How Banks Spin Their Earnings (And Make Media Dizzy)

About three years after mainstream media and the public in general suddenly discovered that we had a serious crisis on our hands – I’m still amazed and sometimes quite choked by the ignorance revealed in dealing with the banks and their reporting.

“A caricature is putting the face of a joke on the body of a truth.”

Joseph Conrad

In fact, I really can’t understand why so few have bothered to look up terms like  “off-balance products,” “mark-to-market accounting,” or “cross-border financing.” This, in turn,  makes it ridiculously easy for the banks to manipulate their official earnings reports.

So – with a little help from my friends – I’ll try to explain (one more time)  what’s going on:

Not surprisingly, banks, in their earnings reports, are quick to highlight the areas of strength and downplay the weak points.

Well, here’s what The New Tork Times/DealBook has to say about it:

Financial firms and other companies can be especially creative when it comes to the headline number they report, that is the profit they showcase at the top of their releases.

Consider Citigroup, which announced its first-quarter results last Monday.

At the top of its earnings release, the bank trumpeted its net income was $3 billion for the period, up from $1.3 billion in the fourth quarter of 2010.

That would seem to be great news, with profit rising more than 130 percent from the previous quarter.

But investors and analysts typically look at year-over-year growth, not quarter-over-quarter growth.

Finding the exact number required some digging.

“Although it nods at the profit decline earlier in the announcement, Citigroup disclosed on the second page of its release that it earned $4.4 billion in the same period of 2010 — meaning that profits fell on a year-over-year basis by 32 percent.”

The headline number wouldn’t be all that notable, except for that it deviates from previous earnings announcement.

In both the third and fourth quarter of 2010, Citigroup highlighted the year-over-year comparisons.

Of course, they were favorable, with earnings rising over that 12-month period.

Citigroup is also an outlier among its peers that have reported so far.

Last week, JPMorgan Chase announced first-quarter earnings of $5.6 billion, contrasting them prominently with the $3.3 billion in the same period of 2010.

Bank of America — which like Citigroup had a profit drop on a year-over-year basis — provided both first quarter 2010 and fourth quarter 2011 as points of comparisons for its latest earnings.

Most news reports points to the fact that Bank of America’s latest earnings was lower than expected, but very few seems to have figured out what NYT/DealBook points out; the numbers are, in fact, far worse.

To highlight the seemingly collective ignorance in the mainstream media, here’s a few examples of the most influential Norwegian media‘s presentation of Citigroup and JPMorgan Chase:

E24.no is Norway’s largest financial news web.

“Citigroup Shuffles In Money” – nice, huh?

As you may notice, E24.no refere to “SIX News” as their source for this news article.

SIX News is a newly established financial news provider in Europe, own by six major global banks.

That’s journalism, for you!

DN.no is supposed to have the most capable financial journalist in Norway.

And DN.no seems to have figured out – all by them self(!) – that JP Morgan increased their earnings by 300% in 2010.

Impressive!

As for the latest quarterly report, DN.no writes:

“The company can enjoy a very strong development in margins in the first quarter.”

Of course they can….

The website Hegnar.no is seen as the most specialized financial news provider.

The owner and publisher (and investor) Trygve Hegnar has a policy of not hiring journalist, only economists, to do the reporting.

Hegnar.no’s reporters makes it clear to everyone that both Citigroup and JPMorgan Chase deliver earnings that are better than expected.

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I have to point out that the Norwegian financial news providers mentioned above are not more ignorant og stupid than most others.

To a certain degree I can understand that it’s easier to just publish a prepared press release, instead of analyzing the numbers by themselves.

But this has turned into a global, serious and dangerous problem.

Fortunately, we some comedians who are able to see through the smoke screen and draw our attention in the right direction.

A caricature is “putting the face of a joke on the body of a truth,” according to author Joseph Conrad.

It’s a pleasure to introduce you to my favorite caricature, the humble and social responsible British investment banker, Sir George, explaining the financial crisis from his point of view:

I guess no further comments by me are needed.

I just hope you are able to see the whole picture a bit clearer.

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