Bank Earnings being affected by new regulation!

Bank Earnings being affected by new regulation! 01/23/2010

The banks are falling, the banks are falling. Bad Government for talking about regulations. The reality is the banks have been lying about their financials for over nine months now and the truth is starting to come out.The run up of the stock market has been based on three major issues. Government Shananigans (not true reporting of inflation, GDP, and Unemployment); Federal Reserve printing of money which began in March of 2009; and lastly the Bank Accounting gimmicks used to show lots of profit and hide massive losses.

Below is a small sample of the banking gimmicks which allowed them to show lots of dough being made and lead the charge for the stock market rally we experienced from March 2009 to January 2010.

1.Changing the mark-to-market accounting principal. Wouldn't it be nice to sell your house today and get the price it was worth in 2006. This is the reality of what the banks have done on the accounting standards when evaluating the value of the assets they own. They have magically gone back in time and now say they have all their assets back to full market value even though the assets are maybe 20-50 cents on the dollar. The April accounting change implemented by both banks and the government allowed them to deviate from mark-to-market accounting principal, basically letting banks to assign favorable value as they want to their portfolio which will be written off in future days. When banks raised the value of their toxic assets, they book them as earnings. For example, Bank of America last year took over Merrill Lynch and in Q1 it increased the value of Merrill's assets to prices higher than Merrill kept them, booking a $2.2 billion gain in the process. They are all paper "gains" for one accounting period for the sole purpose of painting a rosy picture.

2. Taking advantage of "creative" accounting loopholes.One loophole is to book earnings while your debt is actually losing value. A good case here is Citigroup, which last week ended a five-quarter losing streak, took advantage of an accounting rule that allows companies to record declines in the market value of their own debt as an unrealized gain. That turned a $900 million loss into a $1.6 billion gain. The accounting gimmick lit the fire of the March10th, 2009 400 point “Citigroup” rally. Lies, Lies, Lies…

3. Just plain cheating! Switching from Fiscal Tax year reporting to Calendar year to hide losses.The best award goes to Goldman Sach’s for the best accounting gimmick of them all. Switching to calendar year reporting. By switching to calendar year from a fiscal year ending November, suddenly the credit losses of $780 million disappeared from both 2008 report and Q1 2009 report, nowhere to be seen in the future. Of course, this has driven the stock price way up, a perfect timing to dump more shares to the public as far as they are suckers out there.

Bottom line. The market pulling back from 10,700 and change back down to the 10,100 level in three days and blaming it on “New” Regulations is just short sighted and wrong. Though the tough talk on regulations was a factor, China suspending lending for two weeks and numerous other reasons had as much if not more effect. The reality is the stock market rally was built on a house of cards and it is beginning to fall.

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