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Lately banks stocks have shown some progress, even declared profits. But, is it so ? Is it that all is suddenly well for banks specially those big banks ?

let us take a closer look….

A. Citi and Goldman.

Goldman, Citi Accused of Accounting Tricks
By WebCPA.com
April 21, 2009

Goldman reported a first-quarter profit of $1.81 billion last Monday, even as it announced a new $5 billion stock offering. However, the bank was able to avoid including $2.7 billion worth of “fair value losses” on commercial real estate loans and other illiquid assets that it wrote down in December within the first-quarter results it reported. The firm was moving from a fiscal year ending in November to a fiscal year beginning in January as part of its decision in September to become a bank-holding company instead of an investment bank.

–What this means ? Whatever happened in December of 2008. Goldman did not report on any financial statement. Not in 2008 because they were investment bank
and year for them was ending in November. Then they became bank-holding company and opened new year in Jan-2009. So December 2008 goes un-accounted for from any finacial statement. All the losses from December…..since they are not reported they don’t exist. Surpirsed ?

Mr Munger, 78, also sounded a warning over companies involved in derivatives, saying. “To say derivative accounting in America is in the sewer is an insult to sewage,” he fumed.

Now let us look at Citi….

In the case of Citigroup, which reported its first-quarter results Friday, the revisions to the fair value measurement standard allowed the bank to report a $1.6 billion profit instead of a $900 million loss, as well as swing from a $6.8 billion loss to a $3.8 billion gain in trading profits. Citi was able to book just a portion of the loss on the value of some of its impaired assets, as opposed to the full loss, thanks to the new rules, giving it an extra $413 million in after-tax profits.

A credit value adjustment on its debt also enabled the bank to add $2.5 billion in unrealized gain to its net income. Although Citi’s debt declined in the bond market, the bank was able to book a one-time gain approximately equal to the decline, on the theory that it could buy back its own debt at a discount on the open market, even though it has not actually bought back its own debt.

–Credit value adjustment-  this will clear it…take somebody’s house for example was bought for 100,000 dollars with zero down. Now if the value of this house dropped from $100,000 to $50,000 they have not lost money owner actually got richer OK..Watch this…banks come in cut a deal and let them stay in the house by writing up new mortgage for 50,000$. Owner of the house is now on the hook for 50,000$ loan instead of 100,000$ but none the less he is still under debt. Common sense would dictate that..not if you’re following American accouting rules.

As per American accounting rules….owner of this house can declare himself 50,000$ richer because he owns a 100,000$ house now for 50,000$ and this is his un-realized gain.

…more on Citi….

Another important item in the press release is the accounting rules that Citi adopted, which Dealscape pointed out might’ve helped Citigroup: “Citi adopted FASB’s recent rule changes regarding fair valuation (FAS 157) and other than temporary impairments (FAS 115). The adoption of the changes to FAS 157 had no impact on Citi’s financial results. The adoption of the changes to FAS 115 resulted in approximately $631 million pre-tax of lower impairment charges recorded in revenue in the current quarter. Additionally, the cumulative effect of the changes to FAS 115, which did not impact revenues, led to a $413 million after-tax increase in retained earnings and an offset in other comprehensive income on the balance sheet.”

In fact these accounting rules did help Citigroup. As Blogging Stocks points out:

“I could not believe my eyes when I read it but it turns out that Citi was able to take a $2.5 billion gain on a rule that lets it record any declines in the market value of its debt as an unrealized gain. The rule, which Citi adopted in 2007, reflects the possibility that a company could buy back its own debt at a discount, which under traditional accounting methods would result in a profit. But Citi didn’t do that — this has to be some kind of an error…And there should be a rule that forces Citi to take a loss for a decline in the market value of its assets too. But thanks to FAS 157-e, it can record any gain it wants on the value of its toxic waste — and I would not be surprised if Citi did just that in the first quarter.

Ned Kelly was also questioned by an analyst about the assets transferred from mark-to-market Kelly said that the bank moved $29 billion, and wrote up $540 million on the value.- Maria Woehr

B. Wells Fargo.

Wells Fargo’s Profit Looks Too Good to Be True: Jonathan Weil

April 16 (Bloomberg) — Wells Fargo & Co. stunned the world last week by proclaiming it had just finished its most profitable quarter ever. This will go down as the moment when lots of investors decided it was safe again to place blind faith in a big bank’s earnings.

Gimmick No. 1: Cookie-jar reserves.

Wells’s earnings may have gotten a boost from an accounting maneuver, since banned, that it used last year as part of its $12.5 billion purchase of Wachovia

Corp. Specifically, Wells carried over a $7.5 billion loan-loss allowance from Wachovia’s balance sheet onto its own books — the effect of which I’ll explain in a moment.

First, a quick tutorial: Loan-loss allowances are the reserves lenders set up on their balance sheets in anticipation of future credit losses. The expenses that lenders record to boost their loan-loss allowances are called provisions. As loans are written off, lenders record charge-offs, reducing their allowance.

Free to Dip

Once it took control of the reserve from Wachovia, Wells was free to start dipping into it to absorb new credit losses on all sorts of loans, including loans Wells had originated itself. (Think of a child raiding a cookie jar.)

The upshot is that Wells could get by with reduced provisions until the $7.5 billion is used up, boosting net income.

Another quirk: The reserve was related to $352.2 billion of Wachovia loans for which Wells was not forecasting any future credit losses, according to Wells’s annual report.

