Jun 2009 22

Stay Alarmed on the Financial Market!

Posted by

It seems the biggest tidal wave has gone. Some financial corporations bit the dust, some others survived and the bankruptcy grim reaper moved from financial sector to industrial sector. However, financial experts like Keith Fitz-Gerald warn us to stay alarmed. Improving health of big banks can be sometimes just a simple trick.

Big players like Bank of America, JP Morgan, or PNC will probably show growing profits and healthier balance sheets in the near future. Sure, some part will be due to a more stabilized overall economic situation on the market and improving real estate market thanks to lower interest rates, unfortunately, there is a good chance most of these positive results will be simply artificially created.

Hardly a year ago, when Wachovia, Washington Mutual and other banks bankrupted, big brothers like JP Morgan or Citigroup bought them for a fragment of the old price. As part of the package, they were allowed to lower the value of toxic assets held in these banks. The billion dollar cake of debts lost around a quarter of its value (in JP’s case exactly 25%).

A few months have gone and now the situation with toxic assets has changed radically. Banks are preparing new tactic. According to improved conditions of the market, they can simply bring the loans current and simply move their value up. This means they can show substantial changes on their balance sheets and while these loans are slowly repaid, the difference between the booked loan value (which was held somewhere down at the bottom) and the real money repaid can be booked as – profit. And since the difference is huge, so are the profits.

Improved balance sheets and profits mean banks will look more reliable in the eyes of shareholders and investors. With the real side of the financial market still pretty frozen, banks are able to create valuable billion dollar growth out of nothing. With the huge backup of write downs serving as a counterweight, they can easily adjust the numbers to fit their needs.

And this is the main problem. We can expect big numbers appearing in their financial statements here and there, however those don’t represent the real situation at all. It can create a fake feeling that everything is fine, while the disease may be actually spreading. Unfortunately, according to FASB (Financial Accounting Standards Board) rules, everything is legal. So it’s up to you to decide who actually did the mistake…

Leave a Reply

* required