“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.”

-Steven Roth, professor of management at the Tuck School of Business at Dartmouth College, on Bank of America’s earnings fraud

>

We been discussing how many of the recent profits were not “real” — i.e., based on one time sleights of hands — losing a losing month, AIG flow throughs, bailout monies, etc.

Thus, it is gratifying to see on the front page of the NYT Business section, Andrew Ross Sorkin’s article with the provocative but accurate title, Bank Profits Appear Out of Thin Air.

The quote above comes via this same article. It refers to Bank of America’s fraudulent earnings scheme of booking a $2.2 billion gain that falsely increases value of the  Merrill Lynch’s assets recently acquired. BofA decided to give themselves a phony profit bump by raising the value of Merrill assets to prices significantly higher than Merrill kept them.

The banksters who have emptied the US Treasury of its money continue the same games of accounting sleight of hand, finacial engineering, and other tricks of the trade that helped caudse the mewltdown in the first place.

Instead of recievership and liquidation, we rewarded these cretins with your grandchildren’s lunch money.It is idiocy on a grand scale, beyond my feeble imagination.

Excerpt:

“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.”

But it wasn’t only the banksters at BofA pulling this nonsense; All the cool kids were doing it:

• Goldman Sachs and the disappearing month of December
• JPMorgan’s profit was due to repricing the value of its falling bonds
• Citigroup also used the bond trick.

At least investors are no longer being fooled by these shenanigans. Bank of America’s stock plunged 24% yesterday in reaction to the fraud.

>

Source:
Bank Profits Appear Out of Thin Air
ANDREW ROSS SORKIN
NYT, April 20, 2009

http://www.nytimes.com/2009/04/21/business/21sorkin.html

See also:
Citigroup’s Shareholders Wondering When Treasury Ousts Board
Ian Katz and Bradley Keoun
Bloomberg, April 21 2009

http://www.bloomberg.com/apps/news?pid=20601087&sid=aID_zRZJmmqQ&

Category: Bailouts, Earnings, Financial Press

Please use the comments to demonstrate your own ignorance, unfamiliarity with empirical data and lack of respect for scientific knowledge. Be sure to create straw men and argue against things I have neither said nor implied. If you could repeat previously discredited memes or steer the conversation into irrelevant, off topic discussions, it would be appreciated. Lastly, kindly forgo all civility in your discourse . . . you are, after all, anonymous.

88 Responses to “Magic Bank Profits”

  1. call me ahab says:

    hey Barry- nice and clean site- i like it-

    a lot of earnings coming out today- many industries- not pretty so far- the “tale of the tape” to use a boxing analogy will give us a good idea on where we stand as an economy- especially- comments on guidance or lack thereof

  2. Bruce N Tennessee says:

    Agree…I clicked on “the Think Tank”…it said..”nothing in it”….

    …hmmmm

  3. wisedup says:

    Thank god you’ve returned Barry, you’re one of the four best money bloggers
    http://money.cnn.com/galleries/2009/moneymag/0904/gallery.Money100_Money_bloggers.moneymag/2.html

    the stupidity of their last ditch moves indicates that they are close to capitulation.
    TBTF? nah TSTS — too screwed to save

  4. call me ahab says:

    oh and by the way- looking at comments in a previous post- franklin is a a lone soul fighting a tidal wave of dissenting opinion- so being a man of fine caliber- i will refrain from jumping in the fray on any errant comments from dr. franklin-

    however- franklin- please enlighten me as to other sites that you may frequent so that i may attempt the same- Daily Kos possibly? (sorry had to get that in- but I kid, I kid)

  5. ahab,

    franklin only responds to the “Queen of Diamonds”
    http://tags.library.upenn.edu/eldoran/the_manchurian_candidate

  6. rktbrkr says:

    I see Treasury reported “only” a $900 million loss on their 300B CITI guarantees – which doesn’t seem so bad but the guarantees were only in effect for about 1 month – which would be about $10B annualized. I never once saw any costs for reserves associated with the 700B of guarantees that were ladled out to banks and AIG. Projecting that loss rate over the full 700B would be 20B-25B of losses this year, I wonder how much Treasury lost this Q while the banks were booking their profits?

    April 21 (Bloomberg) — The U.S. Treasury estimated $900 million in losses as of the end of last year on $301 billion in Citigroup Inc. assets that the government is guaranteeing, according to a new audit report released today.

    The Treasury, the Federal Reserve and the Federal Deposit Insurance Corp. have agreed to share in losses on the assets as part of $50 billion that Citigroup has received so far under the Troubled Asset Relief Program, the $700 billion bank rescue effort enacted last year. No estimate of losses since Jan. 1 is yet available, according to the report from Neil Barofsky, special inspector general

  7. dead hobo says:

    1) The new site is excellent. It’s functional, it looks good but nothing is distracting.

    2) I watched a few minuted of Cramer last night. I think I finally see what the others here have been howling about. If someone was inclined to follow his advice and only saw the few minutes I watched, they would be pouring cash into the markets again today or very soon. That’s almost criminal advice. It’s sad. I learned a lot by reading his books, but his advice is horrible now. In the past he always attempted to disclaim and explain while putting on his show. Last night, it seemed like the Pollyanna Hour. Too bad.

