Posted by: Mark Gimein on October 24, 2011 at 6:30 AM
Last week, as Occupy Wall Street was occupied with Wall Street’s misdeeds, Wall Street itself was occupied with earnings. These have proved so opaque that if the financial press ended last week explaining the earnings, the next days may be devoted to explaining the explanations.
The basic problem is that the big banks made a huge amount of money in the last quarter, except really they didn’t. Bank of America and Morgan Stanley reported billions of dollars in income … in other words, a dismal quarter as Bloomberg’s Michael J. Moore reported. The issue here is “debt value adjusted,” a phantom profit measure that lets banks record earnings when their own bonds fall in value based on the theory that they could buy it back at a discount.
The accounting maneuver amped up the earnings of most of the banks, but the optics of all this may not be so good for the banks after all. First they’ve gotten repeatedly hammered in the press for inflated earnings numbers (the Financial Times’ Alphaville is notably comprehensive on this). Now guess what? Those same inflated numbers will provide gunpowder for everyone who looking for evidence of excessive profits.
The one investment bank that dodged this is Goldman, which was fortunate enough to declare a loss. But now we still get to debate whether that means it’s doing something wrong or doing pretty much what it should be doing.
(Bank vault image by grittycitygirl via Flickr.)