The New York Times writes on page one about the signs of recovery in the banking industry, but its story for some reason leaves out some crucial information.
There’s no question there have been welcome signs of recovery in the past few weeks. The problem—one the Times barely addresses—is that we just don’t know how valuable those signs really are.
The Times runs down the list of bright spots:
On Thursday, JPMorgan Chase became the latest bank, after Goldman Sachs and Wells Fargo, to announce blockbuster profits in the first quarter. The reports fed a rally in financial stocks that began more than five weeks ago, when Citigroup and Bank of America, two of the banks hit hardest by the crisis, suggested the worst might already be over.
Banks are enjoying a fresh wave of profits from the government’s efforts to nurse the industry back to life. Ultralow interest rates have led flocks of consumers to seek deals on mortgage loans. Investment banking and trading activities are enjoying a bounce from the billions of dollars spent to thaw frozen credit markets. And even before the results of a new health test for the nation’s 19 largest banks are unveiled, those who can flaunt an improvement from their dismal recent performance are quickly trying to free themselves from government money.
Followed by the requisite “to be sure” paragraph:
But this silver cloud has a dark lining: millions of consumers continue to default on their mortgages, home equity and credit card loans. Corporate loan losses are just starting to pile up. And the residential housing crisis is seeping into commercial real estate with a vengeance…
All that’s good, but there have been worrisome signs of accounting foolishness in the last week or so, and the paper mostly ignores that.
We tipped our hat to the Times’s own Floyd Norris for latching onto Goldman Sachs’s “orphan month” in its boffo earnings report. Now a bank-holding company, the firm moved to a traditional quarterly schedule, leaving December in limbo between the fourth quarter and the new first quarter. Unsurprisingly, Goldman booked a ton of losses in December, helping clear the way for its profitable first quarter.
The under-read Michael Rapoport of Dow Jones Newswires put it well on Tuesday about what’s going on here:
Goldman Sachs Group Inc. just took the idea of a “kitchen-sink quarter” up a notch.
In a kitchen-sink quarter, a company reports a ton of bad news - everything but the kitchen sink - in one quarter’s earnings, making that period look bad but clearing the decks so that future earnings look better.
That’s sort of what Goldman did Monday. Only it put $2.7 billion worth of write-downs and losses into a single month, last December. And it’s a month that Goldman doesn’t have to include in or compare to any other period’s earnings - indeed, the bank barely has to think about or refer to that month ever again.
Right. For instance:
About $850 million of those December write-downs stem from bridge-loan financing the bank provided to Dutch chemical maker LyondellBasell Industries, units of which filed for bankruptcy in January. But Goldman said in its annual report that it had incurred the Lyondell losses in December when it marked its financing to “expected recovery levels,” after the Lyondell entity to which Goldman had extended financing suffered “continued deterioration” in its credit.
Switch that $850 million in losses to January, when the Lyondell units’ bankruptcy actually occurred, and Goldman’s first quarter looks a lot worse.
The Times doesn’t make note of this.
Or take for example Wells Fargo. I pointed to an excellent Jonathan Weil column at Bloomberg yesterday that just picked apart Wells’s report, leaving much of its “profit” in question and calling out investors for falling for it. You can add reporters in there, too.
Weil looked at the Wells Fargo fine print and found that its report didn’t comply with SEC rules, that it most likely used now-banned loan-loss reserves (not illegally—Wells was grandfathered in) to pretty up its books, that its reported tangible common equity was three times what it should be, and that it had a massive pool of assets under “other assets” labeled “other.” Ah, transparency.
Finally, Weil noted that Wells didn’t disclose what its earnings would have looked like without the change in FASB’s mark-to-market accounting rule, which presumably allowed it to hold off on taking writedowns on beaten-down assets and to mark up assets it had already written down.
That’s the only point here that Times reporter Eric Dash touches on, ever so briefly:
With good reason: the banking industry has gotten relief from recent changes to accounting rules, which could inflate earnings.
That should have been explored much more.