Tony Jackson has a great opinion piece in FT about banks being able to show profits by marking their debt to market just as their credit worthiness deteriorates. Even though non-banks are allowed to take advantage of this same subterfuge – why don’t they? Maybe because they might actually be allowed to fail…whereas banks will not.
“The LA Times reports on the Wells Fargo “sneak peek” of their first quarter earnings today. One big reason for the surprise was the bank’s allowance for loan losses (we added the emphasis):
“The big surprise for analysts was Wells’ first-quarter provision of $4.6 billion for potential loan losses — a huge amount, to be sure, but markedly lower than Wall Street had expected.
For example, FBR Capital Markets number crunchers had projected a set-aside of $6.25 billion for losses. In a skeptical note to investors, FBR — which has a “sell” rating on Wells — said, “We believe that credit quality materially deteriorated in the first quarter and that Wells Fargo is under-reserving for expected future losses.”
In a Bloomberg interview (hat tip ML-implode.com), Wells Fargo CFO, Howard Atkins responded to a question about the loan loss reserve by simply stating it was adequate:
“Obviously if the economy continues to deteriorate we’ll have to have another look at [loan loss provisions], but as of this moment in time we think 23 billion [total provision] is an adequate reserve.”
Mr Atkins is asked in the interview about the effect of the new mark to market rules recently allowed by FASB. He says the effect from these changes were “nominal”. What he does NOT say is important here. He doesn’t say the effects were something like ” not material” or “negligible”. A fairly close transcript of what he actually says is:
“… the new mark to market rules from FASB still require banks to write down the credit portion of any marks on their portfolios and in fact we did that in the quarter – our earnings actually reflected a negative from writing down some of these securities portfolios but, overall the benefit from that was not that great.”
Was the benefit “great enough” to amount to the $1.65B difference from what analysts expected in the provision for loan and security losses? Listen at about minute 7.20 below and see what you think…
We think it is clear in the interview (and so does ML-implode.com) that changes in MTM rules enabled virtually all of the “surprise” earnings of 55 cents versus the expected 23 cents.
Mr Adkins also said earlier in the interview that a large portion of income for the quarter was derived from fees on new mortgages, but that about 75% of that volume was from refinancing which can be expected to be nonrecurring. In a March 30 opinion given to Bloomberg, Paul Miller, an analyst with FBR, documents his expectations for the surge in mortgage fee income for banks and its non-recurring nature:
“Banks and lenders with “stronger trading and mortgage fee income” will see a benefit in their first-quarter profit that will “not be sustainable” as the broader economy continues to deteriorate.”
The Pragmatic Capitalist says of these earnings shenanigans:
“I expect to hear very similar reports from all of the big money center banks. Stay flexible and patient. I am certain that this sort of noise will create an incredible short opportunity in the coming month.”
FT reports
“US banks that have received government aid, including Citigroup, Goldman Sachs, Morgan Stanley and JPMorgan Chase, are considering buying toxic assets to be sold by rivals under the Treasury’s $1,000bn (£680bn) plan to revive the financial system.
Spencer Bachus, the top Republican on the House financial services committee, vowed after being told of the plans by the FT to introduce legislation to stop financial institutions ”gaming the system to reap taxpayer-subsidised windfalls”.
Administration officials reject the criticism because banking is part of a financial system, in which the owners of bank equity – such as pension funds – are the same entities that will be investing in toxic assets anyway. Seen this way, the plan simply helps to rearrange the location of these assets in the system in a way that is more transparent and acceptable to markets.”
“Transparent and acceptable”… to the markets? or opaque and acceptable to the banking oligarchy/administration? Clusterstock calls it money laundering:
“And let’s be honest, that’s exactly what it is. Banks buying assets from each other to inflate their books has nothing to do with “price discovery” or any such nonsense. It’s all about using taxpayer money to create bids that are higher than what the market currently prices those assets at. And if it turns out those bids were too high and the cash flows never materialize then, oh well, it’s the taxpayer left holding the bag.”
With mark to market now “mark to fantasy” and banks allowed to collude to bid their assets up to prices that are even higher than fantasy, they are sure to show big “profits” soon.
BTW, Zero Hedge has a great post on the resignation of the leader of FHLB over the recent changes of MTM to MTF. If this guy is saying the bank’s numbers are full of baloney, we probably should too. Check it out.
From Reuters ( We added the boldface type):
” The Financial Accounting Standards Board, which sets U.S. accounting rules, on Monday proposed allowing companies to exercise more judgment in determining if a market for an asset is active and if a transaction is “distressed.” “Â and … “Board members said the guidance could help boost fair values, or mark-to-market values, and get investors more interested in U.S. banks.“
Hmmm, even FASB is taking to cheerleading…
What do ya know… even big government is opposed to suspending MTM: From Reuters:
“On Thursday 3/12, OCC deputy Kevin Baily said in congressional hearing that he opposes suspending mark-to-market accounting rules to value bank assets, but said some minor revisions might be needed.”
We oppose suspension of MTM too, but it makes us uneasy to be on the same side as a growing socialist government, bent on controlling all assets by exploiting the current crisis.
