Friday, January 18, 2013

Dumpster Diving

Rooting for bank profits...

Garbage.  That's what MarketWatch called yesterday's earnings reports from Bank of America and Citigroup, serial underachievers in the financial sector.  I especially like this line:  "to suggest that these types of quarters are year-end, 'kitchen sink' quarters is an insult to sinks, kitchens, quarters, and, mostly, investors."  The complaint here is that these so-called disclosures are designed to obfuscate.  Accounting gimmickry and P.R. spin make it hard to understand how well (slash poorly) these businesses are doing.

Take Bank of America (please!), which reported a profit of $732 million for the fourth quarter of 2012. Got that?  The headline number was in the black.  Now let's start digging.  That "profit" was thanks entirely to a release from loan-loss reserves of $900 million (go here, click on Q4 Supplemental Information, then scroll down to page 44).  But why raid reserves when you are holding over $19 billion in non-performing home loans (page 42)?  Because if you don't, you're gonna show a quarterly loss, so hey, whaddya gonna do?

So back out the $900 million, but don't stop there.  We have a tax benefit of $2.636 billion in there (page 4).  Take that out, and now you have some serious red ink.   Note (also on page 4) that it would have been worse had income not included $792 million in trading account profits.  This proprietary trading is exactly what the Volker Rule is designed to limit.  Focusing just on traditional banking activity, we find that Bank of America does a poor job of it.  ZeroHedge paints this picture:

[click to enlarge]

BofA's bottom line was crushed this quarter by a provision for credit losses of $2.2 billion stemming from the company's recent settlement with Fannie Mae.  Even though the settlement disposes of over $12 billion in GSE claims, private-label and monoline claims increased by $1.56 billion in Q4 to almost $15 billion.  So what the company describes as "one-time" charges are more like over-and-over charges, as the New York Times explains here.

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