Dealbook - Bank Profits Appear Out of Thin Air - NYTimes.com:
"With Goldman Sachs, the disappearing month of December didn’t quite disappear (it changed its reporting calendar, effectively erasing the impact of a $1.5 billion loss that month); JPMorgan Chase reported a dazzling profit partly because the price of its bonds dropped (theoretically, they could retire them and buy them back at a cheaper price; that’s sort of like saying you’re richer because the value of your home has dropped); Citigroup pulled the same trick.My only observations:
Bank of America sold its shares in China Construction Bank to book a big one-time profit, but Ken Lewis heralded the results as “a testament to the value and breadth of the franchise.”
Sydney Finkelstein, the Steven Roth professor of management at the Tuck School of Business at Dartmouth College, also pointed out that Bank of America booked a $2.2 billion gain by increasing the value of Merrill Lynch’s assets it acquired last quarter to prices that were higher than Merrill kept them."
1. It is encouraging that the market could see through this which is consistent with the view, long held by adherents to semi-strong form efficiency adherents, that accounting games with depreciation, inventory, etc don't matter since investors can see through them.
2. It is further proof that managers and accounting numbers should never be taken at face value.
3. Why would managers play the games you ask? Maybe agency problem (suppose they are paid based off of earnings) or a seemingly costless attempt to signal something other than reality (it would be fascinating-albeit very difficult-to see how their future earnings or words are interpreted by the market).