Saturday, March 25, 2006

A reader emailed me to ask me the following question. It is an intriguing question that I hope one of our readers has an answer:

I am having troubles in finding a way to estimate the plausible total losses of the AMCs. Do you have any idea on how I could hovercome the problem?

Actually, it's hard to tell. The problem is that since 2001, AMCs have absorbed new batches of NPLs, which is worth a lot more than the old batch on a per dollar basis. So, when they claim they have "recovered" money, is it from sales of the old NPLs or the new NPLs? I don't have any evidence that AMCs are separating the old NPLs and new NPLs when they declare their recovery ratios. You can find those so called ratios in the CBRC website. If you have some AMC contacts, I would be interested in finding out whether they are separating the new and the old NPLs when they declare recovery ratios.

Another problem is that AMCs have learned to buy NPLs from each other at a high price. So, even if the MOF has some regulation requiring AMCs to keep track of recovery ratio for the original 1.4 trillion, they can just sell NPLs to each other at a high price, thereby jacking up the recovery ratio. In this way, the cash recovery ratio for the original 1.4 trillion is artificially high, while AMCs have "invested" in some useless NPLs from another AMC, which they will make a loss on. But that's okay, since NPLs they acquire from another AMC does not count as the original NPLs, but "new investment." Anyway, if readers out there know the accounting, please let us all know.

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