Posts Tagged ‘accounting’

Lies, damned lies, and bank profits

21 April 2009

Remember the good old days when “creative accounting” was an oxymoron?

Ever since Citigroup last month projected a profit for the first couple months of the year, big banks have been startling the Street with better-than-expected quarterly earnings reports.  And for a while, the Street was overjoyed and stock prices shot up for banks and overall.  But um, shouldn’t we have been taking these profit figures with a big grain of salt?

  • Advance manipulation (read: lowering) of expectations so that you can miraculously beat those expectations is an old, old game.
  • Accounting chicanery played no small part in getting us into the current mess.   Covering up losses to impress the market, just like covering up profits to thwart the taxman, is legal and commonplace, under generally accepted accounting practices.
  • An excessive focus on short-term profits also played a big part in getting us into this mess.  Shouldn’t we be looking at other factors, too?  In particular: Bank share prices were way down because of the widespread belief that the banks were either insolvent or headed that way.  Positive short-term profits (cash flow) and solvency (assets greater than liabilities) are two different things, and can coexist at least for a little while.
  • The federal government has subsidized the big banks to the tune of tens of billions of TARP money apiece.   Shouldn’t that make it easier for them to be profitable?  (The whole point was that the banks would loan that money out profitably.  Granted, that hasn’t happened to the desired extent — I just heard on the radio that total lending is lower now than before the TARP legislation — but banks are surely using their TARP money for something that generates income, like T-bonds, no?)

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