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Forum Post: Accounting for Financial Institutions Is a MESS... Distortions In Baffling Financial Statements...

Posted 12 years ago on Nov. 12, 2011, 2:37 p.m. EST by MonetizingDiscontent (1257)
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Accounting for Financial Institutions Is a Mess


Before the financial crisis hit, the accounting rule makers were moving to impose more consistency by increasing the number of assets that will be valued at market values -- the only values that really matter if a bank needs to raise cash by selling an asset.

But the rule makers came under heavy pressure to back down, and they did. Now, says Ed Trott, a former member of the F.A.S.B., "we are moving back to the past" by increasing the ability of banks to massage their numbers as they wish.

Distortions In Baffling Financial Statements


But in some cases, the financial statements look ever so much rosier. JPMorgan Chase reported net income of $15.3 billion during the first three quarters of this year, 22 percent higher than in the period a year earlier and a record for the first nine months of any year.

There are explanations for that — and JPMorgan Chase deserves praise for calling attention to reasons to think the numbers are misleading. But at base the problem is a simple one: Accounting for financial institutions is a mess.

And it is getting worse.

Under the rules, banks have a choice of three ways to report the value of identical securities. Even if two banks are using the same valuation method for the same security, they can come up with different values, and it is very difficult for an investor to get any feel at all for just how optimistic, or pessimistic, a bank’s estimates might be.

This year’s strange financial reports are being caused, in large part, by an accounting rule that has the counterintuitive result of increasing reported profits — and revenues — just because people are losing faith in the ability of the bank to meet its obligations. I’ll get into the details later.

The banks hate that rule now, but a few years ago they pushed for it. They did not foresee there would be a day when banks’ own creditworthiness would be called into question.

Sometimes the worst thing that can happen is that you get what you ask for.

And it is not just the earnings numbers that can be misleading. Bank leverage can be obscured by allowing totally unrelated positions to offset each other, so that rather than showing the bank has placed two bets, the financial statements seem to indicate there is no bet at all.

Revenue figures can also be all but meaningless. Did a bank’s revenues soar? If so, that could mean what it would mean in a normal company — that it is doing more business, and possibly gaining market share on its rivals. But it could mean nothing of the kind. It could reflect the good news that the bank is making money from trading, or the bad news that investors are growing worried that the bank may collapse.

Baffling financial statements can have negative effects well beyond confusing investors. Regulators can also be perplexed. A few months ago the European bank stress tests concluded that Dexia, a French-Belgian bank, was among the best capitalized in Europe. A few weeks later, it essentially failed.
Perhaps the most perverse effect seen this year, however, came at Goldman Sachs, which has not had good numbers to report. In the name of preventing unreasonable swings in earnings figures, it has essentially placed bets that its rivals’ credit standing will not deteriorate. The result would be to make Goldman more vulnerable if there were another financial crisis because it would have to pay out substantial sums if other firms collapsed.

Goldman describes its actions as hedging, but the use of that term seems misleading. What is being hedged is a somewhat meaningless accounting entry, one that in no way reflects actual cash flows and that is likely to reverse on its own a quarter or two later. But the “hedge” involves real money. Goldman will make money if investors grow more sanguine about the prospects of its competitors. But it will lose money if investors get more worried — and it could lose a lot if one or more large firms default.

Goldman officials told me that the amounts involved were not that material for the company, but the numbers are still large by normal standards. The bets produced a loss of $138 million in the third quarter as investors grew wary of the financial position of banks and other financial companies.



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[-] 1 points by stevemiller (1062) 12 years ago

What's in the off balance sheet accounts?

We are fighting propaganda. Propaganda is the weapon that controls the minds of Americans. read more - http://overthecoals.blogspot.com/

Every person controlled by propaganda, denies being controlled. It is up to each individual in the privacy of his own mind to consider his/her own behavior. If you are unwilling to examine self destructive behavior that is impacting your own ability to get a job, to allow the privileged to transfer your wealth to them by unfair taxation, to poison your air/water/food (remember the BP oil spill), and to bribe the entire congress for laws benefiting them at your expense, then you are a traitor.

Each one of these individuals defensively denies having a weak mind that can be manipulated. It is that defense that backfires. If people understood that their own self destructive behavior which forces them to vote for either of the 2 bribed candidate with the most money. The amount of money raised indicates which candidate has been bribed. When the bag men spread the cash to both Democratic and Republican candidates in the race, its because they don't know for sure who will win the election.

It is stupid and ignorant to vote for any candidate receiving bribes. The reason no American will call the bribes by name is the obvious fact that proves each of the 98% voting for the bribed candidate is in the deep propaganda trance they deny. They are too arrogant to consider they might be bribed. They would rather be thrown into the street with no job prospects than to deal with the trance that drives them to vote against themselves.

Curiosity that examines the irrational behavior is necessary to snap the trance. But the arrogance prevents the curiosity with denial. It is the same as a dog chasing his own tale going round and round.

There can be no end in sight until dealing directly with the propaganda trance begins on a national scale. The alternative will be electing the same crooks taking bribes. Its up to each individual to recognize self destructive behavior.

[-] 1 points by MonetizingDiscontent (1257) 12 years ago

(a snip from a recent article at 'financialsense' - "Extend and Pretend is Wall Street's Friend")

Let’s Play Hide the Losses

..."Part 2 of the master cover-up plan has been the extending of commercial real estate loans and pretending that they will eventually be repaid. In late 2009 it was clear to the Federal Reserve and the Treasury that the $1.2 trillion in commercial loans maturing between 2010 and 2013 would cause thousands of bank failures if the existing regulations were enforced. The Treasury stepped to the plate first. New rules at the IRS weren’t directly related to banking, but allowed commercial loans that were part of investment pools known as Real Estate Mortgage Investment Conduits, or REMICs, to be refinanced without triggering tax penalties for investors."

"The Federal Reserve, which is tasked with making sure banks loans are properly valued, instructed banks throughout the country to “extend and pretend” or “amend and pretend,” in which the bank gives a borrower more time to repay a loan. Banks were “encouraged” to modify loans to help cash strapped borrowers. The hope was that by amending the terms to enable the borrower to avoid a refinancing that would have been impossible, the lender would ultimately be able to collect the balance due on the loan. Ben and his boys also pushed banks to do “troubled debt restructurings.” Such restructurings involved modifying an existing loan by changing the terms or breaking the loan into pieces. Bank, thrift and credit-union regulators very quietly gave lenders flexibility in how they classified distressed commercial mortgages. Banks were able to slice distressed loans into performing and non-performing loans, and institutions were able to magically reduce the total reserves set aside for non-performing loans"...

"Extend and Pretend is Wall Street's Friend"


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