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The Newest Ruse: Banks Capitalizing on “Toxic Assets” to Book Puffed-Up Profits

Remember the infamous leaked Vikram S. Pandit memo we wrote to you about awhile back that suddenly saw Citigroup Inc. (NYSE: C) turn a profit on nothing more than vapors?

Stay tuned: We're about to see more of these puffed-up profits. JPMorgan Chase & Co. (NYSE: JPM), Bank of America Corp. (NYSE: BAC) and PNC Financial Services Inc. (NYSE: PNC) will reportedly be booking as much as $56 billion in windfall profits using similar financial chicanery in the months ahead.

Sadly, millions of investors will likely interpret this as a sign that the U.S. financial sector is once again a viable "profit" play – when the reality is that Wall Street hasn't learned a single darned thing from the financial crisis and is up to its old tricks once again.

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  1. Barbara R | June 2, 2009

    One thing we could do would be to require all companies to use an accounting system that only allows for actual money earned, taken in and spent. If the accounting system allowed by law would NOT allow anticipated profits, income, etc., but only what is ACTUALLY there, then we might get back to how business worked when people actually behaved honestly and accepted responsibility for their actions. Novel approach, huh?

  2. lYNN sTEVENSON | June 2, 2009

    WAhy dpesn't pir congressmen see throughh this?hink all Federal mony shpould be pilled back from the banks and they should be held to True accounting.

  3. Joseph Hollow | June 3, 2009

    RE: "Newest Bank Ruse"

    If you are going to write fiery acusatory articles on financial issues, and you don't want to sound like Greta:

    You really ought to learn the difference between the "Asset & Liability" side of the financial statement vs the "Income & Expense" side. While you're at it try to understand why "mark to market" was often a misleading process and was killing financial companies. It was a bookkeeping standard that meant well but needed to be modified.

    FYI "Profits" aren't realized until the asset is sold (or liquidated) and the value is then moved from A & L to the Profit (or Loss) side. Re-valuing a loan (or a loan backed security) held as an asset on a corporate balance sheet (some were historically "current" and unjustafiably marked down via mark-to-market) does not appear as a profit or a loss.

    Furthermore, please stop refering to the so-called "Bank Bailout" as if the bank officers or shareholders are in a position to benefit. The government recieves quarterly interest payments on preferred stock issued to secure the temporary monetary infusions, to which you refer, some of which were unsolicited and unwanted. Will community organizers of "The Left" let the banks repay said "bailout" immediately as they seem to want to do? BTW, the current dividend yield is in excess of 5.5%, which is far in excess of any ROI available in the market place.

    How does this look compared to GM? What will the taxpayer get for their Billions going to ACORN type organizations.

    Also, FYI: Banks don't create money and they don't set interest rates outside of a competitive environment that is ultimately government regulated. Banks charge fees for service and lend money on a spread based, once-upon-a-time on risk. Blaming banks for government mismanagement of the economy is a hoary left-wing cannard. [Edited by Money Morning Admin to fit Money Morning language guidelines. June 4, 4:05 pm]

  4. Steve | June 3, 2009

    Joseph Hollow, your critique of this article is spot-on. The fact that this article is by it's own admittance is based on conjecture ("Stay tuned: We’re about to see more of these puffed-up profits.") makes it even more ludicrous.

    "Not surprisingly, JPMorgan wouldn’t comment when I called – nor would any of the other big banks." No, that's not surprising at all. Why would they humor you?

  5. Jonathan Goldstein | June 4, 2009

    It would appear that neither you (Steve) nor Mr. Hollow actually understand what you read. Both JP Morgan's spokesperson and Well's CEO commented on the record that this was precisely what they intended to do. There's no conjecture about it. As for the notion that bank officers didn't benefit, get serious. Many laughed all the way to their tax payer funded walking papers after having driven shareholders straight into the ground. Maybe you worked for a bank and are trying to clear your conscience….

  6. Barbara R | June 4, 2009

    Jonathan Goldstein – I don't think many here are saying that bank officers didn't benefit outrageously from this system. THE PROBLEM IS THAT THE MEDIA IS LETTING THE GOVERNMENT AND ITS OFFICIALS CALL THE SHOTS ON WHERE TO PLACE THE BLAME AND NOT FOCUSING ON THE GOVERNMENT'S ROLE IN THIS FIASCO. THE POLITICIANS WERE IN BED WITH THOSE BANK EXECUTIVES AND HAVE NOT BEEN HELD ACCOUNTABLE BY ANYBODY! The politicians talk about fixing the system but to do that it would start with Washington. Outlawing lobbying and somehow keeping campaign donations to a ridiculously low level so that no group or individual has outside influence would help. I see no difference between the following: an individual working for a company taking bids on a contract and that individual keeps money from a company bidding on the contract but the contract goes to another company – it is still taking a bribe (undue influence). How does that differ from a politician taking campaign money and/or lobbying money from a company in considering how to vote a certain way. Even if they don't vote on a particular bill to favor the company, at some point that money influences their behaviour. There is plenty of it to go around for both parties. Republicans in getting rid of Glass Steagall and the uptick rule were influenced by Wall Street and Banks; Democrats in failing to regulate Fannie Mae and Freddie Mac, putting them into conservatorship and not receivership with OUR TAXPAYER MONEY and never mentioning Franklin Raines when talking about clawbacks. Both are guilty. There should be a law passed that states no taxes will be raised until the executives of any company (CEO, CFO, COO) receiving taxpayer help pay back all bonuses received in 2007 and 2008 AND all politicians receiving campaign donations and lobbying money in 2007 and 2008 from those companies must pay it back as well. They should all have liens against their houses and bank accounts until they do so. Where is the media in all this? Why aren't they doing their job? The focus has been on bank executives but NOT on Fannie Mae and Freddie Mac executives nor on the politicians. It is hypocrisy of the first order when Dodd, Franks and Obama demand bank executives pay back their bonus money and executives who came late (2009) to these banks to clean up the situation are being told to have their salaries capped but Dodd, Franks and Obama are not being asked to return their lobbying largesse and campaign donations from Fannie Mae who we bailed out with taxpayer money. These men were the #1, 7 and 3 recipients of Fannie Mae lobbying money and Franklin Raines was Obama's #1 campaign donor. I have a real issue with the WHOLE focus being on bank executives and NONE on politicians who failed in their job to regulate and deal with this situation and who tried to make our financial system a welfare state giving money to people who didn't qualify and couldn't pay back loans so they could buy a house. A house is a privilege not a right. An individual can always rent. I think Republicans like Eric Cantor who got money from AIG should be required to return it as well under the same circumstances outlined above. I am sick and tired of the politicians who had a big hand in this crisis determing the conversation and the media NOT DOING ITS JOB by saying so.

  7. Jonathan Goldstein | June 4, 2009

    To Barbara – Yup…and well said. I find it interesting that neither party (and both clearly had a hand in being asleep at the switch here through several generations of politicians) has done any kind of self examination. They've been asleep at the switch for all of this and have taken countless dollars that would be a conflict of interest under even the most generous of circumstances. It sure would be funny to see the citizen sitting up on the dias and grilling the politicos on CSPAN…can you imagine???!!! Now that would be entertainment.


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