Is JPMorgan Hiding Losses? 6 comments
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On Saturday, the Financial Accounting Standards Board (FASB) told banks that “mark to market” accounting standards would be relaxed and that they could use internal “models” to create fantasy prices on unsalable, and what might be considered by some to be worthless, assets.
The return to “mark to fantasy” accounting may have something to do with the fact that, at 7:00 AM, this morning, JP Morgan (JPM) reported a better than expected 11 cent per share profit, even after allegedly marking down a host of assets inherited from recently acquired Washington Mutual (WM). Although commercial banks, unlike investment banks, could always hide investment losses, by categorizing certain losing bets as “not for sale”, when acquiring a company, like WaMu, they were previously required by the accounting rules to write down all the losses to market value.
In spite of the small profit, JPM also reported that almost all areas of the banking business are now significantly stressed, and less profitable. That is not news, because we all know that already. The extent of the decline in all areas of banking, including credit cards and commercial lending, however, was surprising. Credit card charge offs rose from $1.7 billion to $3.3 billion. Provisions for losses in commercial banking rose from $47 billion in 2nd quarter of 2008 to $126 billion in the 3rd. Most frightening, however, were overall revenues. Net revenue dropped precipitously, down 18.3%, to $16.1 billion from $19.7 billion last quarter, and from $17 billion in the 3rd quarter of 2007.
The webcast will take place today, at 9:00 AM. It would be nice to see the issue of mark to fantasy is fully explained and the truth ferreted out. Whether or not that will happen is questionable, however. We shall see…
Disclosure: Author has no interest in JPM
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This article has 6 comments:
THis is a joke, "ask an accountant, what is two plus two. And their answer is this. It will vary between minus two and plus eight, depending on whether we are talking to the IRS, the client or his bank". The other answer is "what do you want it to be?"
This system does not have a shred of creditbility. End of story.
In an effort to save the banking herd, the FDIC tossed a wweaker member to the starving beast.
Mark-to-market has severe short comings in reflecting value.
A bond is ultimately valued by its expected cash flows discounted to its present value.
If there is no market, does that mean there is no value? If your competitor is forced to sell at a discount for whatever reason, does that mean that the security sold and all other similar securities should be valued at the distressed market price?
If your neighbor was forced to sell his home today, what price would you get? Not the best price. Now what if you had to mark your home down because of that sale? Does it reflect reality? No! It reflects ditressed market conditions.
The more illiquid the asset, the more the distortion in value will occur in periods of distress.
In the case of the banks, this non-cash mark down impairs capital. We know what this causes on a systemic basis.
Mark-to-market is a normalized environment may be helpful, but it has only magnified the problems in the current environment.
Valuing a security based upon its expected cash flows is certainly subject to abuse. Someone who wants to cheat will cheat and the rules don't matter anyway.