Time to start tackling the big question: how were such huge credit derivatives positions allowed to be put on by JPMorgan’s chief investment office (CIO) in a matter of mere months back at the start of 2012? Someone, or several someones, should have noticed that the synthetic credit portfolio (SCP) was headed for a disaster of epic proportions.
Weren’t there risk limits? Despite being a top of the range tool for crisis aversion, and being breached several times, the warning signs around these weren’t effectively responded to. Even worse, they were simply accommodated for. We’ll discuss that in future posts. Here, we want to talk about another tool that could have averted disaster: the marks on the book. The marks should have shown increasingly frightening losses, leading people to ask what the hell was going on. Read more
Debates about asset valuation can quickly turn philosophical. The FT’s story on Deutsche Bank on Thursday provides fresh fodder, carrying allegations from three ex-employees that the bank failed to properly value certain credit derivative positions and thereby created a misleading impression of its health.
At first we thought, ‘umm, yeah, Deutsche Bank and others, no?’ But the mention of Berkshire Hathaway seemed an interesting twist. Read more
“The question is,” said Alice, “whether you can make words mean so many different things.”
In a recent Alphaville post, I made the claim that if the monolines had been required to mark the credit risk that they had taken to market, they would not have played such a prominent role in the financial crisis. Here I want to provide some support for that claim. Read more
Goldman Sachs has revealed a series of dramatic cost cuts and a 58 per cent drop in fourth-quarter earnings, after grappling with tumultuous trading conditions in the latter part of the year, reports the FT. Like many of its investment banking competitors, Goldman was hit by ongoing eurozone turmoil and a subsequent slowdown in market activity in the last three months of 2011. The results follow disappointing earnings at rival JPMorgan and Citigroup after customers withdrew from trading. FT Alphaville also points out that Goldman’s mark-to-market accounting for its investment and lending division – which often makes loans below market rates to clients of other divisions, and crystallised a roughly $1bn loss in the fourth quarter – may be reconsidered in future.
What’s this? Something you haven’t seen before in Goldman Sachs’ results?
Net revenues in Investing & Lending were $2.14 billion for 2011. Results for 2011 included a loss of $517 million from the firm’s investment in the ordinary shares of Industrial and Commercial Bank of China Limited (ICBC) and net gains of $1.12 billion from other investments in equities, primarily in private equity positions, partially offset by losses from public equities. In addition, Investing & Lending included net revenues of $96 million from debt securities and loans. This amount includes approximately $1 billion of unrealized losses related to relationship lending activities, including the effect of hedges, offset by net interest income and net gains from other debt securities and loans. Results for 2011 also included other net revenues of $1.44 billion, principally related to the firm’s consolidated entities held for investment purposes.
Mark-to-market accounting for financial assets has caused large fluctuations in profit and loss accounts for both Goldman Sachs and Morgan Stanley due to volatility in markets. While this would have been par for the course for broker dealers, the two firms became bank holding companies at the height of the crisis. Their peers within this group, such as J.P. Morgan Chase and Wells Fargo, account for less than half of their assets using mark-to-market, making their earnings less prone to swings. By contrast, Goldman Sachs uses mark-to-market for 97 per cent of its assets, the WSJ reports. Both former broker dealers are now contemplating a move away from mark-to-market to historical cost accounting for some of their assets, such as loan commitments. Regulatory approval isn’t needed for such a change which could impact their accounting results as early as the first quarter.
Because some day you might want a detailed breakdown of how Europe’s banks are accounting for their Greek, Spanish — and even Italian — bonds, here’s a helpful table from Deutsche Bank.
It comes from Mohit Kumar and Abhishek Singhania, who’ve crunched the stress test data: Read more
Eighteen months, $6.39bn of toxic assets, a $12bn loan and a pandaemonium of accounting shenanigans later…
…We’ll ask again, what exactly was the point? Read more
Citi doing weird accounting manoeuvres? Perish the thought!