    3) http://www.marketwatch.com/news/story/Even-Jack-Bauer-couldnt-stop/story.aspx?guid={BE0D1772-A628-454D-80BF-C4484CEBA7DF}

    I don’t know if this was written tongue in cheek, but it’s spot on in a lot of places. The soft corruption of association has infested the US Government and the Treasury is being pillaged. The only way to fix a lot of it is by firing a lot of people at each place on the dole. You have to break the rhythm. Otherwise, these morons will run the entire world economy into the ground in a couple of years. I’m not exaggerating.

  8. call me ahab says:

    MEH

    brainwashed? hmmmm- well he is a graduate student which means he has been in a University for some time . . . hmmmm – you may have something there

    Also- earnings so far have been grim- CAT slashed guidance- not a good sign

    US Bancorp doubled loan loss reserves- beat estimates- I hope everyone understands- that any money coming from mortgage financing was another gift from Uncle Sam by forcing down interest rates (by buying long term bonds- QE). Good ole’ Uncle Sam

  9. far as I can tell, GS still got away with it…

    the story died and no one cared, just like the AIG hand-off, which was even more disgraceful

  10. rktbrkr says:

    Fraudulent profits and deceptive stress tests, that should bring in lots of fresh capital! Just waiting for Tiny Tim’s Toxic Scheme to fall flat on it’s face soon. Dimon , Jim torpedoed that I think

  11. Rajesh says:

    BR: “Instead of recievership and liquidation, we rewarded these cretins with your grandchildren’s lunch money.”

    It is more a case of receivership and losing you a lot of your grandchildren’s money or losing a little of your grandchildren’s lunch money and hoping that will be enough.

    Nationalization is the most expensive option; it may be the right option. Spending an enormous amount of money now may be more cost effective over the long term than the small amounts we have put at risk so far; but banks are complicated to value. If we could predict which loans will go bad in the future we could make a simple economic decision. But since political actions here and abroad will determine which loans will go bad and which loans will be repaid.

    GM is a greater danger to the economy than CitiGroup. If the Obama administration can take measures to restore economic growth, the banks will take care of themselves.

    ~~~

    BR: I disagree — I believe you are wrong about nationalization/receivership — it is the cheapest approach: the right parties, namely, the shareholders, creditors and bondholders take the hit. There should be little or no taxpayer money involved — certainly much cheaper than the trillions poured down the rathole so far.

  12. rob says:

    “At least investors are no longer being fooled by these shenanigans” Sorry but I have to call BULLSHIT on this one! It is the part this pisses me off the worst! They sucker the retail investor into purchasing because of the better than expectations crap. Average retail investor just wants to stick there money in and let it sit. They sound the all clear and Joe Retail comes in, only to have the traders eat his lunch a few days later! Makes me sick and madder than hell!

    ~~~

    BR: You may be right — I assume a certain degree of sophistication amongst investors and keep forgetting most of the investing public are treated like rubes.

    (You people have spoiled me)

    One thing is clear: The “traditional” individual investors are not present in the same numbers the were in the 1990s . . .

  13. hipster says:

    but, we have now been programmed to buy the dip….i think it’s a set-up. A pump and dump….my thoughts are that buying this dip is way too early and people will get hurt buying this dip.

    I think the PPT had more to do with this rally to kill the shorts off or at least buy some time and rebalance the etfs so their move on this downswing will not be so parabolic.

    Earnings and fundamentals seem to be dictating this mornings action.

  14. dead hobo says:

    BR said

    At least investors are no longer being fooled by these shenanigans. Bank of America’s stock plunged 24% yesterday in reaction to the fraud.

    comment:
    ———————
    To me, the BoA report was the most honest of the bunch, yet it gets credit for finally causing the markets to consider the obvious and tumble. In a normal quarter, both items that raised earnings to positive territory would be ignored. I don’t know if the BoA report was published with the same intent to scam a gullible public as the other 3 banks, but it’s still shameful that only a handful of reporters managed to print reports that drew attention to the scams. Probably 90% of reports either ignored the scams or buried the lead at the bottom of the story. Then they all appeared to read from the same press release. Today, everyone seems to notice the problems. What phonies. FYI, the NYT appeared to be on the job throughout.

  15. Onlooker from Troy says:

    rob Says:
    April 21st, 2009 at 8:40 am

    They sucker the retail investor into purchasing because of the better than expectations crap. Average retail investor just wants to stick there money in and let it sit. They sound the all clear and Joe Retail comes in, only to have the traders eat his lunch a few days later! Makes me sick and madder than hell!<<<

    Exactly my feelings on this. By running this B.S. P.R campaign about green shoots and banks earning money in the first quarter, the admin, Bernanke, Wall Street, and the media have perpetrated a fraud upon the retail investor who takes them at face value and thinks that the market must know more than they do and they better get back in or miss the boat. We’ve hurt the little guy again in order to prop up these money machines. The fleecing of America.

  16. “It is more a case of receivership and losing you a lot of your grandchildren’s money or losing a little of your grandchildren’s lunch money and hoping that will be enough.”

    I keep hearing this over and over again..

    Could we, finally, see an attempt at a Proof of that Conclusion?

    You know, need not be a dissertation, but, maybe?, just maybe, some of the underlying Premises?
    ~~

    These talking-point automatons are too much, at least Pavlov’s Dog would fetch the Paper..
    ~~
    take a page from BR, he stands up with his Opinion, lays out the case, and leaves it open for discussion/parsing.

    simple Declaratives are, seldom, as useful..
    ~~

    ahab,

    if CAT didn’t produce piece of ‘Heavy Equipment’, save, maybe Parts, for the next 24 months, noone would notice..
    the next time you go for walkabout, notice the number of idle “Pieces” sitting hither and yon..
    ..ask Ransom what the ‘Capacity Utilization’ is on their Rental Fleet, while you’re at it..

