National City’s Hands are Tied

National City Corp. has got its level 3 accounting inverted. Instead of valuing worthless assets in the billions of dollars, National City is complaining that it has $1B of assets that it must carry at zero value. What’s the asset? Shares in Visa.

National City gained $532 million by selling Visa stock when the credit-card company went public in March and still holds 19.7 million Class B shares, according to an August filing by Cleveland-based National City. The stake is probably worth about $1 billion and is carried at zero because sales are restricted, Treasurer Thomas Richlovsky said.

The banks must hold Class B shares for three years from the IPO or until settlement of remaining Visa litigation in which the banks may be liable, whichever is longer.

“Our hands are tied” by accounting rules, Richlovsky said.

Oh, the indignity of it all. But Richlovsky’s got a point. Why should their hands be tied by rules that no one else seems to have to follow. Fear not, however, for the poor suffering bank. There are always many ways around the law, and besides, what better use is there for a business degree?

“There’s value there that’s not being reflected,” said Charles Mulford, an accounting professor and director of Georgia Institute of Technology’s Financial Reporting and Analysis Lab. The bank’s stake in San Francisco-based Visa, the world’s biggest card network, is “certainly worth more than zero,” and National City could sidestep the sale restrictions by using the shares as collateral to obtain financing, he said.

“If you have something of economic value, there’s always some way to realize that value,” Richlovsky said in an interview. “Wall Street firms make a living coming up with structures or processes. If we had a need or a desire to instantly raise cash or capital, there are things we can do.”

OK, so what is the true worth Mr. Mulford? Say the shares are worth $1B today, but you cannot sell them for three years. What will the Visa shares be worth three years deep into the mother of all credit crises? Let’s ask the street what it thinks.

Never have regional banks been so disrespected by bondholders. National City Corp. Chief Executive Officer Peter Raskind says Ohio’s biggest lender is the “best capitalized of all major U.S. banks” after raising $7 billion this year, yet its bonds show it’s at risk of default. Cleveland-based National City’s bonds have plummeted as much as 17 cents on the dollar since June and yield more than 10 percentage points above Treasuries, similar to Ford Motor Co. debt.

That means it’s junk! But the suit-wearing folks on Wall Street don’t like to say that.

The Visa stake isn’t something analysts and investors “give too much credit for,” said Standard & Poor’s analyst Jack Bartko. “Even without the restriction, the value of the stock might save one or two bad quarters, but doesn’t provide long-term financial flexibility.”

You see, Mr. Richlovsky, it’s really the decrepit bond market that your hands are tied by. This happens in a credit crunch.