Tag Archives: Financial institution

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.

Related by the Econotwist’s:

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Filed under International Econnomic Politics, Laws and Regulations, National Economic Politics

Fitch Place Most US Banks On Negative Rating Watch

Fitch Ratings issued Friday a number of separate press releases placing most US banks most US bank, and bank holding companies that are sovereign-support dependent, on Rating Watch Negative. A new proposal, that’s a part of the Dodd-Frank Act, will govern the way the FDIC implements the resolution of financial institutions, and may have adverse credit implications for US financial institutions, according to Fitch.

“The proposed rule is likely to mean that should intervention be necessary some creditors, namely senior debt, subordinated debt, and preferred and common shareholders will incur losses consistent with their treatment as if the entity filed a Chapter 7 (liquidation) bankruptcy petition.”

Fitch Ratings


The financial institutions that stand to be most impacted are Bank of America and Citigroup due to support they have received from the US government. The rating action is a direct result of the recently released Notice of Public Rulemaking, on implementing of the Dodd-Frank Wall Street Reform and the Consumer Protection Act, the agensy says.

The two companies – Bank of America Corporation and Citigroup –  mostly impacted by this announcement

This is due to the fact that both entities’, and their related subsidiaries’, Issuer Default Ratings (IDRs) and their respective senior debt obligations have benefited from support provided by the US government, according to Fitch.

“At the present time, Fitch’s long-term ‘A+’ IDR ratings for Citigroup and Bank of America incorporate a three-notch uplift for the long-term rating and a two-notch uplift for the ‘F1+’ short-term ratings. If Fitch determines on a go forward basis that support from the sovereign state can no longer be relied upon it is not certain that Fitch would immediately lower the IDRs of Bank of America or Citigroup to their unsupported rating levels,” the rating agency says in a press release.

Over the near to intermediate term, Fitch’s fundamental credit assessment of Bank of America and Citigroup will continue to consider existing support already received, such as debt still outstanding issued under the Federal Deposit Insurance Corp. (FDIC’s) Temporary Liquidity Guaranty Program (TLGP), in its ratings of those institutions.

As a result, the IDRs will continue to incorporate support received during the crisis, as well as improvements in intrinsic financial profiles and expectations for continued improvement, Fitch says.

“Each of these companies has maintained a ‘1’ Support Rating, translating into a Support Rating Floor of ‘A+’, since the depths of the recent financial crisis after each firm received and benefited from extraordinary direct support from the US government.”

Fitch’s rating criteria calls for the assignment of the “higher-of either the companies” Support Rating Floor of ‘A+’ or its perceived fundamental stand-alone IDR rating (excluding support), which is currently ‘BBB+/F2’ for both affected companies.

Since Fitch is placing on Rating Watch Negative all US bank and bank holding companies’ Support Ratings and Support Rating Floors, the IDRs of Bank of America and Citigroup and their respective sovereign support dependent ratings are also placed on Rating Watch Negative.

The IDR and issue-level ratings for all other banking companies, except for Bank of America and Citigroup and certain related affiliates, are unaffected by Friday’s actions since the current IDR ratings are all above their current Support Rating Floors.

“The rating actions follow Fitch’s interpretation of the recently released Notice of Public Rulemaking ‘Implementing Certain Orderly Liquidation Authority Provisions of the Dodd-Frank Wall Street Reform and Consumer Protection Act‘ (proposed rule or NPR), which was issued by the FDIC on Oct. 12, 2010,” Fitch writes in the statement.

The proposed rule will govern the way the FDIC implements the resolution of financial institutions, such as bank and insurance holding companies or other non-bank financial institutions deemed to be systemically important, an authority granted to the agency by Dodd-Frank.

The NPR reiterates that under no circumstances should taxpayers ever be called upon to bail out systemically important financial institutions in the future, nor be exposed to loss in the resolution of these companies.

While the NPR also reiterates the FDIC’s mission of resolving institutions in a manner that ‘maximizes the value of the company’s assets, minimizes losses, mitigates [systemic] risk and minimizes moral hazard,’ it nevertheless makes clear that creditors, including senior bondholders, should bear their proportion of the loss in an orderly resolution.

This more stringent mandate to impose losses on senior unsecured creditors calls into question the very core of Fitch’s Support rating framework, the likelihood of full and timely payment in the event that the rated institution faces serious financial deterioration in the future.

Resolution of the Rating Watches will be based in part on language from the final rule once formally adopted as well as Fitch’s view on how the final rule will impact its view of support.

The FDIC’s proposed rule is likely to mean that should intervention be necessary some creditors, namely senior debt, subordinated debt, and preferred and common shareholders will incur losses consistent with their treatment as if the entity filed a Chapter 7 (liquidation) bankruptcy petition, Fitch explains.

“Importantly, Fitch has not imputed sovereign support in its ratings for bank holding company creditors, i.e. most U.S. bank holding companies carry a ‘5’ Support rating.”

“Fitch believes that the NPR is one of many across numerous jurisdictions globally to govern how policy makers and regulators may address failing or failed institutions in the future.”

Recently introduced resolution regimes in some countries in Europe have so far provided similar wide-ranging powers to the banking authorities to impose losses on bank creditors but have, nevertheless, left open the possibility of taxpayer support.

The proposed NPR appears to divide senior creditors’ claims by maturity and stated purpose and introduces a number of considerations for Fitch’s ratings of these systemically important institutions.

