According to a recent article in the Wall Street Journal, the SEC is looking into United States banks that have restructured troubled loans in order to make them appear healthier than they actually are. The SEC is looking into practices such as “extend and pretend” or “amend and pretend” in which a bank gives a borrower more time to repay a loan.
The SEC is also investigating the common practice of “troubled debt restructuring.” In such restructurings, the bank changing the terms or breaking the loan into pieces is actually modifying the existing loan. Although these practices are permitted, the SEC officials are concerned about the way certain banks are accounting for these on their books. According to the article, the banks sometimes break up a troubled loan in order to place a portion of it on “performing status.” This accounting sleight of hand reduces the reserves needed to be set aside. According to the article, at this point, United States banks hold an estimated $156 Billion in troubled commercial real estate loans. About two-thirds of the commercial real estate loans maturing at banks from now until the year 2015 are under water.
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