The strange role of 'credit value adjustments' in Bank of America and Citigroup's earnings | Business

Back in April, I wrote about the odd way in which investor concerns about potential defaults at Citigroup and Bank of America were boosting the banks’ earnings. I quoted commenter sulliclm‘s explanation:

they have to mark their liabilities to fair value, and in the case of their own debt (or in this case liabilities on derivative positions), they have to consider their own default potential as a component of fair value. So the more likely it becomes that Citi will default on their debt/swaps, the less those instruments are worth to the investors that hold them. Therefore the accounting guidance says that Citi should reduce the value of the liabilities on their books, and they book this reduction as a gain through the income statement. As an auditor I find the guidance to be ridiculous, but its the rule so companies are following it …

Now we’re getting the flip side. The $1 billion loss that Bank of America reported today included a $2.6 billion charge because investors bid up the value of BofA’s debt over the course of the quarter. Citigroup, meanwhile, took a $-1.7 billion “credit value adjustment.”

So maybe BofA and Citi are much healthier than their earnings numbers make them look. Or maybe not: The former head of fixed-income research at none other than BofA, David Goldman, figures the trading profits reported by all the big banks are largely the result of an unsustainable surge in the market price of the mortgage-related “toxic waste” still on their books. Which would make it sort of a wash, or worse. Don’t you just love accounting?

Stocks Rally Further in Run-up to EU Summit

MOSCOW — Global stocks enjoyed one of their best days in weeks on Tuesday ahead of a summit of European leaders that’s expected to be dominated by calls to boost economic growth.

Europe remains the focus of attention across all financial markets in the run-up to the June 17 Greek election that could go a long way to determining the country’s membership of the euro as well as the future of the single currency zone.

http://www.124monkeys.com Sean DeCoursey forgot his password

That’s not accounting, that’s economic voodoo concocted to play supposedly profitable balance sheet games with investors and tax collectors.
http://philsbackupsite.wordpress.com/ ilene9

Justin, maybe it’s me, but I’m afraid I don’t understand the issue, still after reading your article twice. – Ilene at http://www.philstockworld.com
waltwriston

I think Citi is up to something. First why sell Philbro for 250 when it earned more than that since 95 year-over-year, and they’re winding up their US major banking operations in “high icome area’s.” Word is they’re loooking into 6 regions to focus on. I’m suspicious of what they’re up to. I have this feeling after they if the do the 30.1 reverse stock split the company maybe be absorbed. They’re IMO making it easier to liqudate by wind up they target areas, and selling asset that preform at fire rate prices. If they do the 30.1 I’m jumping shit before 60 days.