Green Shoots or Weeds?
Positive bank earnings announcements from Wells Fargo, Goldman Sachs and then Citigroup provided enough juice to propel the stock market through a sixth week in the green in mid-April. But a lot of non-believers are dubious that this is the sign of a real turnaround.
Goldman Sachs' noble announcement that it would be repaying taxpayer TARP funds pronto, as well as its consensus-beating first quarter earnings announcement surprised plenty of people in April. Dick Bove, the Rochdale bank analyst who has been the most outspoken supporter of some of the industry's beleaguered giants, put out a very glowing “buy” report on the news. Indeed, the bank did well in some areas, particularly its trading business. The thing is, skeptics weren't as worried about what was in the report as what was missing — the entire month of December. Taking advantage of the firm's legal change from investment bank to bank holding company, Goldman shuffled the calendar a bit on its fiscal year so that December — a bad month for the firm — literally dropped out of its quarterly comparison.
Wells and Citi made use of similar accounting hocus pocus to beautify their numbers, according to analysts. Citi crushed estimates, apparently enjoying the fruits of an accounting rule change it adopted in 2007, FASB rule 157e. Turns out Citi was able to take a $2.5 billion gain from the rule which allows it to record any declines in the market value of its debt as an urealized gain.
Meanwhile, Wells Fargo announced its best quarterly earnings ever, giving its share price a nice kick. But analysts weren't terribly convinced. KBW's Frederick Cannon said the bank was likely to need another $25 billion on top of the $25 billion it already received from the U.S. Treasury. He also predicted another $120 billion in “stress” losses at the bank assuming the recession continues through the first quarter of 2010 and unemployment reaches 12 percent.
