Tuesday, September 22, 2009

Accounting for the Truth

Bank profits drive the stock market faster than other industry stocks like manufacturing. This is one reason while the banking collapse corresponded and drive the Wall Street nose dive.

So one question that has troubled me greatly is how quickly the banks have recovered from their meltdown.

I have read a few economists and heard some reference to accounting changes that now project profits for these banks that still owe the government billions.

Yalman Onaran wrote this on Bloomberg.com, compiling the inside quotes and analysis that I've been searching for: (http://www.bloomberg.com/apps/news?pid=20601109&sid=alC3LxSjomZ8):

"Analysts who have examined the quarterly profits and government tests say that accounting rule changes and rosy assumptions are making the institutions look healthier than they are. "

Accounting rule changes?

"Citigroup’s $1.6 billion in first-quarter profit would vanish if accounting were more stringent, says Martin Weiss of Weiss Research Inc. in Jupiter, Florida. “The big banks’ profits were totally bogus,” says Weiss, whose 38-year-old firm rates financial companies. “The new accounting rules, the stress tests: They’re all part of a major effort to put lipstick on a pig.”

In this article (http://www.moneyandmarkets.com/big-bank-profits-are-bogus-massive-public-deception-33228) Weiss really covers the shady books of pumping up the "toxic assets", moving their horrible performances from quarter to quarter, and the real meaning of "credit value adjustment."

From Onaran's piece:

"Further deterioration of loans will eventually force banks to recognize losses that their bookkeeping lets them ignore for now, says David Sherman, an accounting professor at Northeastern University in Boston. Janet Tavakoli, president of Tavakoli Structured Finance Inc. in Chicago, says the government stress scenarios underestimate how bad the economy may get."

One area that they are referring to is the collapse of the commercial real estate market. Businesses are closing in strip malls at a rapid pace and lendors are getting stuck with bad loans.

"Banks are writing off commercial real estate loans now at a bigger rate than in the last 20 years," said Kathy Boyle, president of Chapin Hill Advisors in New York. "It's a double-whammy. Banks have another shoe to drop on their balance sheets, and regional banks tend to have a much bigger exposure."

Goldman Sachs and JP Morgan now have political allies and ties to government policy to help shield them from the pending collapse. How can we evaluate the Stock Market without talking about politics? How can a company such as Citigroup report a profit yet owe the government, the taxpayers - you and me - 50 billion dollars?

The FDIC is running out of funds to bailout banks. But we can rest assured this isn't over. We can try to avoid the large corporate banks with the local choice, but their smaller capital makes them more vulnerable to collapse.

I don't know that I have answers, but I feel closer to asking the right questions and getting names of the economists asking similar questions.



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