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Bank Profits Depend on Debt-Writedown `Abomination'

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posted on Jul, 12 2010 @ 03:18 PM
More accounting gimmickry, as if anyone is surprised...common, daily practice today makes the tales of Enron and Sarb-Ox seem like sagas of purity from a vanished, idealized realm.

What will it take for shareholders to demand accountability, or for the feds to start cracking down on this sort of nonsense? Of course, in our brave new bailed-out world where government and banking have become grotesquely enmeshed, nothing will be done to upset the apple cart.

Bank of America Corp. and Wall Street firms that notched perfect trading records in the first quarter are now depending on an accounting benefit last used in the depths of the credit crisis to prop up their results.

Bank of America, the biggest U.S. bank by assets, may record a $1 billion second-quarter gain from writing down its debts to their market value, Citigroup Inc. analyst Keith Horowitz estimated in a June 23 report. The boost to earnings, stemming from an accounting rule that allows banks to book profits when the value of their own bonds falls, probably represented a fifth of pretax income, Horowitz wrote....

...In the first quarter, the four biggest U.S. lenders -- Bank of America, JPMorgan Chase & Co., Citigroup and Wells Fargo & Co. -- produced combined profit of $13.5 billion, the most since the second quarter of 2007. That figure probably fell by 28 percent in the second quarter, based on a Bloomberg survey of analysts’ estimates. The banks are scheduled to announce results over the next two weeks, led by JPMorgan on July 15.

The second-quarter results may include gains taken under a U.S. accounting rule known as Statement 159, adopted by the Financial Accounting Standards Board in 2007, which allows banks to book profits when the value of their bonds falls from par. The rule expanded the daily marking of banks’ trading assets to their liabilities, under the theory that a profit would be realized if the debt were bought back at a discount.

In practice, it’s an accounting “abomination” because fluctuations in the value of the debt don’t change the amount the banks owe, said Chris Kotowski, an analyst at Oppenheimer & Co. in New York.

“Just because Morgan’s credit spreads widened out this quarter doesn’t mean that their ultimate interest and principal payments changed one iota,” Kotowski said. “The market will back it out, both on the upside and the downside.” ...

More at source:

posted on Jul, 12 2010 @ 03:37 PM
God love 'em.

I FASB 159'd my own debt in respect and admiration of the Banks accounting methods. Since there's zero chance of them ever collecting, I valued the debt at zero and now owe nothing to any banks. It's a truly wonderful system.

Oh, and my net worth increased 35%!

[edit on 7/12/2010 by mythatsabigprobe]


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