Andrew Ross Sorkin wrote an article in today’s New York Times, “Bank Profits Appear Out Of Thin Air”, confirming my suspicions:
This is starting to feel like amateur hour for aspiring magicians.
Another day, another attempt by a Wall Street bank to pull a bunny out of the hat, showing off an earnings report that it hopes will elicit oohs and aahs from the market. Goldman Sachs, JPMorgan Chase, Citigroup and, on Monday, Bank of America all tried to wow their audiences with what appeared to be — presto! — better-than-expected numbers.
But in each case, investors spotted the attempts at sleight of hand, and didn’t buy it for a second.
With Goldman Sachs, the disappearing month of December didn’t quite disappear (it changed its reporting calendar, effectively erasing the impact of a $1.5 billion loss that month); JPMorgan Chase reported a dazzling profit partly because the price of its bonds dropped (theoretically, they could retire them and buy them back at a cheaper price; that’s sort of like saying you’re richer because the value of your home has dropped); Citigroup pulled the same trick.
Bank of America sold its shares in China Construction Bank to book a big one-time profit, but Ken Lewis heralded the results as ‘a testament to the value and breadth of the franchise.’
Sydney Finkelstein, the Steven Roth professor of management at the Tuck School of Business at Dartmouth College, also pointed out that Bank of America booked a $2.2 billion gain by increasing the value of Merrill Lynch’s assets it acquired last quarter to prices that were higher than Merrill kept them.
‘Although perfectly legal, this move is also perfectly delusional, because some day soon these assets will be written down to their fair value, and it won’t be pretty,’ he said.
Meredith Whitney said the same thing on Bloomberg TV yesterday afternoon calling first quarter bank earnings “The Great Whitewash”.
Anybody looking for an honest assesment of financials books and business: Good Luck! They’re just not interested in that right now.