How to appease the 99 percent

Smaller Wall Street bonuses? Robin Hood Tax? No drums?

How about this: large banks like Citi, Morgan Stanley, JP Morgan and Bank of America reported shiny third-quarter earnings, but not so much from stellar performance as from booking profits on their own worsening credit. In other words, they aren’t doing as great as their earnings say.

The banks are recording gains from debt valuation adjustments (DVA, also CVA). That means, say I have a mortgage and my credit score worsens because I’ve been demoted to freelance from full-time. The value of my mortgage decreases. And on the theory that I can repurchase that mortgage at a lower price, because of its worsening quality, I can (theoretically) make a profit. I can’t buy back my mortgage but banks can buy back their debts.

Morgan Stanley bought back $2 billion of their own debt and earned $100 million. They also booked $3.4 billion in accounting gain from DVA, which makes up $1.12 of their reported $1.14 earnings per share.

Citi and JP Morgan booked $1.9 billion in DVA gains while Bank of America recorded $1.7 billion. Goldman Sachs‘s $450 million gain from DVA is minuscule by comparison, but that’s because it hedged potential DVA gains to prevent wild swings in its earnings.

Just what CEO of Morgan Stanley Steve Gorman means when he calls their third-quarter DVA a “bizarre accounting anomaly” and said it may swing the opposite way in the next quarter.

Financial News calculated that taking the DVA effect out of the earnings of America’s five largest investment banks would wipe out their entire cumulative pre-tax profits. Have a neat chart:

The 99 percent may be happy to know that the big banks aren’t doing that much better than the rest of us, unless the accounting acrobatics provoke more drumming instead.

Just in case, Matt Levine at DealBreaker disagrees and has a great explanation of DVA, which is half the reason for this link. The other half is for the most liked comment on his post:

Guest:
I can’t wait until OWS protesters start to complain about this.

So… maybe not.

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