six million workers off the employment rolls means 6 m X 175 sq. ft. unoccupied = more than a BILLION square feet suddenly sitting EMPTY. And more commercial real estate coming on line, presumably, as projects already in the pipeline are finished. More empty space coming on line at a city near you.

So what’s a downtown office building worth these days? What’s the value of a loan taken out in the salad days by the owner of the building and now held by a major bank? Mark-to-market rules were loosened precisely so that banks wouldn’t have to value their loans at fire sale prices.

The answer to your question, then: There’s no real way to say WHAT the banks’ assets (their loans) are worth in a no-buyers market. Could their losses exceed a trillion dollars? Depends on how you reckon them, but theoretically, sure.