    Econonic ‘Stimulus’, my eye! just a different form of ‘kneel for Cash or Hari-kari’

    It is no shortage of Things we lack, It’s a Shortage of Men & Women who aren’t afraid of Real Solutions..

  17. Marcus Aurelius says:

    Fraud to cover fraud cannot end well.

    All of the commentary here and elsewhere does not change the facts. We can argue and opine as if the facts don’t matter, but that does not change the truth and reality of them. These are the facts:

    1. The banks are insolvent.
    2. The government is insolvent.
    3. The people are insolvent.
    4. Our economic base is neither sound nor functional.
    5. Ours is not a capitalist system.
    6. Our currency and our laws are issued by fiat.
    7. Our Constitutional Republic is gone.

    On the positive side of the ledger:

    1. It’s spring.
    2. I just saved a bundle on my car insurance.

  18. cjcpa says:

    Marcus,
    did you stay at a Holiday Inn Express last night?

  19. Marcus Aurelius says:

    cjcpa:

    Not last night, but months ago. It’s the gift that keeps on giving. Best investment I ever made. Even had a free breakfast in the lobby.

  20. cjcpa says:

    Equivocation is my new whipping boy.

    From google finance main page:
    *–GFT on Tuesday wrote that a decline in the US stock market on Monday could have been “healthy profit-taking after the six week rally,” though it could also have been “the start of a concerted sell-off which will gather pace.” The firm expects corporate results to drive the tone of the market–*

    Either it is or it isn’t. We’ll see what happens…
    Thank you for the marvelous insight. /sarc.

    It’s not that I would begrudge anybody for being uncertain, but I don’t think such a tautological, empty sentence deserves to be the feature….

    I promise not to cut and paste from there again.

  21. E says:

    Marcus, while I agree with all of your post, let me add the caveat – all insolvencies declared above depend on the value of the dollar remaining constant, or even going higher. The situation is much different if the dollar goes south.

  22. Marcus Aurelius says:

    E:

    Agreed (if I understand your point correctly). A strong dollar enslaves the indebted/insolvent.

  23. E,

    did you get that right? those institutions become ‘less’ insolvent with lower U$D value?

  24. franklin411 says:

    You guys will have to hold the apocalypse watch largely without me today. As you know, it’s Tuesday, and Tuesdays/Thursdays are very busy for me. I have the gym from 7 am to 9 am, and then I’m working from 9-1 (teaching a class…I have more work/getting more jobs now than I’ve ever had in the past few years). And then at 1:45, I have an appointment with a very cute blonde to do a bit of shopping.

    Never fear, though…my paycheck went up by $40 a month thanks to President Obama’s payroll tax cut, so I’m getting a Blackberry 8900! The data plan was too rich for my blood before, but with these new funds from the Economic Recovery and Reinvestment Act, I feel fine about spending an extra $30/mo on an indulgence like a data plan. My BB is still in transit, but maybe by Thursday I’ll be able to blog on the go!

    The point? Things are improving, for those willing to see it. The ERRA funds are only barely starting to affect the economy, and stimulus will ramp in the second half of the year. Already, millions of poor people like me are benefiting from the President’s policies and we’re spreading that love by spending. Oh, and to top it all off, my United Technologies (UTX) is up 4% after they pointed out that the recovery is underway and orders are rebounding.

    It’s a nice day outside. 86 degrees today and I live at the beach, in a college town. There will be hotties in bikinis strutting outside my window all day, I assure you. Take off the blinders, cancel the apocalypse party, and enjoy the recovery!

  25. call me ahab says:

    anyone have a take on AAPL tomorrow? they typically low ball their estimates and then beat- I wonder if their high end strategy may work against them in this environment- whole tech sector will take a dive if AAPL doesn’t beat

  26. FrancoisT says:

    @Rob:
    “They sucker the retail investor into purchasing because of the better than expectations crap. Average retail investor just wants to stick there money in and let it sit.”

    There would be a very simple way for retail investors to stick it to Wall Street big time.
    Let’s call a national 401k strike: everyone with a 401k direct the fund manager to put everything into cash/money market until…they start treating us as customers, not problems to manage and chickens to be plucked.

    Imagine that; no more annuity for the fat cats, a gigantic vacuum of money out of the market.

    Would teach the motherfuckers a great lesson.

  27. Transor Z says:

    Solipsism:
    “Inside every married, middle-aged professional with young kids and a dog is a 20-something Franklin struggling to emerge.”

    Enjoy the beach days, dude. Just remember that today’s “very cute blonde” can become tomorrow’s “person you better check in with before unilaterally deciding how to spend that ‘extra’ $40 a month on a data plan or video games.” Otherwise, you’ll learn what “apocalypse” REALLY means. ;)

  28. FrancoisT,

    if you could couple that w/ some 3x Short ETF purchases, peep could, almost, make themselves whole, pre-waterfall, all by themselves..

