According to Mish, a number of these institutions are playing "valuation games" with assets held on their balance sheets:

"They really want to sell this garbage, but they can't except at prices that will cause them to raise more capital. From here on out, any assets banks or brokerages move to the "assets held to maturity" class is extremely suspect. Merrill Lynch (MER) set the tone for what such assets might be worth when it shocked everyone by announcing it sold CDOs at 22 cents on the dollar. The reality was much worse. Merrill Lynch actually got 5.5 cents on the dollar..."

That being said, it's worth keeping an eye on these financial institutions as they deal with a potential capital breakdown. Maybe the storm will pass them by, but maybe not... 

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[image: Pedro Almodovar's Women on the Verge of a Nervous Breakdown]

I thought Merrill did get 5 cents on the dollar. They received 22 but will have to give back 17 if they do not perform, which means they get 5 cents on the dollar if you read the fine print. Anyway banks have a bigger problem. Merrill and LEH are borrowing money at 9% right now and with all the loans coming due in the next sixteen months this will be a problem from the Wall Street Journal:

"The crunch will begin next month, when some $95 billion in floating-rate notes mature. J.P. Morgan Chase & Co. analyst Alex Roever estimates that financial institutions will have to pay off at least $787 billion in floating-rate notes and other medium-term obligations before the end of 2009. That's about 43% more than they had to redeem in the previous 16 months.

The problem highlights how the pain of the credit crunch, now entering its second year, won't end soon for banks or the broader economy. The Federal Deposit Insurance Corp. said on Tuesday that its list of "problem" banks at risk of failure had grown to 117 at the end of June, up from 90 at the end of March. FDIC Chairman Sheila Bair said her agency might have to borrow money from the Treasury Department to see it through an expected wave of bank failures. She said the borrowing could be needed to handle short-term cash-flow pressure brought on by reimbursements to depositors after bank failures.

As banks scramble to pay the floating-rate notes, they could see profit margins shrink as wary investors demand higher interest rates for new borrowings. They're also likely to become less willing to make new loans to consumers and companies, aggravating economic downturns in both the U.S. and Europe."

So where will the 95 billion come from, other investments. Some they will have to borrow.

Great analysis of the problems facing the financial sector. It seems that many of the true problems are only now rising to the surface.

- The TradeKing Blog