First Brokers, Now Banks: More Fictitious Gains

Yesterday’s surprisingly bad news out of Citibank and then UBS sent us back to the  research archives looking for information about the quality of Banks earnings.

As we  noted last week, much of the Brokers’ gains were fictitious.

It turned out that a decrease in the value of the B/D’s  own debt was offset with a phantom accounting entry. These are presented in the earnings as if they are actual gains, not accounting phantasms.

But don’t think its just the big Brokers. The Banks are now getting in on the scam act:

"Now some banks may be set to similarly benefit from their own misfortune. Financial titans such as Citigroup Inc., Bank of America
Corp., and J.P. Morgan Chase & Co., which will report third-quarter
results next month, all opted earlier this year to start applying
market values to some of their own liabilities, according to the
research service the Analyst’s Accounting Observer.

This means they, too, might see a boost to profit from
declines in the value of their debts during the summer credit crunch.
"It might not be unusual at all to be seeing gains on debt issued
hitting earnings in the third quarter," the Analyst’s Accounting
Observer said.

Officials at Citigroup, J.P. Morgan and Bank of America declined to comment.

The brokers
and banks are doing nothing wrong or improper in booking such gains.
The accounting rules as they stand allow the practice. But some
investors are crying foul, saying the rules shouldn’t have been changed
to allow for such gains . . ."

So much for gains in earnings quality . . .


The Gold at Crunch’s End
How Banks May Benefit From Their Debt Values; ‘The Gains Were Real’
WSJ, September 28, 2007; Page C1

Category: Corporate Management, Earnings, Finance, Psychology

Listener Determined Download Prices?


Interesting story about Radiohead’s new release, "In Rainbow’s."

Their pricing scheme for downloads is designed to give the Music Industry — especially major labels — fits. According to their website, IT’S UP TO YOU.

Notes Salon:

"This weekend the band announced that its new album, called "In Rainbows," will
go on sale on Oct. 10. They still haven’t signed with a label, and the album
won’t be available in record stores nor on iTunes or any other online music
shop. You’ll find it only on the band’s site, and if you’re looking for a
digital version, the price is very attractive: Whatever you’d like to pay.

You can pre-order the new album here.
Click to purchase the download and you’re presented with a simple screen at
which you’ve got two boxes to fill in, quantity and price (in pounds). "It’s up
to you," the site says."

For those of you who, like me, prefer the physical media, you have a high priced, rpemium option:

"If you’d like something physical, the band is also selling "In Rainbows" in
something it calls a "discbox," a beautiful package that includes a CD, two
vinyl records, digital files, album artwork, and lyrics booklets. It sells for
40 pounds, about $81 (the price includes shipping anywhere in the world). If
you’ve got a Radiohead superfan in the family — and who among us doesn’t? –
your holiday shopping just got easier."

(Additionally, I see a lot of other Econ bloggers have weighed in on this natural experiment:  Free Exchange, Mankiw Blog, Truth on the Market, Freakonomics, Long Tail & Marginal Revolution . . .)

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