    “Defund to Defend”

  29. E says:

    Barry, one more to add to the list of “Magic Bank Profits” is WFC:

    “Details were scarce and we believe that much of the positive news in the preliminary results had to do with merger accounting, revised accounting standards and mortgage default moratoriums, rather than underlying trends,” wrote Cannon, who downgraded the shares to “underperform” from “market perform.” “We expect earnings and capital to be under pressure due to continued economic weakness.”

    http://www.themarketguardian.com/2009/04/wells-fargo-may-need-50-billion-in-capital-kbw%E2%80%99s-cannon-says/

  30. sunny45 says:

    It appears almost every one knows the profits are fake cooked up with accounting gimicks, but the Mkt keep going up for the last 6 weeks!

    Is the investing public that dumb or suckers for traders who are on the momentum euphoria? I

    In the short term being ‘insane ‘ appears to be profitable!!

  31. E says:

    Hoffer,

    These institutions become solvent when the dollar decreases to a certain point.

  32. WaveCatcher says:

    Wall Street and its captive government “servents” are just pimping their wares as usual. It’s all part of the wealth transfer game.

    Should we act surprised? It would be insane to expect anything different given their motives. (Although not insane to hope for better from them via proper regulation.)

    The fraud and deception that will lead Joe Retail to “buy the dip” will eventually lead to a genuine revulsion of stock ownership. This unfortunately is a required part of the bottoming process leading eventually to a durable bottom.

    We won’t see a durable bottom until Joe Retail is thoroughly disgusted with Wall Street, and its wares.

  33. WaveCatcher says:

    oops, s/b “servants”

  34. Stuart says:

    In Chris Whalen’s recent IRA report re: Citibank and the FDIC, here’s why the bank facade cover-up is continuing. It’s pretty clear really. despicable, disgusting but very simple and very clear. It’s surprising actually this hasn’t garnered more interest and discussion considering the credibility of the source and the implications contained within this statement.

    “Foreign bond holders, like the government of China, have reportedly told the Obama Administration that further losses to debt holders of US banks will result in a boycott of US Treasury auctions.”

    http://us1.institutionalriskanalytics.com/pub/IRAMain.asp
    (extracted from 3rd last paragraph)

  35. Pool Shark says:

    To Franklin:

    “Fred, is that you?” ;-)

  36. Mannwich says:

    Gosh, I didn’t know that franklin411 was an important bellweather for the rest of the country. I think I’ll turn bullish now.

  37. hipster says:

    i am so damned pissed that shareholders and bondholders are not wiped out instead of the taxpayer being wiped out. Fuck you Geithner.

  38. Marcus Aurelius says:

    franklin 411 is blissful.

    The barn is on fire. Never a better time to roast marshmallows.

  39. E says:

    Stuart, that is quite probably the entire ballgame.

  40. Transor Z Says:

    April 21st, 2009 at 10:14 am
    Solipsism:
    “Inside every married, middle-aged professional with young kids and a dog is a 20-something Franklin struggling to emerge.”

    Enjoy the beach days, dude. Just remember that today’s “very cute blonde” can become tomorrow’s “person you better check in with before unilaterally deciding how to spend that ‘extra’ $40 a month on a data plan or video games.” Otherwise, you’ll learn what “apocalypse” REALLY means.

    >that was a gem…if I only had known then what I know now….

  41. Mannwich says:

    Blissful and wistful. That’s Southern Cal for you. They don’t call it La-La land for nothing.

  42. MRegan says:

    This from Ross Sorkin’s dealbook report caught my eye:

    “But that was before the government reached into its bag of tricks again. Now Treasury, instead of putting up new money, is considering swapping its preferred shares in these banks for common shares.

    The benefit to the bank is that it will have more capital to meet its ratio requirements, and therefore won’t have to pay a 5 percent dividend to the government. In the case of Citi, that would save the bank hundreds of millions of dollars a year. ”

    This swapping of preferred for common gambit strikes me as a desperate move. The basic is problem is you cannot capitalize debt. You cannot spin hay into gold. Why do they insist on doing what cannot be done? Although after watching my fellow peasants protesting to further the privileges of the wealthy and listening to the morons with access to the microphone talk about the efficacy of torture after the 183 times in a month tidbit and the whispers about what they did to KSM’s two sons (at the time 7 and 9), why not? Anything can happen. Pumpin’ yer thumbs on a PDA can produce ‘plusvalía’. Sure, why not?

  43. Bruce N Tennessee says:

    Franklin411:

    We enjoy you here, boy. Don’t think we don’t. Glad your paycheck went up 40/month due to Obama. I had to pay an extra 5 figures due to AMT…so enjoy my money and the blonde…

  44. call me ahab says:

    I know that everyone is Macro based on this site (thus- The Big Picture) – however any comments on my AAPL post would be appreciated-

    @ MRegan-

    from your previous posts it is apparent that you are from Peru, Columbia, Chili or there abouts- been all over the world but have not made it to South America (why?)- I will need to hit you up for advice/ideas when I manage to get off my ass and check the place out.

  45. Stuart says:

    E, that IMO is the ENTIRE ballgame and it’s largely being missed. Astounding.

  46. Myr says:

    The bailout of the bailout will need a bailout.

    The entire system is corrupt and bankrupt. Companies are allowed to pretend they have profits. The government provides trillions in guarantees and pretends there will be no losses. Hand in hand, they bamboozle the average person with a coordinated media barrage of lies. This is a game they can not win…it is a type of ponzi scheme of confidence. The average person has no freaking clue what to make of what’s happening…they just know if the market is up or down. Only when the bear returns in force later this year will people understand that we who have been yelling our heads off were right. Until then, they will be confused and paralyzed.

