This quarters' results from America's largest banks have truly shown how many different ways earnings can be manipulated and massaged to come out with "net income" that meets analysts' expectations. In fact, bank earnings now appear so malleable, it is difficult to imagine how any competent big bank CEO could ever allow his/her firm to miss on an earnings report.
One third of Citigroup's (C) quarterly profit for instance, was comprised entirely of loan loss reserves. Similarly, JPMorgan (JPM) simply erased the entire CIO loss by taking a $1.7 billion tax write-off, reducing loan loss reserves (YOY) by $1.6 billion, increasing the value of mortgage servicing rights by $233 million (due to, get this, 'improved risk management'!), and, of course, adding-in 12 cents per share in DVA gains.
Not to be outdone, Bank of America (BAC) released its own set of results today comprised almost entirely of earnings that aren't really earnings. Income before taxes was $3.4 billion of which $1.9 billion was attributable to 'reserve releases' (reductions in loan loss reserves). That's 56% of pretax income.
On top of this, investors might want to take a peak at the "Representations and Warranties New Claims Trends" where 'Outstanding Claims' rose $6.7 billion (to $22.7 billion) from Q1. Compare this to how much those same claims have risen sequentially in previous quarterly reports: + $3.5 billion from Q4 2011 to Q1 2012; + $2.6 billion from Q3 2011 to Q4 2011, and + a mere $90 million from Q2 2011 to Q3 2011.
Now considering the obvious trend here, you would think Bank of America would be provisioning for this sharp increase. You have to scroll back up the presentation to the "Consumer Real Estate Services Section" to find how much the bank has put aside, but eventually you find that "Representation and Warranties Provision" is $395 million. So that's $395 million (with an 'm') in provisions made for an increase in claims of $6.7 billion (with a 'b').
I implore investors to dig into these reports before taking the headline numbers at face value. What is under the hood is quite troublesome. I certainly recommend shorting Bank of America or going long put options on the stock.