Wednesday, April 22, 2009

False Profits

Great article in the NY Times on the huge profit numbers the banks have been posting over the last week . In a nutshell, when a bank's bonds go down in price, they're allowed to book a paper profit on the net reduction in price because they could theoretically buy them back at a reduced rate from where they were issued. The catch is that they are allowed to book this profit, even when they don't actually buy the bonds back.

The NY Times singles out Citigroup, but this is true for all of them. Great quote:

Meredith A. Whitney, a prominent research analyst, said in a recent report that what banks were doing amounted to a “great whitewash.” The industry’s goal — and one that some policy makers share — is to create the impression that banks are stabilizing so private investors will invest in them, minimizing the need for additional taxpayer money, she said.