Professor Edward Kane:

In many cases these are not potential losses, they are actual losses. If one tried to sell these assets in the marketplace and the other side did due diligence, one would immediately mark them down. The question arises of how one can hide information, soft information in particular, from the auditors. One may know that the firm is in grave trouble but the auditors may not have sufficient information to allow them to determine that. The basic problem pertains to the regulatory culture. Banks that have trouble turning over their debt or raising new stock are always going to claim it is due to a problem of liquidity. Somehow the markets are drying up and people are not ready to invest. However, this is also a good indication of insolvency. The culture has the attitude of giving the banks the benefit of the doubt. If they say it is just a liquidity problem, supervisors will let them ride with that for a while even though the bankers know it is an insolvency problem. They will take action to restore their insolvency, which means taking more risks.