More Bank “Earnings” Shenanigans

Why do we allow this sort of raw falsehood in our so-called “financial reporting”?

Citibank and, I presume Bank of America (I have to go through the BAC release to know for sure, but the market seems to think this is true) is back to its old tricks when it comes to “earnings”: They’re reporting the decrease in certain values as earnings.  Specifically, the deterioration in their own bond spread is counted as earnings and Citi also released more loss reserves, although claims their lates deteriorated.  So how do you square releasing loss reserves with a deteriorating late picture?  Well, you don’t.

Second, this “CVA” game brings back memories of the outright deceptive treatment of “capitalized interest” that WaMu was running in the first part of 2007 and which, in fact, was why I started this blog.  In WaMu’s case they were going a step further and paying out this fictional money in dividends, which of course are real money and really gone, while the fictional “earnings” from capitalized interest (negative amortization balance increases) never materialized.

Now this is legal, I might add, but the problem with this accounting treatment is that it makes the reported results meaningless.  In the case of bonds spreads the firm is on the hook for par at the time of maturity, so either these “earnings” will be recaptured (that is, they’ll be a loss down the road) or the company will default in which case this entire discussion is academic.

Why, more than four years after this crap started in 2007, these practices continued to be allowed is beyond comprehension.  The market, for its part, is seeing through these sorts of games almost-instantly — this morning BAC’s stock spiked instantly on the release but as soon as people started reading the earnings release that spike immediately reversed.  A few years ago the “hopium” from this sort of aggressive accounting treatment might have lasted days or even weeks and in fact led to some tremendous shorting opportunities in the financials.  Today, not so much as the market has gotten wise to the games.

Incidentally this distortion will ultimately lead to people talking about S&P “earnings” and claiming that they are “ok” with this “contribution” added in.  Don’t buy it for a second – these sorts of “CVA” adjustments are temporary games that will come back out in subsequent quarters; mathematically they simply have to.  The simpleton will buy on these figures, seeing a “divergence” between value and price that does not exist, and get his or her clock cleaned.

This crap ought to have been stopped after the 2000 tech wreck, and certainly after 2007.  If there’s one good thing to say about these schemes it’s this: The market no longer believes it, and is punishing the firms that run this crap; the financials got hammered hard yesterday, and it looks like nobody’s buying into the BAC hopium this morning either.

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