Tuesday, April 21, 2009

Wall Street Calls Bank of America's Bluff

On Monday, Bank of America presented a fantastic first quarter result with a profit of $4.2 Billion! In the face of insolvency, losses that amount to 20 years of profits, and purchases of Merrill Lynch and Countrywide that very likely doubled the bank’s exposure to toxic assets, how is this possible??

With such great news, Wall Street must have gone crazy, because Bank of America’s stock went down by 24% the same day. What happened??

The answer is as simple as it is predictable: Bank of America’s report is utterly fraudulent.

I looked at the SEC report myself, and found that a little over $2 Billion of the “gain” is a result of the fact that Bank of America has decided, with no basis in reality, that its toxic assets are now worth a hell of a lot more than what they were only a few weeks ago. They can do this because the rule known as mark-to-market has been repealed.

Also, Bank of America makes reference to other new GAAP rules (rules that govern accounting), which apparently (according to them) enables them to put assets in “special purpose entities”, away from the balance sheet. This is what Enron pioneered, and it is what eventually brought down that company.

I could find no numbers concerning how much had been hidden away from the balance sheet this time, but the bank obviously doesn’t want that to be found. This makes me believe that the real number is very big.

Think of Bank of America as a regular guy. This guy has a yearly salary of $30,000. He has a credit card debt of $2,000. He also owes a loan shark a further $10 Million, and he lives in his aunt’s house.

The guy prepares a loan application to buy his own house, and in it he states that his income is $100,000, that he has a credit card debt of $2,000, and that he already owns his own home.

The only thing that’s accurate in his application is the credit card debt. The reason for that is that it can be checked by the bank. Everything else is pure fantasy.

It is the same way with SEC filings. You can bend the rules so much that SEC reports hardly mean anything anymore. You can’t trust ratings agencies or auditors either, because they get paid by the companies that they are supposed to be scrutinizing.

All this makes Wall Street look at a certain metric: quality of earnings.

“Quality of earnings” is not mentioned very often in financial journalism, probably because it seems to suggest that not all profits are actually a reflection of a company doing well. Quality of earnings describes to what degree the earnings of a company can be attributed to actual sales, as opposed to accounting wizardry.

I have over the last year argued that there has been an alliance between politicians, Wall Street, banks, regulators and the media to cover up the true extent of the financial crisis in order to preserve the financial oligarchy. By doing this, they have been able to uphold the illusion that everything is fine.

Even though Wall Street traders are not saying it out loud, they seem to be breaking ranks. They can no longer push up the prices of bank stocks and other financial stock in the face of such obvious and rampant fraud.

Expect stock markets to go much lower in the coming months.

Moreover, I advise that the winner-takes-all voting system should be destroyed.


Anonymous said...

Nicely explained. Thanks for your
hard work.

Anonymous said...

This is a very clear and simple explanation of what is happening.

I am running into more and more people who are saying that they are not going to pay their credit cards off because they've realized that with interest rates hovering above 20%, they'll never be able to pay them off and they'd rather hold onto their cash.

Why isn't geithner focusing on this issue of consumer debt? Even if you bail out all the banks, if consumers and small businesses are saddled with bad credit and debt, who are the banks going to lend to?

Jacob said...

Geithner isn't focused on credit card debt because he only cares about the well-being of Wall Street players, but Obama, I believe, is meeting today with all the major credit card companies in order to make them get rid of bad practices.

Crazy interest rates may be a thing of the past some time this year. Also, arbitrarily raising interest rates (for instance, raising credit card interest rates if someone pays a gas bill late) will very likely be banned.