All I Can Do is Write About It

And Lord I can't make any changes
All I can do is write 'em in a song
I can see the concrete slowly creepin'
Lord take me and mine before that comes
'Cause I can see the concrete slowly creepin'
Lord take me and mine before that comes ~ Lynyrd Skynyrd


Bank of America reports earning which where three times higher and blew away analyst estimates. Share prices then proceeded to fall 24%. BAC reported gains from mortgage refinancing at its Countrywide unit and trading profits at its Merrill Lynch unit. However, loan losses and grim employment prospects caused market participants to send share and bond prices lower.

Notice it is loan losses, loans which are not marked to market, which are the problem. As with Citi, a significant portion of BAC's strong data may be due to accounting chicanery, I mean rules. I am still waiting to read analysts assessments, but I am interested to see if BAC pulled a Citi and booked its depressed bond prices as unrealized profits.

This is actually legal and acceptable by GAAP standards, but in my opinion it is unethical. They thinking is that if a company's bonds are trading at a significant discount the company will be able to purchase its bonds at a discount, thereby effectively retiring its debt below par. The problem with this is that the one reason a company's bonds would be trading at a significant discount is because the company has a weak credit profile. In other words it does not have the ready cash to pay back its debt early, even at deep discounts. Banks who book depressed bond prices as profits and then brag about their latest quarterly earnings are being disingenuous at best and committing permissible fraud at worst.

The real stories will be the stress test results. If these tests report that most large banks are just fine and need little or no further assistance, the markets will batter that banks. The market knows better. This has government officials quaking in their boots. They fear more bank runs. I wonder how those who were claiming that the change to MTM accounting rules would solve everything?

I wish I was still actively running a book. I would be like a kid in a candy store. All I can do is write about it. You can take the boy from trading, but you can't take trading from the boy.