John At The Center

Whitney argues that the real problem is that banks are disinclined to lend – and that simply removing these assets from their balance sheets will not change that fact

What Meredith is saying here is right:

Writedowns from structured securities and illiquid assets is only one challenge related to the commercial banks. A challenge of equal importance is rising defaults from on balance sheet loans. Due to the pro-cyclical nature of loss reserving, banks are required to build reserves when their earnings power is weakest.

But loans are assets on the balance sheet and if you’re expecting a rise in defaults, you can write those down too. It’s not very different from writing down structured securities. In high level, it’s the same, but maybe the practice of doing so is different.

via FT Alphaville » Blog Archive » Why Meredith Whitney thinks a “bad bank” is a bad idea.