Fitch alsp notes that some obligations, including short-term senior debt and certain other creditors such as ‘commercial lenders or other providers of financing who have made lines of credit available to the covered financial company that are essential for its continued operation and orderly liquidation’ are specifically differentiated from senior bondholders in the NPR.

“Should this carve out provision remain as part of the final rules, Fitch would need to consider how best it would rate the segregated obligations,” Fitch writes.

Adding: “The proposed rule, as required by U.S. law, is subject to a public comment period of at least 30 days from publication in the Federal Register so it is important to note that material changes to the proposal could occur before enactment.”

Once implemented, Fitch believes that the proposed rule will serve as the road map by which the FDIC implements its expanded authority in the resolution of a systemically important failed institution.

In the past, systemically important institutions that became troubled typically received some form of federal support and/or regulatory forbearance that allowed them to continue operating through a rehabilitation period, with creditors and shareholders often becoming significant beneficiaries.

The FDIC has used a “least cost [to the deposit insurance fund] resolution” approach in carrying out its resolution activities since the Financial Institutions Regulation, Reform and Improvement Act (FIRREA) of 1989.

This approach is preserved in the NPR and is consistent with the Dodd-Frank mandate of maximizing the value of assets and minimizing losses.

The proposed rule additionally preserves many tools for the FDIC to use to further incorporate the requirements of Dodd-Frank that resolutions mitigate systemic risk and minimize moral hazard.

“Fitch has long recognized through its Support Ratings the role that support plays in global banking. In most developed markets, governments have historically taken a dual approach to assuring the stability of their financial infrastructure including strong regulatory oversight on the front end and backstopping critical components of the system in times of duress.”

The proposed rule for implementing Dodd-Frank preserves a wide array of tools for the FDIC to resolve systemically important institutions while also mitigating systemic risk and financial contagion.

Under the proposed resolution approach, select creditors may benefit from some forms of support under certain circumstances and where, in the judgment of the FDIC, the alternatives would ultimately put the system at greater risk.

“That said, whereas bondholders, both senior and subordinated, and even shareholders, have benefited from support in the past, direct support for these creditors is effectively prohibited under Dodd-Frank,” Fitch Ratings concludes.

Related by The Swapper:

EU-US Top Leaders Agree To Meet In Lisboa On November 19th

Derivative Trading Just Keeps Getting Bigger

The Dirty Little Secret Of The Dodd-Frank Legislation

USA Could Be Forced Into Another Trillion Dollar Bank Rescue

Flight to Mystery

Will Basel III Crush the Global Economy?

Webster Tarpley: The Financial Reform Is A Failure

Hey, America! Wall Street Got A Message For You

Two Thirds of Americans Support Stricter Financial Regulations

Fitch: The Long-Term Goldman-Effect

A Report To Make You Go “Hmmm…”

Meredith Whitney: Even More Bearish On Housing And Financials

 

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US States Holding More Than $30bn In Unclaimed Cash And Property

While Mr. Schwarzenegger is terminating all the public expenses he’s able to, the state of California is holding on to nearly USD 6 billion in form of unclaimed property, belonging to approximately 11,6 million individuals and organizations. The various US states are currently holding unclaimed cash and property mounting to more than USD 32 billion.

“The California State Controller‘s Office has been successful in returning more than  USD 1 billion worth of unclaimed property to its owners.”


California state controller’s office is putting up never-before-efforts to reach the owners of unclaimed property, according to the website CashUnclaimed.com. From January 2007 until the end of 2009, the office sent out 3,17 million notices warning owners that their property was likely to be taken over by the state. The question of success is a matter of opinion.


“The efforts have started showing encouraging results. The California State Controller’s Office has been successful in returning more than $1 billion worth of unclaimed property to its owners,” CashUnclaimed.com writes.

One out of seven……well, I guess Mr. Schwarzenegger’s tax collectors can book a few more tax dollar, but I wouldn’t go so far and call the almost three year long project a “success.”

In addition to the 3,7 million notices, 1,89 million notices are sent to suspected owners informing them that their property have been taken under the state custody.

The state of California has enacted Unclaimed Property Law that requires property holders such as corporations, business associations, financial institutions and insurance companies to annually report and return dormant property to the State Controller’s Office.

Source of Revenue

In spite of the efforts by the state authorities, California is still sitting over the mound of unclaimed cash and property.

“The state is looking at this huge cache of money as a source to fill the budgetary deficit of the state as it is certain that a large chunk of this will remain unclaimed forever,” CashUnclaimed.com writes, adding:

“More and more Californians are coming forward to stake their claim over the property that they had forgotten somewhere down the line.”

Hey! That reminds me; I still have that beach house….I’ve totally forgot!

Sure…

Who Owe The Norwegian PM 100 Dollar?

According to the website, it is estimated that 9 out of 10 Americans are owed cash that sits unclaimed year after year.

Those who are still not taken any initiative to find any unclaimed cash in their name can log on to the site; http://www.cashunclaimed.com, and check if they have some hidden treasures.

It’s got one of the largest databases for unclaimed money in the world.

The current database lists billions of dollars in unclaimed money, property, accounts and assets from all 50 states and several Federal agencies.

Unfortunately, the search engine could not locate any outstandings belonging to me.

However, it seems like someone in the US owe the Norwegian prime minister, Jens Stoltenberg, the crucial amount of one hundred dollar.

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