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Hi, I'm James Early, lead advisor for the Motley Fool Income Investor newsletter, and I'm going to talk to you about the hidden risks that I see on bank balance sheets.
Banks have been in the news lately, with Bank of America
This means that banks make more of a spread. So they didn't get a bailout like AIG got with $200 billion in money, but they got a very favorable operating environment, which they are exploiting.
Question is, though, is it time to jump into bank stocks? That's what a lot of people are asking. I say "no," specifically because of bank balance sheets. And this is why banks aren't lending these days. We see all of this political pressure to lend, and on the surface, it looks like a great environment, but they are sitting on cash.
In fact, 95% of real estate loans -- or at least home real estate loans -- in 2009 were backed by Fannie Mae
Specifically, an accounting rule called FAS-157 was partially eased in 2009. FAS-157 required banks to mark bad loans to market values, so by easing it, these banks were able to basically carry these potentially bad loans at book value -- at the potentially realizable value eventually, which is not the same thing as what they are really worth right now. So I think that banks are sitting on worse assets than they look like and might appear from the balance sheet, at least. Too much risk for me. Yeah, maybe there is money to be made, but I'll take a breather for now. I'm James Early, and this is my "120" on bank stocks.
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