Apparently if credit default risk widens on a bank, and its bonds get hit, the bank can count that as income. Gosh you have to love U.S. accounting standards.
From Business Insider:
The one item everyone is raising red flags about is the $1.9 billion pretax DVA gain. DVA is short for debt valuation adjustment.
[R]esults 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 other words, when investors and traders bet against a banks' bonds, causing credit default swap spreads to soar, the bank is allowed to book a mark-to-market gain
Last year, Bloomberg spoke to Oppenheimer analyst Chris Kotowski who called the DVA an "abomination."
He explains, "Just because Morgan’s (MS) credit spreads widened out this quarter doesn’t mean that their ultimate interest and principal payments changed one iota."
Apparently this rule was passed by FASB in 2007. I wonder who lobbyed for it? More importantly what sort of accounting standard do you have when lobbying is part of it. What a joke.
....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.
Ironically these same banks went to cry to the accounting board that mark to market should go away (which FASB did in April 2009), since its unfair - and really what does the market know about fair value pricing?
But apparently exceptions can be made.