Making Revenue Out Of Nothing At All

Banks are no longer making money doing what they once did–banking. So instead, they have resorted to trading with each other and booking “trading revenues.” Besides tossing assets back and forth between each other and engaging in coordinated trades, they also book the shrinking value of their liabilities as revenue.

Consider the irony that the following statement implies (via Reuters):

“Trading revenue were boosted as banks wrote down fewer losses from bad loans and recorded the declining value of their debt as a liability. Banks can book the deteriorating value of their own debt as trading revenue.”

Does this sound…unorthodox? Well it is. Say a bank issues bonds at par ($100). The bonds then trade in the open market. If they trade lower than par, say at $70, then the bank can book $30 as trading revenue. The “mark to market” loss is booked as revenue, but in no way has the liability changed. They still owe the bondholder $100. Is this legal? Yes, thanks to FAS 157. As with all Ponzi finance schemes, this too will come crashing down.

Perhaps when banks miss their earnings estimates next quarter, they can simply explain that since their debt did not sufficiently decline in value, they could not book any trading gains. The squirming should be colossal.

I’ve said it before and I’ll say it again: Stay away from bank and financial stocks (including General Electric (GE)–which is the largest over-leveraged hedge fund in the world). If you are a speculator, be short.