  47. scm0330 says:

    franklin used to be a frequent blogger over at real money when they were giving out the .edu subs for free. he left when the free period ran out. now, with his porkulus money, maybe he could subscribe!

  48. Stuart says:

    Geithner testimony about the use of TARP funding to the banks is beyond useless. He stonewalls andd doesn’t say jack $hit! He’s side stepping every question with broad pie in the sky explanations. It’s like asking him, do you think it’s going to rain tomorrow. His reply: well, with the tropical winds blowing west and the lessening of sun spot activity, the oceans water temperatures are .4 degrees below their 35 year historical median in the south pacific. Our objective is to give a fair and balance viewpoint of weather in general for the best benefit of all potential recipients of such information and to ensure we give full complicity with anyone wishing to make weather forecasts. WTF????

  49. AmenRa says:

    LMAO. Good one Stuart.

    p.s. With the turnaround yesterday I’m now patiently waiting for confirmation in either direction.

  50. batmando says:

    Stuart -
    The other parts of Chris Whalen’s piece that are telling…

    “One of the reasons that the Obama Administration provides for not taking action on Citi and other insolvent money center banks is that regulators lack the legal authority to act against a bank holding company (BHC) vs. the federally insured subsidiary banks. But this is not true. Federal regulators do have the power to compel management and board changes within BHCs. And they have two very powerful threats to use against officers and directors who do not take the “suggestion.”

    “First, the Fed and other regulators have the power to issue judicial orders and, more important, to commence enforcement actions against the officers and directors of a BHC.

    “Second and more important, the regulators have the ultimate threat of resolution, meaning the FDIC takes control of the subsidiary banks, bankruptcy for the parent holding company, years of civil litigation for the officers and directors, and also a possible enforcement action.

    “With that background, it needs to said that the only thing standing between America and a solution to zombie banks is a lack of guts in Washington.”

  51. wally says:

    Stuart,
    That is an interesting point: he is, either by nature or choice, not an honest and forthcoming person. My general experience is that people who cannot answer a straight question are avoiding doing so for reasons – they understand perfectly well that they are doing something that they should not be doing.

  52. Avl Dao says:

    @ Marcus Aurelius at 9:39 am “Fraud to cover fraud cannot end well….” and your 7 facts.

    Good & succinct.
    I’m still believing the truth-n-reality are that 1) HH debt is at 370% of GDP, an unstable and unsustainable level; 2) there’s no effective mechanism for US wages to significantly rise against the tidal pull of globalized wages pressures; 3) the US GDP model is still structured to be 70% driven by consumer spending that is debt-fueled.
    This is more than a formula to prevent any sustainable recovery; it sets the stage for our continued involuntary passage – kicking & screaming – thru a Structural Economic Transformation akin to 1973-1982 in scale, scope and suffering, but not in specifics. This SET is different.
    This time we’re being pushed away from our ‘dying’ GDP model and our naive 25-yr experiment with operating a huge nation’s GDP via 70% from consumer debt and spending.

    But where are we being pushed to in this SET …and can we guide our trajectory?

  53. klwenck says:

    If you could actually read financial statements you might have noticed that a bank that you think should be in “receivership and liquidation” had $173 billion in cash on their balance sheet at the end of the quarter and another $176 billion in cash equivalents such as short-term marketable securities. So, Bank of America definitely has enough liquidity to get through the current environment and so I guess it isn’t insolvent…

    But, moving on to other things, for all of the people who were biting their fingernails down to their knuckles yesterday about the increase in non-performing assets, they probably didn’t notice that loan loss reserves are still larger than non-performing assets.

    Loan loss reserves at 3.0 percent of loans and leases are very substantial as well, especially when viewed against the very pessimistic scenario of someone like Mike Mayo with his brave prediction that credit losses will peak at 3.5 percent. For practical purposes, Bank of America is already fully reserved against any likely credit losses. Average losses on non-performing assets are also usually no more than 20 to 30 percent of the loan value even in this very challenging environment.

    While you were thinking of catchy things to say in your blog to further mislead the ignorant, you also probably didn’t listen closely to some interesting things said on the conference call. Answering a question from an analyst who seemed concerned about the size of the credit loss provision, Lewis answered “well, in a quarter where we had the additional income from equity gains and the Merrill debt revaluation, you might say that in such a situation that we could be more conservative with the credit provision for the quarter.”

    Lewis also made additional comments about concerns that the bank will need more capital by stating again that he didn’t see that they needed more capital. Given the $350 billion of liquidity on the balance sheet, Bank of America doesn’t need any more capital for liquidity reasons. If they keep adding to loan loss reserves at at rate roughly in line with operating earnings, they also won’t need any more capital for regulatory or balance sheet purposes.

    You made another interesting comment too, however, about “investors not being fooled” given that the stock was down 24 percent. The supposed wisdom of investors should be evaluated with a perspective on their long-term results where 80 to 90 percent of supposedly “professional” money managers managing mutual funds, hedge funds, and institutional accounts do not beat market indexes over any period of time.

    As such, the knee jerk reaction yesterday was probably just yet another reaction of the sloppy and the ignorant about whatever delusion they might have been having yesterday. If my comments sound arrogant and without any basis, they should be viewed in context of the fact that I have a 20 year performance record managing mutual funds that is above all market indexes and am now retired.