Gimmick No. 2: Cooked capital.

The most closely watched measure of a bank’s capital these days is a bare-bones metric called tangible common equity. While the term doesn’t have a standardized definition under generally accepted accounting principles, it typically means a company’s shareholder equity, excluding preferred stock and intangible assets, such as goodwill leftover from past acquisitions.

Measured this way, Wells had $13.5 billion of tangible common equity as of Dec. 31, or 1.1 percent of tangible assets. Yet in a March 6 press release, Wells said its year-end tangible common equity was $36 billion. Wells didn’t say how it arrived at that figure. Nor could I figure out from the disclosures in Wells’s annual report how it got a number so high.

Shouldn’t Be Guessing

Investors shouldn’t have to guess. Under a Securities and Exchange Commission rule called Regulation G, companies that release non-GAAP financial measures are required to disclose “a reconciliation of the disclosed non-GAAP financial measure to the most directly comparable GAAP financial measure.” (The rule applies to press releases, as well as formal SEC filings.) That way, anyone can see how the numbers were calculated.

Wells didn’t do this in its March 6 release. A spokeswoman, Julia Tunis Bernard, declined to tell me the math Wells used. Silly me — I thought the SEC’s rules apply to Wells Fargo, too.

Gimmick No. 3: Otherworldly assets.

Look at Wells’s Dec. 31 balance sheet, and you’ll see a $109.8 billion line item called “other assets.” What’s in that number? For that breakdown, you need to go to a footnote in Wells’s financial statements. And here’s where it gets comical.

The footnote says the largest component was a $44.2 billion bucket that Wells labeled as “other.” Yes, that’s right: The biggest portion of “other assets” was “other.” And what did this include? The disclosure didn’t say. Neither would Bernard.

Talk about a black box. That $44.2 billion is more than Wells’s tangible common equity, even using the bank’s dodgy number. And we don’t have a clue what’s in there.

Gimmick No. 4: Buried losses.

How quickly investors forget. One week before Wells’s earnings news, the FASB caved to pressure by the banking industry and passed new rules that let companies ignore large, long-term losses on the debt securities they own when reporting net income.

Wells didn’t say what its first-quarter earnings would have been without the rule change, which companies can apply to their latest quarterly results. As of Dec. 31, though, Wells had $12.2 billion of gross losses on securities held for sale that weren’t included in earnings. Of those, $4.2 billion were on securities that had been worth less than their cost for more than a year.

C. JP Morgan/Bank of America and PNC Financial Services.

JPMorgan’s WaMu Windfall Turns Bad Loans Into Income (Update2)

May 26 (Bloomberg) — JPMorgan Chase & Co. stands to reap a $29 billion  windfall thanks to an accounting rule that lets the second-biggest U.S. bank transform bad loans it purchased from Washington Mutual Inc. into income.

Wells Fargo & Co., Bank of America Corp. and PNC Financial Services Group Inc. are also poised to benefit from taking over home lenders Wachovia Corp., Countrywide Financial Corp. and National City Corp., regulatory filings show. The deals provide a combined $56 billion in so-called accretable yield, the difference between the value of the loans on the banks’ balance sheets and the cash flow they’re expected to produce.

Faced with the highest U.S. unemployment in 25 years and a surging foreclosure rate, the lenders are seizing on a four- year-old rule aimed at standardizing how they book acquired loans that have deteriorated in credit quality. By applying the measure to mortgages and commercial loans that lost value during the worst financial crisis since the Great Depression, the banks will wring revenue from the wreckage, said Robert Willens, a former Lehman Brothers Holdings Inc. executive who runs a tax and accounting consulting firm in New York.

“It will benefit these guys dramatically,” Willens said. “There’s a great chance they’ll be able to record very substantial gains going forward.”

I guess that is enough..I am not going to cover all banking institutes..it’s bullshit anyway.  Following article may give you an idea about the rest of them …..

Buffett Lambastes Bankers, Insurers for ‘Stupidity’ (Update1)
By Erik Holm and Andrew Frye

May 4 (Bloomberg) — Berkshire Hathaway Inc. Chairman Warren Buffett lambasted bankers, insurers and regulators for being blind to the possibility home prices could fall, and said their shortcomings caused the worst recession in half a century.
‘Sewage-like Qualities’

“They were going to take a lot of sewage and mix it up in a different way and said it’s not sewage,” Munger said. “The laws of nature are such that it keeps its sewage-like qualities.”

Damn that word again…reminds me again what flows in the ’sewage’. Well, if you’re still interested go ahead and do your research on other banks..( I will rest my case believing what Mr Buffet said). Just when the economy is in middle of the biggest crisis, loans of all types are going bad and there is highest un-employment in a completely debt ridden society…banks…(..who created debt..and can’t collect them) are still booking profits….there are no losses in America.

Can’t be…if there is anything bad..just don’t look in that direction, look the other way..and all  will be well. You see the idea is to have you focus on caviar not on the shit even though it’s given to you daily for breakfast. Think caviar not ‘that’..think caviar…not ‘that’..you should recite this as a mantra this will calm you down…and hey who knows may be you too will start to see ‘green shoots’….I don’t recite this mantra so I am not seeing any

Instead of green shoots in banking sector. I am actually thinking ‘IT’ might hit the fan sometime this year.

And wait..till you read the commercial-real-estate section where banks made even bigger loans….you will start to wonder how in hell these institutes can turn profit..but that’s magic my friend.

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