Reporting Bank Profits--Lipstick on the Pigs
Apr 20, 2009
JP Morgan Chase, Citigroup, and Bank of America are all reporting much better than expected earnings this first quarter of 2008.
The stock markets today are not impressed. It seems that few people really believe that these banks suddenly became profitable unless taxpayer money has covered their losses.
Martin Weiss is not impressed at all. He is advising people to use this current rise in the stock market to dump the bad stocks that they wish they had dumped two years ago.
Here is what Martin Weiss says:
Wall Street is aglow with the latest “better-than-expected” earnings reports by major banks. But take one look below the surface, and you’ll see three of the most egregious accounting gimmicks in recent history.
Gimmick #1. Toxic asset cover-up. In their infinite wisdom, global banking regulators have now agreed to let banks cover up their toxic assets by booking them at fluffy-high values, bearing little resemblance to actual market prices. Like magic, the bad assets are suddenly worth more, as hundreds of billions in losses are defined away.
Gimmick #2. Reserve flim-flam. Every quarter, banks are required to estimate their losses and decide how much to set aside in loss reserves. If they deliberately guess too much in one quarter and too little in the next, they can shove all their bad earnings into earlier P&Ls and make future P&Ls look rosy by comparison.
Gimmick #3. The great debt sham. Consider this scenario: A financially distressed real estate developer owes the bank $4 million. His revenues have plunged. He’s lost a fortune in his properties. And he’s on the brink of bankruptcy.
Therefore, in the secondary market, traders recognize that loans like his are worth, say, only half their face value, or about $2 million. So far, a very common situation, right?
But now imagine this: He walks into the bank one morning and claims that he really owes only $2 million. Why? Because, in theory, he says, he could buy back his own loan for that price, thereby reducing his debt in half.
In practice, of course, that’s a pipedream. If he actually had the cash to buy back his own loans on the market, then he wouldn’t be financially distressed in the first place. And if he weren’t financially distressed, his loans wouldn’t be selling on the market for half price.
The reality is that he can’t buy back his own debt and never will. And even if he could someday, he will still be on the hook for the full $4 million unless and until he files for bankruptcy and the bankruptcy judge decides otherwise.
That’s why the government would never let real estate developers — or hardly anyone else, for that matter — mark down the debts on their books and still stay in business. But guess what? The government lets banks do precisely that!
It’s the ultimate double standard: The banks get away with inflating their toxic assets. But at the same time, they’re allowed to mark to market their own debts, which happen to be trading at huge discounts on the open market precisely because of their toxic assets.
Accountants call it a “credit value adjustment.” I call it cheating.