    I am having fun with my own personal portfolio, however, and given Bank of America’s $2.4 trillion of assets and historical return on assets metrics of 1.2 to 1.4 percent of assets, even a very conservative projection of only earning 0.8 percent of assets in the future would result in earnings per share of over $3.00. I guess the people yesterday acting like cockroaches when the lights are turned on don’t have the same perspective that a stock at less than three-times normalized earnings might be interesting.

  54. ZenProfit says:

    “Instead of recievership and liquidation”

    should be: ” Instead of receivership and liquidation”

    Keep up the great work.

  55. bigal says:

    “The entire system is corrupt and bankrupt.”

    MORALLY corrupt and bankrupt. That is the bigger problem, money games are just the symptom.

    The audacity of lies/spin are getting bigger and bigger. The end game for the U.S. economy will come much sooner than we think. You can regulate banks, but you cannot regulate morality and honesty. That can only happen with true leadership and firm consequences.

    I sure hope the Audacity of Hope is much larger and stronger than I see it today. Let us all pray.

  56. Stuart says:

    @Batmando: I didn’t think that was correct either but it’s all part of the obfuscation. Even Geithner’s performance so far this morning. As frustrating to watch, everything ties in now with this statement that keep the banks whole, else we pull the Treasury plug. It explains the continual efforts by all players that would be in the know to continue to pump funds into the banks with seeming kit gloves. It explains Geithner’s stonewalling this morning as well. Pretty much anything that in the past year made you scratch your head and wonder what the hell is with this, including the FASB rule changes.

  57. Bruce N Tennessee says:

    I am sure this has been commented upon, but this is the way you make magic profits…already gave 150 billion at the office? Well, they are back for another 30 billion…180 billion and counting….

    http://news.moneycentral.msn.com/provider/providerarticle.aspx?feed=OBR&date=20090420&id=9802110

    AIG closes deal for $30 billion in new federal funds

    “NEW YORK (Reuters) – American International Group Inc , which has received more than $150 billion in taxpayer support since last September, has closed a deal to access nearly $30 billion in additional federal funds.”

    I realize most already knew this, but it still chaps me…and I see today, that instead of bankruptcy, we are scheduled to give more to GM and Chrysler…

    http://finance.yahoo.com/news/GM-Chrysler-to-get-55B-more-apf-14985008.html?.v=10

    GM, Chrysler to get $5.5B more in government loans

    If you are going to bankrupt them, why loan more money just before you do?

    …Am I missing something here…or is there no common sense on the horizon?

  58. Mannwich says:

    @klwenck: After all that we’ve seen, why exactly would you or anyone else trust any of the numbers the banks put out? What’s your basis for this implicit trust? Just asking. Not trying to be snarky. Am genuinely interested in your opinion on this…

  59. leftback says:

    It appears that a Dead Bank Bounce is in effect today, as predicted. Resistance now exists in the SPX 840-850 zone and I would expect this little rally to fail in due course.

    Wonder what the Johnny Retail trade is thinking about the bank and REIT stocks they bought on Thursday? I also wonder how long it will take for weak hands to unload those shiny new purchases. Perhaps ben22 will give us a report from the retail trenches…

    On a more macroeconomic topic, what happens when Tiny Tim has burned through the remaining $170B of TARP funds and has to come back to Congress? We must be getting quite close to the wheels coming completely off the cart.

  60. rktbrkr says:

    Bruce, for some reason the Bush/Paulson financial rope-a-dope plan has been carried over intact – even with a change in admins there is built in resistance to change. I think history books will describe Geithner as O’Bamas worst mistake and the reason for his single term. WE ARE IN TOUGH SHAPE as will become painfully clear when bubble state foreclosures pull the banks over the precipice with Tiny Tim grasping their ankles on the way down.

  61. klwenck says:

    reply to Mannwich:

    Financial institution financial statements and leverage ratios have been a joke for years but there are some things you can trust such as cash and cash equivalents and cash flow. The rest of the stuff you can make your own guesses about. As we have seen from Wells Fargo, however, banks can be very profitable when their short-term funding costs are essentially zero.

    Another aspect of the whole debacle that has not been commented about is that there will be much less competition in the future among lenders and less competition means higher interest rate spreads. Another “dirty little secret” of the whole debacle that no one seems to want to talk about is that hedge funds have been providing our economy’s marginal lending capacity for years while playing the carry trade. Now that 27 year olds at hedge funds are out of the lending business as their prime brokers have drastically reduced allowable leverage, banks will be much more profitable without such inexperienced and incompetent competitors in the lending market.

    The eventual outcome of all this once the U.S. works through the overall credit contraction from hedge fund “lenders” being removed from the market will be a much more sustainable economy and a very profitable group of major banks.

  62. DL says:

    What gets me as that only now (today) is Congress holding discussions on bank bailouts. Stiglitz and others are testifying today. Their attitude (Congress) is to go ahead and spend $787B FIRST, then ask questions later.

    Well, I suppose that being late is marginally better than never.

  63. Transor Z says:

    @klwenck: Even taking the BoA financials at face value, you must admit that Q1 included some sizeable one-time transactions on the investment side that are extremely unlikely to repeat in Q2. There is considerable skepticism about BoA and the other major banks’ ability to repeat Q1 performance having to rely more heavily on earnings from conventional lines of business. No sophisticated person looks at a single snapshot under such aberrant circumstances and gives the patient a clean bill of health.

  64. Mannwich says:

    @klwenck: Thanks for your analysis. You may indeed be right but what worries me is that it’s hard for anyone to have any confidence or trust in any of these firms or the entire anymore and that’s whole basis for everything in our system. Until any semblance of that returns, I fear we’ll still be wandering aimlessly in the wilderness.

