Many people believe that a lot of what takes place on Wall Street is a sophisticated version of the gritty, street-level hustle called Three-card Monte.
While those who've been around a while know there's more to it than that, the sorts of things that politicians, policymakers, regulators, insiders and others have been up to in recent times certainly makes you wonder.
How else can you explain dissembling and bold-faced lies asserting that things are under control and the credit crisis is behind us -- when evidence suggests that is not the case?
Or the Federal Reserve risking taxpayer funds and whatever credibility it had left -- not to mention its very survival -- in an effort to rescue financial intermediaries from bad decisions for which they should be held fully accountable?
And finally, what about the fact that firms are continuing to use shady methods to disguise and distort their financial position, as the following report, "Banks Hide $35 Billion in Writedowns From Income, Filings Show," by Bloomberg's Yalman Onaran seems to make clear?
Banks and securities firms, reeling from record losses resulting from the collapse of the mortgage securities market, are failing to acknowledge in their income statements at least $35 billion of additional writedowns included in their balance sheets, regulatory filings show.
Citigroup Inc. subtracted $2 billion from equity for the declining value of home-loan bonds in its quarterly report to the Securities and Exchange Commission on May 2 without mentioning the deduction in the earnings statement or conference call with investors that followed. ING Groep NV placed 3.6 billion euros ($5.6 billion) of negative valuations in its capital account, while disclosing only an 80 million-euro depletion to income.
The balance-sheet adjustments are in addition to $344 billion of writedowns and credit losses already reported on the income statements of more than 100 banks. These companies have raised $263 billion from sovereign wealth funds, their own governments and public investors to shore up capital. The balance-sheet writedowns also reduce equity, which needs to be replenished. Adding the $35 billion leaves the banks with a $116 billion mountain of losses to climb.
"The smart people are the ones who've identified the problems, put them out there in full transparency, and addressed them by raising more capital," said Michael Holland, who oversees more than $4 billion as chairman of Holland & Co. in New York. "There is still billions of dollars of crap out there that hasn't worked itself through the system. Banks need more capital to work that all out."
Accounting Rules
Taking losses on a balance sheet instead of an income statement is acceptable under accounting rules, which make a distinction between so-called trading books and long-term investments. Changes in value on the trading side go straight to revenue. Changes in the value of bonds held for the long haul can be marked down on the equity line of a balance sheet, as long as the declines aren't considered permanent.
Banks that are more willing to acknowledge their balance- sheet writedowns, such as Amsterdam-based ING, say the valuations of assets will be reversed when markets recover. ING, the biggest Dutch financial-services company, said in its first-quarter earnings report last week that the drop in the value of bonds tied to home loans that are held to maturity is irrelevant as long as the underlying mortgages don't default.
With that logic, most of the writedowns on the income statements could be reversed if asset prices recover.
