Rational Advisor

Wells Fargo recently announced its highest quarterly profits ever! It cited a dramatic gap between deposit costs and lending rates - the interest rate spread, and also talked about the boom in mortgage refinancing and write-downs of mortgages and other loans as reasons for these profits.

And then not to be out done, JP Morgan and Goldman Sachs are surprised on the upside with good profits despite significant additions to reserves and write-offs.

The real killer was when Citigroup, the biggest bum and most reckless of all the mega banks, reported its best profits since 2007. And even more amazing was it’s $1.6 Billion quarterly profit came despite incurring $7.3 billion in loan defaults, and putting aside $2.7 Billion for future crap credits. Wow, it would have had a $11 Billion profit!

So, the skeptic in me says. lets dig deeper - how could these have all of a sudden all at once have such rosy, incredible numbers.

Well, we would have to understand another recently adopted accounting rule (FASB 159). This crazy standard permits corporations, including banks, with publicly traded debt to recognize profits because their bonds decline in value, and are allegedly less of a liability because of the decline. The stupidness of this is that if a company is in or is is thought to be in trouble, and its debt crashes in value, the issuer is allowed to book profits! Is this ever Nuts! Because you are in trouble and your debt value falls you have more profits! Therefore the worse off an entity is from a creditworthiness standpoint, the more illusory earnings it can book and look great! In the case of Citigroup, this stupidity created a $2.4 Billion benefit in the quarter; if you took this rule out, Citi would have lost some $800 billion - Now, that would not have revived this market, would it!