  65. Bruce N Tennessee says:

    http://www.nasdaq.com/asp/EconodayFrame.asp

    Bank of Canada statement 4/21/09.

    “In an environment of continued high uncertainty, the global recession has intensified and become more synchronous since the Bank’s January Monetary Policy Report Update, with weaker-than-expected activity in all major economies. Deteriorating credit conditions have spread quickly through trade, financial, and confidence channels. While more aggressive monetary and fiscal policy actions are underway across the G20, measures to stabilize the global financial system have taken longer than expected to enact. As a result, the recession in Canada will be deeper than anticipated, with the economy projected to contract by 3.0 per cent in 2009. The Bank now expects the recovery to be delayed until the fourth quarter and to be more gradual. The economy is projected to grow by 2.5 per cent in 2010 and 4.7 per cent in 2011, and to reach its production capacity in the third quarter of 2011. Given significant restructuring in a number of sectors, potential growth has been revised down. The recovery will be importantly supported by the Bank’s accommodative monetary stance.”

  66. MRegan says:

    Ahab-

    I am from Chicago, one of my alter egos is from Peru. Regarding South America, please feel free to ask me, if I know something of value I will share it, and if I don’t, I will make something up. Hopefully you can separate the wheat from the chaff. (Here’s a hint- I laugh quietly when I am bs’ing).

  67. Mannwich says:

    Testing 1, 2, 3. WordPress eating comments again.

  68. E says:

    Stuart, one more follow on to your comment about the whole ballgame….from Chris Whalen’s piece:

    “Foreign bond holders, like the government of China, have reportedly told the Obama Administration that further losses to debt holders of US banks will result in a boycott of US Treasury auctions.”

    Geithner is the Treasury Secretary. It is quite arguable that his number one priority, or better yet, his number one responsibility, is to protect the US Treasury market. Not the banks, not the taxpayers, not even Obama’s administration and political capital. Just the Treasury market.

    Worth pondering, anyway.

  69. leftback says:

    @DL said:

    “What gets me as that only now (today) is Congress holding discussions on bank bailouts. Stiglitz and others are testifying today. Their attitude (Congress) is to go ahead and spend $787B FIRST, then ask questions later.”

    I am sure that many people are familiar with this shoot first, ask questions later approach. Such exercises in pseudo-democracy are common in many walks of life, from academia to government. One can only hope that Stiglitz’s arguments can reach some of the smarter moderates on both sides of the aisle, at least those who haven’t already been previously captured by the Goldman Sachs spacecraft.

  70. Avl Dao says:

    I can say this as a long-time resident of Illinois and a voter who supported Obama: at some point we have to hold Obama 100% accountable for selecting Geithner and Summers, and supporting Bernanke, as well as supporting the original TARP to Congress, the modified TARP, and TARP II.

    It is juvenile and delusional to do other-wise.

    Team Obama will prove to be far more moldable by severe public pressure than people realize; but first we must get over our embarrassment at our naiveté.
    It is not a lost cause…but will be if folks continue to assume that merely voting on 11/4/09 was the one-time cure-all act called for. Hah! It was merely the 1st step.

    You can be a Team Obama supporter without enabling and apologizing for all their mistakes and poor appointments. I am.

  71. Avl Dao says:

    I can say this as a long-time resident of Illinois and a voter who supported Obama: at some point we have to hold Obama 100% accountable for selecting Geithner and Summers, and supporting Bernanke, as well as supporting the original TARP to Congress, the modified TARP, and TARP II.

    It is juvenile and delusional to do other-wise.

    Team Obama will prove to be far more moldable by severe public pressure than people realize; but first we must get over our embarrassment at our naiveté.
    It is not a lost cause…but will be if folks continue to assume that merely voting on 11/4/09 was the one-time cure-all act called for. Hah! It was merely the 1st step.

    You can be a Team Obama supporter without enabling and apologizing for all their mistakes and poor appointments.

  72. drollere says:

    mannwich is right. running a ponzi scheme is about cash flow. running a bank is about trust.

    i know, good bankers are getting tarred with bad bank behavior, and banks are getting tarred with “non bank lending institution” bad behavior … and so what? who was lobbying congress to set up the “non bank lending institution” laws before the non bank lending institutions existed? the tobacco companies?

    this is not merely an insolvency/credit crisis. it’s a fundamentally a crisis in accounting. how can you determine the solvency of a bank when its obligations and capital reserves depend on the obligations and capital reserves of other players, similarly entangled, through opaque contracts and synthetic securities that are not cleared through any market? and if you can’t determine solvency, how can you determine credit?

    someone is insolvent when you look at their balance sheet and determine that their cash flow *and* marketable assets cannot suffice their debt payment schedule. and there is no balance sheet here. the “stress test” is not about financial information the feds already had on every bank, but about entanglements they were not previously legally entitled to see. the solvency doesn’t hinge on liquid cash but on illiquid contracts. in the meantime, using cash flow to judge solvency is like using a down payment to judge credit worthiness. we see where that got the mortgage industry.

  73. leftback says:

    Avl Dao said: “You can be a Team Obama supporter without enabling and apologizing for all their mistakes and poor appointments. I am.”

    My sentiments exactly. Thank you. Bring on Stiglitz and Volcker for the second Act.
    Would you mind bending over, Mr Blankfein?

