This Day On The Street
Continue to site right-arrow
ADVERTISEMENT
This account is pending registration confirmation. Please click on the link within the confirmation email previously sent you to complete registration.
Need a new registration confirmation email? Click here
Stocks Under $10 with 50-100% upside potential - 14 days FREE!

DVA's Bring the Bank Earnings Noise

Stocks in this article: BAC C GS MS JPM

NEW YORK ( TheStreet) - Did Bank of America (BAC) report a 2011 profit? Did Morgan Stanley (MS) have the only loss or the biggest earnings beat of any large Wall Street firm in the first quarter of 2012?

The answer to both questions depends on whether investors count hypothetical gains on the trading costs of a firm's debt as revenue, highlighting the biggest reason why bank earnings are still murky four years after the onset of the financial crisis.

Accounting gains based on the rising cost to insure a bank's debts amid tanking markets, and losses as those costs and markets recover, are swinging the recent earnings of Bank of America, Morgan Stanley, JPMorgan (JPM), Citigroup (C) and Goldman Sachs (GS) by billions. Although analysts, ratings agencies, regulators and traders generally ignore those swings, they stand as the best example of why bank financial statements remain convoluted as firms struggle to prove to investors that their earnings are recovering in the wake of the crisis.

The accounting -- called a "debit valuation adjustment" or DVA --creates an earnings gain when market indicators show waning confidence in a bank, and a loss upon a recovery. That potential gain is also equal to the amount a bank would gain if it bought back all of its debt at discounted prices.

Morgan Stanley, Bank of America, JPMorgan and Citigroup saw billion dollar-plus gains on DVAs in the third quarter of 2011 amid fears of a European meltdown. In the first quarter of 2012, they saw slightly smaller sized losses as markets recovered. The biggest problem is that those gains and losses appear to be high on accounting imagination and short on reality, even if they decide whether a quarter will be profitable or loss making for a bank.

"Banks are polluting their income statements," says John E. Core, a professor of accounting at the MIT Sloan School of Management, of the accounting method. Core and other accounting experts say that the practice - the genesis of a 2004 accounting rule change by the Financial Accounting Standards Board called FAS 159 or the "Fair Value Option" - makes bank earnings less transparent, with the potential for firms try to use swings as an undeserved benefit.

JPMorgan, Bank of America, Citigroup, Goldman Sachs and Morgan Stanley all took the FASB option to fair value some assets and liabilities starting in 2007, just ahead of the financial crisis. Once firms take the fair value option, it's binding.

1 of 4

Select the service that is right for you!

COMPARE ALL SERVICES
Action Alerts PLUS
Try it NOW

Jim Cramer and Stephanie Link actively manage a real portfolio and reveal their money management tactics while giving advanced notice before every trade.

Product Features:
  • $2.5+ million portfolio
  • Large-cap and dividend focus
  • Intraday trade alerts from Cramer
  • Weekly roundups
TheStreet Quant Ratings
Try it NOW
Only $49.95/yr

Access the tool that DOMINATES the Russell 2000 and the S&P 500.

Product Features:
  • Buy, hold, or sell recommendations for over 4,300 stocks
  • Unlimited research reports on your favorite stocks
  • A custom stock screener
  • Upgrade/downgrade alerts
Stocks Under $10
Try it NOW

David Peltier, uncovers low dollar stocks with extraordinary upside potential that are flying under Wall Street's radar.

Product Features:
  • Model portfolio
  • Stocks trading below $10
  • Intraday trade alerts
  • Weekly roundups
Dividend Stock Advisor
Try it NOW

Jim Cramer's protege, David Peltier, identifies the best of breed dividend stocks that will pay a reliable AND significant income stream.

Product Features:
  • Diversified model portfolio of dividend stocks
  • Alerts when market news affect the portfolio
  • Bi-weekly updates with exact steps to take - BUY, HOLD, SELL
Real Money Pro
Try it NOW

All of Real Money, plus 15 more of Wall Street's sharpest minds delivering actionable trading ideas, a comprehensive look at the market, and fundamental and technical analysis.

Product Features:
  • Real Money + Doug Kass Plus 15 more Wall Street Pros
  • Intraday commentary & news
  • Ultra-actionable trading ideas
Options Profits
Try it NOW

Our options trading pros provide daily market commentary and over 100 monthly option trading ideas and strategies to help you become a well-seasoned trader.

Product Features:
  • 100+ monthly options trading ideas
  • Actionable options commentary & news
  • Real-time trading community
  • Options TV
To begin commenting right away, you can log in below using your Disqus, Facebook, Twitter, OpenID or Yahoo login credentials. Alternatively, you can post a comment as a "guest" just by entering an email address. Your use of the commenting tool is subject to multiple terms of service/use and privacy policies - see here for more details.
Submit an article to us!

Markets

DOW 18,053.71 +23.50 0.13%
S&P 500 2,088.77 +6.89 0.33%
NASDAQ 4,806.8590 +33.3870 0.70%

Brokerage Partners

Rates from Bankrate.com

  • Mortgage
  • Credit Cards
  • Auto

Free Newsletters from TheStreet

My Subscriptions:

After the Bell

Before the Bell

Booyah! Newsletter

Midday Bell

TheStreet Top 10 Stories

Winners & Losers

Register for Newsletters
Top Rated Stocks Top Rated Funds Top Rated ETFs