‘Bogus’ Profit: Bank Profits Get Fatter With Accounting Rules Masking Looming Loan Losses

[marmar]

Bank Profits From Accounting Rules Masking Looming Loan Losses
By Yalman Onaran


June 5 (Bloomberg) -- Big banks in the U.S. say they’re on the mend. The five largest were profitable in the first quarter, rebounding from record losses for the industry in the fourth quarter. Share prices have jumped, with the KBW Bank Index doubling since March 6.

Treasury Secretary Timothy Geithner, after “stress testing” 19 banks on their ability to withstand a worsening economy, declared in early May that Americans can be confident in the banks’ stability and resilience. Wells Fargo & Co. and Morgan Stanley were among banks raising $43 billion in new capital since then through share sales.

“With our capital and assets, stressed as they have been, we can go back to focusing all our attention on managing our business and restoring value,” Citigroup Inc. Chief Executive Officer Vikram Pandit said after Geithner’s examinations were completed.

The revival may be short-lived. Analysts who have examined the quarterly profits and government tests say that accounting rule changes and rosy assumptions are making the institutions look healthier than they are.

The government probably wants to win time for the banks, keeping them alive as they struggle to earn their way out of the mess, says economist Joseph Stiglitz of Columbia University in New York. The danger is that weak banks will remain reluctant to lend, hobbling President Barack Obama’s efforts to pull the economy out of recession.

‘Bogus’ Profit

Citigroup’s $1.6 billion in first-quarter profit would vanish if accounting were more stringent, says Martin Weiss of Weiss Research Inc. in Jupiter, Florida. “The big banks’ profits were totally bogus,” says Weiss, whose 38-year-old firm rates financial companies. “The new accounting rules, the stress tests: They’re all part of a major effort to put lipstick on a pig.” ........(more)

The complete piece is at: http://www.bloomberg.com/apps/news?pid=20601109&sid=alC3LxSjomZ8

[SoCalDem]

1. If consumers (formerly citizens) could "forget about" their debts, they too cold be solvent

Apparently only corporations can "hide" their debts and "count" their "profits" :puke:

[gratuitous]

2. So, if you write your own rules

You can look as profitable as you want to be. The question is why bank stock prices are going up: Surely savvy investors are checking into the bank's statements and know that the bank "profits" are mostly illusory. So who is bidding up the stock prices? We know it couldn't possibly be people who are being steered into those stocks by dishonest brokers, or fund managers who are taking commissions on the sales just to sucker their clients while dumping their own bank shares.

It obviously must be something else at work here.

[femrap]

7. They're riding a bull bump in a bear market...

very common. The banks were hammered so low that they couldn't go much lower...that's a buy for short term. And these traders, hedge fund boys and mutual fund dudes are personally invested in Wall Street...this is their livelihoods. They must believe in the financial sector...they are the financial sector. The U.S, as a nation, is a financial nation. All we do is print paper. We no longer make anything. Our GDP is very dependent on these financial dudes/sharks coming up with new ways to let people GAMBLE with paper.

And they're not smart...they follow the herd. I've worked with them. They're pathetic, greedy, no conscience, macho to the point of being unstable, little bullies. I want to witness the collapse of Goldman Sachs. They've ruined this country...and they can take Citigroup and B of A with them.

[gratuitous]

9. From your keyboard to Cthulu's ear

But I suspect that this bump is being fed by folks desperate to realize anything out of their own bank stock holdings, and they're basically swapping worthless paper for near-worthless paper, dumping the near-worthless paper on their hapless clients, and at least snagging a commission for themselves.

I suppose some of them might fall for their own lies. That would serve them right.

[femrap]

12. WASF

and it really makes me sad and at the same so fucking angry. This could have been avoided if only Obama had spoken the truth and stopped putting $$$ down a rat hole.

Grrrrrrrrr. My garden is in and growing....

[Hannah Bell]

10. or (like GM) as unprofitable.

[customerserviceguy]

3. I used to be a tax accountant

and there are at least a dozen ways to lie with numbers.

I used to have people come up to me and say, "There was this article in Money magazine, they took an admittedly non-simple fictional 'family' with various tax and deduction attributes, gave it to twenty different accountants, and came up with twenty different figures. How does that happen?"

My reply: "If I took a bowl of fruit, put it in the center of a room, and got twenty different artists to look at it and paint it, would you expect to get twenty exact copies of the same work?"

My point was: accounting is less a mathematical science than it is an art. Or as the old saying goes, figures don't lie, but liars can figure.

[unblock]

5. only a dozen?

:shrug:

[Pale Blue Dot]

4. K & R

People need to understand the scam.

[unblock]

6. except that these accounting tricks happen all the time.

typically the only time i think balance sheets are reasonably accurate is when there's the first quarterly loss after a long period of profitability. once they realize they're having a losing quarter, they tend to dump every loss they possibly can so that the path is clear for a profitable NEXT quarter. that means that all the accounting gimmicks they used to delay recognizing losses, now they'll finally recognize them.

and with the next profitable quarter, the games resume.

what pisses me off is that most analysts don't know how to look past the numbers and read the fine print, to understand if the accounting treatments used are standard, reasonable, and appropriate; or if they're more gimmicks and loopholes designed to paint an artificial picture of what's really going on.

[femrap]

8. They say the best stuff is always hidden in

the footnotes.

[Wednesdays]

11. K&R

:kick:

[DavidDvorkin]

13. Looming Loan Losses

would be a cool name for an oldies band.