  74. call me ahab says:

    @ MRegan-

    whoa- that makes me a bit hesitant to ask (good information is key)- Peru is an especially desireable location to ramble about in- Machu Picchu an obvious tourist destination- but I am sure there is much more to see. Surfing possibly? Cities- besides Lima and Cuzco that are worth wandering to?

  75. gregh says:

    Who is “Joe Retail” or the retail investor?

    i wonder what percentage of volume he/she really accounts for these days. Lots of discussion lately about joe retail’s sentiment, participation, how they’re being deceived or being ignorant etc. I’m guessing their role isn’t that great from a ‘move the markets’ perspective. Aren’t most “average” retail investors are buy/holders who never sold? If so, the other non-active-trader retail investors are probably a tiny portion of the overall equity market community.

  76. gregh says:

    i’m heading to Peru for my friends wedding (she’s from lima). You could spend a few months in Peru. Probably as much to see/do as SE Asia (if cheap destinations are your thing).

    Lots of Unesco world Heritage sites (ruins and older cities), crazy geographic diversity – coastal deserts, tallest tropical mtns in the world (19k feet), Amazonian jungle, very good surfing, very good mountaineering/trekking, great seafood.

    If you’re keeping eyes on your investments and you’re an inflationist goldbug I think there are lots of mines there too ;)

  77. Paul Jones says:

    People are getting wise to the con.

    Is there any hope for the POTUS?

  78. MRegan says:

    Ahab-

    I was joking. Regarding Peru:

    Trujillo- go see Chan-Chan, las huacas, el templo el brujo. Don’t go to Huanchaco alone, go to Chiclayo and find a way to get to Batán Grande. BG was a huge hacienda (caña de azúcar) owned by the Aurich family, it was also the center of the Siccan culture, the largest necropolis in LatAm can be found there. Go to Cajamarca-Baños del Inca, Ancash–Conchucos Chavin de Huántar (the route from Pativilca to Huancabamba- Caraz, Anta Huaraz takes you through Cañón del Pato- look it up-fascinanting, if you are adventurous go to Chacahapoyas and check out the Kuélap ruins and the Pozo de Yanayacu, if you are really adventurous try to get to Santiago de Chuco and ask some one to take you Cachicadán. If you get there dile hola a viudita de mi parte,

    Of course Lima and Cuzco and Machu Picchu you’ll love it. In Cuzco I have a pal named Chalo who owns a 57 chevy (he was a mechanic briefly in Germany and now works as a tour guide for Teutons) I can get you his contact info
    Peruvian cuisine is delightful and delicious. Got to La Mar- for the shnutty- or go to CantaRana in Barranco or the place some call El Catamarán (jajaja)
    In Lima go to Barranco and go to De Rompe y Raja- peña or Don Porfirio da lo mismo
    Go to Arequipa. My father-in-law runs the restoration project in that city which was founded in the 1540′s (Arequipa comes from Quechua and it means ‘Yes you may dwell there’ more or less. pheww- there’s more- want it?

  79. call me ahab says:

    gregh-

    thanks for the input- all sounds great- I am always into cheap destinations

  80. call me ahab says:

    MRegan-

    wow! that is a incredible amount of info- man- I knew you had the inside track on Peru- I will need to print and peruse at a later time so I can take it all in-

    thanks- i really appreciate it

  81. leftback says:

    Assuming this sell-off continues in the XLF, how will they ever persuade anyone to buy bank stocks again?
    We are finally starting to see much more bifurcation between the financials and the rest of the market.

  82. emmanuel117 says:

    testing

  83. johnbougearel says:

    I don’t think investors were fooled by it at all. The banksters provided excellent visibility and a reasonable degree of certituded and safety for us to trade the market on the long side into peak financial earnings season. After BAC reported, visibility decreased, and uncertainty increased a bit.

    However, if one looks out at the reports out this week and next, we see there is anecdotal signs we may see some ‘green shoots’ you know, them weeds Bernanke was alluding to a few weeks back. Yep, we should see some green shoots, but when momma’s green shoots grow up to be weeds (cowboys), dats when we gots problems

  84. ben22 says:

    @ franklin,

    You would make that argument right after you reveal that after the new $40 dollars in your check, you immediately find a way to spend almost all of it. Now THAT is what I call American baby!

    good for you man. I suppose if I saw all the “improvements” you did, I’d be spending more too.

    to comment on the discussion above where BR thinks rob “could” be right about retail getting suckered back into the banks. BR, rob is exactly right, that’s what’s going on right now. There is also a fresh batch of papers going out this quarter from Fidelity, Vanguard, Oppenhiemer, Columbia, etc. about how market timing will destroy you and then they go on and discuss lots of compelling data on some fancy charts, all of which just so happen to begin in the year 1982.

  85. ben22 says:

    One thing is clear: The “traditional” individual investors are not present in the same numbers the were in the 1990s

    This is from BR above.

    it seems that is evident when looking at a chart of the DOW in Gold terms.

    It’s like an 84% decline right now since 1999-2000.

    Traditional individual investors are also a lot more likely to embrace what were once “alternatives” such as commodities than they were, say just a couple years ago. Just my opinion but I think I’m right. If someone can prove I’m wrong, then I’m wrong.

  86. ben22 says:

    test

  87. Stuart says:

    “his number one priority, or better yet, his number one responsibility, is to protect the US Treasury market.”

    Yes, definitely a good point to ponder. It is his last line of defense and it must be funded above all other markets.