Unpublicized by Washington but not unnoticed by many was the International Monetary Fund (IMF) setting another more realistic tone in issuing a sobering report last week indicating that the global financial sector has lost a staggering $4.1 trillion in value in the last 20 months. The report also predicted a global "credit famine," and sharply lowered its previous predictions of global economic health. The IMF now expects the world economy to contract by 1.3% in 2009 (previously it had suggested a 0.5% growth rate). It also suggested that 30 of the world's 34 most advanced economies would actually shrink this year. It indicated as well that it believes the U.S. economy is set to contract by 2.8% and the European Union's by a startling 4%, far worse than expected. http://online.wsj.com/article/SB124043653743145097.html
Against this backdrop of apparent Obama administration wishful thinking, lack of transparency and Bank Bailout manipulation ~ here are the true grim facts behind Big Bank's glowing first-quarter Earnings Reports ~ courtesy of Martin Weiss, Money and Markets.
Legal Cover-Ups, Flim-Flam and Sham
In the Big Bank's "Glowing"
First-Quarter Earnings Reports
Martin Weiss
http://www.moneyandmarkets.com/big-bank-profits-are-bogus-massive-public-deception-33228
Excerpt:
" Wall Street is aglow with the latest "better-than-expected" earnings reports by major banks. But take one look below the surface, and you'll see three of the most egregious accounting gimmicks in recent history.
Gimmick #1. Toxic asset cover-up. In their infinite wisdom, global banking regulators have now agreed to let banks cover up their toxic assets by booking them at fluffy-high values, bearing little resemblance to actual market prices. Like magic, the bad assets are suddenly worth more, as hundreds of billions in losses are defined away.
Gimmick #2. Reserve flim-flam. Every quarter, banks are required to estimate their losses and decide how much to set aside in loss reserves. If they deliberately guess too much in one quarter and too little in the next, they can shove all their bad earnings into earlier P&Ls and make future P&Ls look rosy by comparison.
Gimmick #3. The great debt sham. Consider this scenario: A financially distressed real estate developer owes the bank $4 million. His revenues have plunged. He's lost a fortune in his properties. And he's on the brink of bankruptcy.
Therefore, in the secondary market, traders recognize that loans like his are worth, say, only half their face value, or about $2 million. So far, a very common situation, right?
But now imagine this: He walks into the bank one morning and claims that he really owes only $2 million. Why? Because, in theory, he says, he could buy back his own loan for that price, thereby reducing his debt in half.
In practice, of course, that's a pipedream. If he actually had the cash to buy back his own loans on the market, then he wouldn't be financially distressed in the first place. And if he weren't financially distressed, his loans wouldn't be selling on the market for half price.
The reality is that he can't buy back his own debt and never will. And even if he could someday, he will still be on the hook for the full $4 million unless and until he files for bankruptcy and the bankruptcy judge decides otherwise.
That's why the government would never let real estate developers ~ or hardly anyone else, for that matter ~ mark down the debts on their books and still stay in business. But guess what? The government lets banks do precisely that!
It's the ultimate double standard: The banks get away with inflating their toxic assets. But at the same time, they're allowed to mark to market their own debts, which happen to be trading at huge discounts on the open market precisely because of their toxic assets.
Accountants call it a "credit value adjustment." I call it cheating.
Finding all of this hard to believe? Then consider ...
How Citigroup Mobilized ALL THREE of These
Gimmicks to Create One of the Greatest Accounting
Shams of All Time in Its First-Quarter Earnings Report
I'm outraged. But I'm glad to see that someone besides us is speaking out:
- Meredith Whitney, one of the few no-nonsense analysts in the industry, says that the banks' latest reports are, in essence, "a great whitewash."
- Jack T. Ciesielski, publisher of an accounting advisory service, calls it "junk income."
- And Saturday's New York Times, picking up from their research, lays out precisely how Citigroup has transformed a massive loss into what appears to be a fat profit ...
First, Citigroup deployed the Toxic Asset Cover-Up. By inflating the value of the bad assets on its books, it was able to beef up its after-tax profits by $413 million.
Second, Citigroup used the Reserve Flim-Flam gimmick: By (a) shoving most of its bad-debt losses into last year's fourth quarter and (b) greatly understating its likely losses in the first quarter, the bank legally rigged its books to look like it had made major improvements. Even assuming no further deterioration in its loan portfolio, I estimate this gimmick alone bloated profits by at least another $1 billion.
Third, Citigroup went all out with the Great Debt Sham, marking down its own debt and creating an additional $2.7 billion in purely bogus profits from this maneuver alone.
So here's Citigroup's true math for the first quarter:
|
So-called "profit" |
$1.6 billion |
|
Gimmick #1 |
$0.4 billion |
|
Gimmick #2 |
$1.0 billion |
|
Gimmick #3 |
$2.7 billion |
|
Total gimmicks |
$4.1 billion |
|
|
|
|
Actual result: |
$2.5 billion LOSS! |
And all this despite the fact that Citigroup's loan portfolios actually deteriorated further in the first quarter. Based on its Q1 2009 Quarterly Financial Data Supplement, we find that:
- Net credit losses in Citi's global credit card business surged from $1.67 billion at year-end 2008 to $1.94 billion by March 31. And compared to March 2008, they surged by a whopping 56 percent! (Page 9 of its data supplement.)
- Foretelling future credit card losses, the delinquency rate (90+ days past due) on those credit cards jumped from 2.62 percent at year-end to 3.16 percent on March 31 (page 10).
- Credit losses on consumer banking operations jumped from $3.442 billion on December 31 to $3.786 billion on March 31. And compared to the year-earlier period, they surged 66 percent (page 12).
By almost every measure, Citigroup's first-quarter numbers are worse than they were just three months earlier and far worse than they were 12 months before.
My forecast: Citigroup's effort last week to twist this into an "improvement" will go down in history as one of the greatest banking deceptions of all time.
But Citigroup is not the only one. Nearly all other major banks are suffering similar surges in their credit losses and delinquency rates. Nearly all are using at least one of the same gimmicks to bloat their first-quarter profits. And every single one is destined to see massive new losses, driving their shares to new lows and the banking system as a whole into a far more severe crisis.
Bottom line: Rather than the private-public partnership the government has called for to address the nation’s banking woes, we see little more than private-public collusion to hide the truth from the public, paper over the problems and, ultimately, sink the banks into an even deeper hole."
