First Brokers, Now Banks: More Fictitious Gains

Yesterday's surprisingly bad news out of Citibank (C) and then UBS (UBS) sent us back to the research archives looking for information about the quality of Banks earnings.

As we noted last week, much of the Brokers' gains were fictitious.

It turned out that a decrease in the value of the B/D's own debt was offset with a phantom accounting entry. These are presented in the earnings as if they are actual gains, not accounting phantasms.

But don't think its just the big Brokers. The Banks are now getting in on the scam act:

"Now some banks may be set to similarly benefit from their own misfortune. Financial titans such as Citigroup Inc., Bank of America Corp., and J.P. Morgan Chase & Co., which will report third-quarter results next month, all opted earlier this year to start applying market values to some of their own liabilities, according to the research service the Analyst's Accounting Observer.

This means they, too, might see a boost to profit from declines in the value of their debts during the summer credit crunch. "It might not be unusual at all to be seeing gains on debt issued hitting earnings in the third quarter," the Analyst's Accounting Observer said.

Officials at Citigroup, J.P. Morgan and Bank of America declined to comment.

The brokers and banks are doing nothing wrong or improper in booking such gains. The accounting rules as they stand allow the practice. But some investors are crying foul, saying the rules shouldn't have been changed to allow for such gains . . ."

So much for gains in earnings quality . . .

Source:
The Gold at Crunch's End
How Banks May Benefit From Their Debt Values; 'The Gains Were Real'
DAVID REILLY
WSJ, September 28, 2007; Page C1
http://online.wsj.com/article/SB119093341775741818.html