Dear John Thain

Some Notes and Predictions on Stress Test Results

Hi Malthus,

The short answer to your question is that any particular quarter can be profitable, and the losses show up over time.

I, basically, have no idea how loss reserves against loans work, but I've heard they are very formulaic. Basically, if the formula says you need to retain part of earnings or eat into shareholders equity to build reserves, then it flows through your accounting statements that way. The fact that institutions need more capital is essentially saying, "You might be generating profits now, but when losses are fully pushed through the balance sheet and income statement, you'll need more. Get it now!"

To be honest, I don't really think that all this finance and accounting B.S. matches all that well with the reality of these companies anyway... These firms are so complex and their positions and operations are so obfuscated, that an outsider can really only get the broad strokes.

Hope this helps (and doesn't make me look too naive!).

-DJT


On May 06 04:39 PM malthus wrote:

> My biggest question and one I would love to get the author to write
> about is.... how the heck are banks (like BofA) reporting "profits"
> if they are in need of capital infusions?
>
> In other words, shouldn't every drop of extra income go into loan
> reserves up and until they have reached their capital requirement
> *prior* to them taking profits (which are taxed, etc. whereas loan
> reserves would not be taxed).
>
> Would love you to write a blog entry about the craziness of BofA
> and Wells reporting profits and at the same time needing capital
> infusions. i.e. they did not reserve enough last quarter!