Citigroup's loan disclosures: Over-provisioned or fudging fair value?

There has been a great deal of talk in the financial media of late about bank's loan values, which may be vastly overinflated due to flexibility offered by accounting rules. The SEC revealed that it sent a memo to a number of CFOs at banks, telling them, "Clear and transparent disclosure about how you account for your provision and allowance for loan losses has always been critically important," and "although determining your allowance for loan losses requires you to exercise judgment, it would be inconsistent with generally accepted accounting principles if you were to delay recognizing credit losses." (Hat tip, Zero Hedge).

Clearly, there is concern that many banks are not taking the appropriate marks on their loan portfolios. Last week, DailyFinance discussed the next hundred-billion-plus-dollar question for the banking system: whether or not the enormous gap between some banks' book values and market values was a cause for concern. One curious development since then has been the Financial Times' revelation that Citigroup CFO Ned Kelly was forced out by U.S. regulators shortly before reporting second quarter results.