From the bank’s first-quarter results press release: Read more
A new line on Lloyds just-released banking results:
Spotted on the Financial Accounting Standards Board website:
How regulators can build a market for reasonably-cheap-to-issue Contingent Convertible capital, by Barclays: Step 1) Eliminate mark-to-market accounting to ensure that asset price swings never result in a CoCo trigger being reached…
… Oh, wait… Read more
US banks have won an unexpected victory after the Financial Accounting Standards Board backtracked on plans to force them to value their loan books according to market prices, the FT reports. The Board stunned the banking sector in May when it rolled out proposals to account assets and liabilities at ‘fair value’, contrary to moves by the International Accounting Standards Board to allow loans and some other debt instruments to avoid this treatment. FASB’s change of heart will favour banks with vast loan books, like Wells Fargo or Citigroup. Looks like Fitch Ratings’ prediction of ‘condorsement’ in global accounting rules, as reported by FT Alphaville, is bearing out. For now.
This is meant to be the year of accounting convergence.
You’re probably already yawning by now — but wait! This is important. Read more
Belgian bonds are blowing out.
Which means pain for any (unhedged) entity holding the stuff — for instance, Belgian banks. Citigroup attempts to quantify Belgian financials’ exposure to their host country in a Wednesday research piece — though it’s worth noting that they do reckon Belgium “is in a far stronger position than the [European] peripheral countries” by dint of its relatively healthy current account and smaller deficit. Read more
Ancient Greek mothers would often finish mythic tales told to their children (wholesome stuff like Oedipus, Electra and so on) with ‘…and then the story came true’, goes an apocryphal historical canard.
A lesson on tragic predestination and omnipotent fate, apparently. Read more
It’s October 2008.
We’re in the depths of the financial crisis. Read more
Dead, deader — and eventually, stuffed inside the ECB/Greek banks.
Chart courtesy of Citigroup’s European banks analysts (click to enlarge): Read more
Basel is busy bolting stable doors.
Indeed, one of the big drivers behind new Basel III counterparty risk capital requirements is the infamous negative basis trade. Read more
Continued from Part I.
The idea that banks arbitraged accounting categories to avoid mark-to-market losses as credit markets seized up in 2008 and 2009, won’t exactly be surprising. Since 1996, financials have been allowed to choose whether to put assets in their banking book — held at amortised cost — or in their trading books, which is marked to market. The decision isn’t entirely up to them — they have to show an intent to actually sell or trade — but nevertheless arbitrage opportunities between accounting books exist. Read more
Was it £1.6bn, £1.3bn, or £280m?
You can literally take your pick of Lloyds’ pre-tax interim profits. Read more
Does the reception of the European banking stress tests now hinge on an accounting quirk? There’s been some confusion over which aspects of European banks’ balance sheets will actually be stressed, FT Alphaville says – and the debate hinges on whether banks’ debt holdings will be held-to-maturity or available-to-sale. Read more
‘Authorities moved too quickly to solve the 2008 financial crisis.’ — Discuss, says FT Alphaville. That’s one idea contained in a new BIS working paper, which has compared today’s financial meltdown with the Nordic banking crises of the 1990s. Read more
Tremble US financial institutions, for FASB is about to fair value your assets, FT Alphaville writes. Barclays Capital has a handy summary of the planned accounting changes, which banks say will increase volatility. Well, really? Read more
The Financial Accounting Standards Board’s new rules expanding mark-to-market accounting have drawn fire for their possible effects on volatility, according to the American Banker. The FASB wants banks to value loans they intend to hold in much the same way as for loans they want to sell. If the change is approved by a rules panel, dramatic revisions to banks’ balance sheets could follow, the WSJ says.
Bye bye FAS 157, hello Topic 820, as the Financial Accounting Standards Board moves to tackle mark-to-market. But, FT Alphaville writes, it may come at the cost of confusing different classes of asset valuation. Read more
Forget the BaFin naked short-selling ban (for a second). Tuesday’s other desperate European regulatory act took place in Italy, reports FT Alphaville. According to Dow Jones “the Bank of Italy Tuesday said Italian lenders holding European government bonds in their available-for-sale portfolio don’t have to take into account possible capital gains or losses on them.” Read more
Fair value –or mark-to-market — accounting is back in the news, FT Alphaville finds, as standards boards in the US and Europe dispute over its value. So what role, if any, did fair value accounting play in the crisis? Read more