Are banks using write-downs to game their numbers?

Posted Oct 4th 2007 2:38PM by Zac Bissonnette
Filed under: Newspapers, Scandals, Housing

Several banks have been taking big write-downs related to subprime loans lately, and many of us have been applauding their conservative, prudent accounting. Their stock prices have responded well, with investors betting that the worst is over, and glad that the companies have come clean.

But The Wall Street Journal's Heard on the Street column [subscription required] has a different take: "At the same time, some investors are wondering whether banks are being so conservative with their accounting that they will quietly book profits down the road as the securities they still hold rebound in value. Fans of accounting scandals know this as filling the cookie jar. Later, the cookie jar is emptied, giving earnings a boost when needed most."

It seems plausible. Investors have been fretting for months over the subprime debacle, and most on the Street have been expecting sizable write-downs. Many have been willing to give the banks the benefit of the doubt, writing off this quarter just as the banks are writing off their loans.

The problem is that the banks know investors are thinking this, and realize they can probably get away with writing down a little bit more, without their stock prices taking a corresponding hit.

This idea of cookie jar accounting is hardly new -- to learn more about it and other tricks companies use to boost their financial statements (or hammer them temporarily in this case), check out Financial Shenanigans.

Tags: accounting, Heard on the Street, HeardOnTheStreet, housing, inthenews, subprime, write-downs

Print this

Reader Comments (Page 1 of 1)

10-04-2007 @ 3:30PM

Don Martin said...

There's a lot of mortgage-related paper out there where there are simply no bids. And it's no mystery what's taken place in the ABX. It's a graveyard market (no one wants to get in and those who are in want to get out).

I can appreciate people suspecting that some of the larger financials might use this environment to set themselves up, from an earnings reporting perspective, for the next three to five years. However, there is no financial visibility in the housing sector. In an environment like this, the parties who continue to hold onto these loans are assuming a level of risk that wasn't present, or at least wasn't understood, two to five years ago.

Given the new understanding of risk in this sector, it shouldn't come as a surprise that reported earnings may be higher _IF_ a rebound occurs and the rebound happens to be a strong one. Earning a superior return is what one expects when they endure an elevated level of risk.

Just don't discount the possibility that unwinding the real estate bubble could take multiple years instead of just months or a couple of quarters.

10-04-2007 @ 4:03PM

wildbill said...

They used to call this "write-off" and I can only presume that the wording has been changed to sound more confusing or less offensive. This is little more than an adaptation of "Greenspeak"-use a euphemisim and keep everyone guessing. In plain English it is a LOSS, no matter what you call it. However, it is a quarterly loss and balanced against large profits from the previous quarters, so no big deal. It is the same as the large investment houses reporting on a "best guess accounting method" which has been a SEC standard. Nothing here is of consequence unless the red ink continues to flow. This will hinge on the consumer. For the past 5 years the economy has been at least 70% consumer driven, if it continues all will be well however, personally I am not optimistic.