US banks have started reporting profits, even repaying some
of the funds given to them by the government. But, as Nobel Laureate Paul
Krugman points out, a bank’s profits aren’t really hard numbers, since a great
deal depends on how much money the bank sets aside to cover the possibility of
future losses. As Citigroup’s $1.6 billion first quarter profits show, there
is quite a lot of elbow room for massaging the numbers. Around $700 million of
the bank’s revenues came from selling off its remaining stake in the Brazilian
credit card firm, Redecard.
Another $250 million were released from reserves, and $110
million came from a tax rebate. But most important of all, and perhaps
shocking, was the $2.7 billion boost to revenues from an accounting rule that
allowed Citigroup to buy back its debt at a lower price. US Financial
Accounting Standard 159 says that when a debt declines in value, banks have to
assume they bought the debt back and retired it. Since the notional buyback is
at less than sticker price, the bank has now made money on the deal !
Then there is the case of Bank of America, whose net income
rose to $4.25 billion in the January-March quarter, from $1.21 billion a year
earlier, only to find its stock price fall by a staggering 24 per cent. That
is because investors realised that out of the total increase, $1.9 billion
came from the bank’s sale of its stake in China Construction Bank, while
another $2.2 billion came from the fact that some of the Merrill Lynch debt
fell in value (long live FAS 159 !). Similarly, as Dr. Krugman points out,
Goldman Sachs changed its definition of a quarter so that (in Dr Krugman’s
words), “the month of December, which happened to be a bad one for the bank,
disappeared from this comparison”. JPMorgan Chase has also reported better
numbers, using FAS 159.
(Source : Business Standard, dated 23.04.2009)
