NEW YORK (
) -- It seems unlikely the witches at the start of Shakespeare's
were thinking about second-quarter results for
when they uttered their famous lines "Fair is foul and foul is fair/Hover through the fog and filthy air," but you never know with witches--or accountants, for that matter.
Many analysts have lately slashed second-quarter estimates for Goldman and Morgan Stanley, and Sanford Bernstein followed suit in a report published Thursday. Bernstein argues sovereign debt fears have put a chill on underwriting and trading activity and increased funding costs for trading desks, among other factors.
The part Shakespeare's "weird sisters" would love, though, is that those increased funding costs will actually allow Goldman, Morgan Stanley and competitors like
Bank of America
to book second-quarter gains.
The gains don't appear large enough to offset the earnings hit from weaknesses in other businesses, but they aren't exactly chump change. Bernstein estimates a gain of $300 million for Goldman and $1 billion for Morgan Stanley related to the increased credit costs.
That wasn't a typo. Creditors have less confidence in Goldman and Morgan Stanley now than they did in March, so the banks book a gain.
Why, you ask? Because a controversial 2007 accounting rule known as FASB-157 assumes the banks will buy back their obligations at market rates, even though they may have no intention of doing so. The market rate for an IOU (bonds, bank debt) from the big banks has fallen as the banks are perceived to be shakier. That means buying those IOUs is cheaper today than it was in March. If the banks were to buy back their own IOUs they'd be doing so at a discount. Hence, the gain.
Richard Bove, analyst at Rochdale Securities, says everyone is coming around to the view that FASB 157 should be dumped, though he says bank bashers had no problem with it when it hurt bank earnings, requiring them to mark down assets they weren't planning to sell. Now that they are getting an earnings boost by marking up their liabilities, everyone who hates banks is up in arms.
"The rule was never any good; it was stupid from day one," Bove says. "It doesn't deal with cash going through the banking company."
Funnily enough, the accounting method in FASB 157 is also known as "fair value" accounting. So in effectively saying "fair is foul," Bove sounds like a modern day incarnation of one of Macbeth's witches. Now
Written by Dan Freed in New York