Expected Write Down of MBS Portfolio Was $44,000. Just One Year Later It's $263,100,000!!!

Bloomberg has an interesting story today about how "crazy and unrealistic" loss projections on mortgage backed securities just one year ago are now turning into reality. 

Last year the Federal Home Loan Bank of Seattle said that the accounting rules forcing them to mark to market and therefore write down its portfolio of mortgage backed secuities by $304.2 million was way too unrealistic.  They said a more realistic anticipated loss would be only $12 million.

Now, one year later, the real losses are in.  Guess what?  The real losses are $311.2 million on the portfolio of mortgage securities.  Now the bank is suing.

...in December, it filed lawsuits against 11 Wall Street underwriters, including Goldman Sachs Group Inc. and Morgan Stanley, seeking more than $3.9 billion of refunds on the securities, plus interest.

Another bank was in a similar situation.

... a similar instance at the Federal Home Loan Bank of Atlanta. The bank reported an $87.3 million writedown on its mortgage-backed securities for the 2008 third quarter; however, it said it expected its actual losses would be only $44,000...

The rest of the story: Last year when the Atlanta bank released its financial results for the third quarter, it said it had raised the credit-loss estimate to $263.1 million.

Can you believe that?  If a $87.3 million writedown was a crazy over the top number, then what is $263.1 million?  That's $263,100,000 vs. their "reasonable"  expectation of $44,000.  Unbelievable!

Of course, they squealed about how mark to market was so off base and they got Congress to change the accounting rules so that the banks could show bigger profits.  With bigger profits, I guess there would also be bigger bonuses.

The FASB rule change gave companies a new way to avoid counting paper losses from toxic debt securities in their earnings. Before 2009, whenever companies recorded writedowns on impaired securities that they labeled as held-to-maturity or available-for-sale, they had to run the full amounts through net income for any losses deemed to be "other than temporary."

Now they get to separate the impairments into two parts: estimated future credit losses and everything else. The first kind reduces earnings and regulatory capital. The other doesn't.

Do you still believe any banks are actually solvent? 

I wonder whether these kinds of mortgage backed securities are the ones that the Federal Reserve has been buying up?  If so, I wonder who is going to have to eat the losses?