(Updates to include Bank of America's special gain.)NEW YORK ( TheStreet) -- "The whole world is watching!" is the battle cry of the Occupy Wall Street demonstrators, usually heard when New York's Finest decide that the maintenance of law and order requires arrests (or socking some guy in the jaw). But there's something even more outrageous, and more relevant to the point of those demonstrations, taking place just a few blocks from where the protestors and cops have been mixing it up. I'm referring to the quarterly phenomenon known as "bank earnings," in particular, the earnings announced today by Bank of America, Tuesday by JPMorgan Chase and Monday by Citigroup. The spectacle of these three bailed-out denizens of American capitalism raking in billions in windfall profits, while nickel-and-diming their customers and keeping a tight lid on lending, is perhaps the best example we have of the inequities that gave rise to the OWS protests. Last week I described the kind of demands that these demonstrators ought to make. Today I'll touch on the kind of daily horror that makes those demands justified. Now, I know what people are going to say: I should be happy that the Street is raking in billions because these banks are drivers of the New York economy, yadda yadda. There's some truth to that. But really, folks, if these guys are going to be robber barons, can't they be honest robber barons? My beef with these banks is not just the old one, which is that they are brazenly profiting from a bailed-out system, but that this time they've boosted their profits by taking advantage of accounting gimmickry. Let's start by taking a look at JPMorgan's earnings announcement, which declared that the company's third-quarter profits -- which had fallen $100 million to a paltry $4.3 billion, the poor dears -- were goosed by $1.9 billion from something called a "debt valuation adjustment," or DVA. CEO Jamie Dimon explained the DVA thusly: "The DVA gain reflects an adjustment for the widening of the Firm's credit spreads which could reverse in future periods and does not relate to the underlying operations of the company." Here's an analogy: Let's say you own a house, and, like most homeowners, you have a mortgage on that house. Because of market conditions, totally unrelated to anything you've done, the market value of your mortgage -- were it to be sold as such things often are -- has declined. In other words, the market value of your debt has declined. Well, lucky you! If you were a bank, that is. Under harebrained accounting rules, banks can record a profit when that happens because they could theoretically buy back their debt for less money (which, admittedly, is not something you or I could do).
That rule can act in reverse if conditions improve, and penalize earnings. But let's face it: If the economy does turn around, Morgan presumably will have tons of other profits to offset the losses from the gain in the value of its debt. After all, if there's something that Morgan is able to produce, in fair times and foul, it's profits. On Monday, when Citigroup announced its earnings, it played catch-up with JPMorgan. In announcing a third-quarter earnings gain of 74%, Citi also goosed its earnings by the identical amount of $1.9 billion, and also because its credit spreads were getting worse. In Citi's case, there was a widening of credit spreads in derivatives, and it is calling its accounting gimmick a "credit valuation adjustment." At Bank of America, the company today announced a $1.7 billion pretax gain in trading debit valuation adjustments. The problem with these kinds of accounting adjustments is that they are a fraud. Now, I don't mean that in the legal sense, heaven forbid, but in a sense that most of these banks have ripped from the dictionary -- they're dishonest. They should be illegal, rather than ingrained in, and explicitly authorized by, Generally Accepted Accounting Principals. My favorite expert on sleazy accounting tricks, former Crazy Eddie financial wizard and blogger Sam Antar, tells me that the accounting rule that permits the DVA atrocity, SFAS 159, "allows banks to report paper profits from its weakness in its debt and distorts their financial performance." You won't see "SFAS 159" or other accounting rules on any of the placards being held by the protesters at Liberty Plaza (Zuccotti Park to you). These are mostly unemployed people, mostly young, and few have any pretense to financial sophistication. All they know is that they are in the "99%" of people who earn disproportionately less of the nation's wealth than the super-privileged 1%. What they don't know, but what they would benefit from learning, is that the 1% got that way with the help of idiocy like SFAS 159, and with the help of a regulatory apparatus that doesn't give a damn about accounting chicanery, even when directly contrary to the securities laws. Just look at Sam's blog for numerous examples of that.
Accounting gimmickry is just one of the reasons that the system is rigged in favor of the wealthy and privileged. Now, I don't expect Jamie Dimon or Vikram Pandit to not take advantage of the accounting rules that allow them to legally boost their quarterly financials. But I do expect our elected officials to see to it that Dimon and Pandit deploy some of their companies' wealth back into the hands of the taxpayers responsible for pouring billions of dollars into their banks to keep the financial system afloat. Yes, I know, Citigroup and JPMorgan paid back their TARP funds in full, and early, not out of the goodness of their heart but to avoid restrictions on executive pay. They know how to work the system. They don't have to take to the streets because they own the streets. Gary Weiss's forthcoming book, AYN RAND NATION: The Hidden Struggle for America's Soul, will be published by St. Martin's Press on Feb. 28, 2012.