Credit Value Adjustments

Spinning straw into gold has hit bank financial reporting. Earnings of the major banks reflected changes in income by use of Credit Value Adjustments. Believing any data from Citigroup or Goldman is much like the old Wood Allen joke. A man speaking to a doctor confesses, "Doc, my brother is crazy, he thinks he's a chicken. The doctor says " why don't you turn him in?" The man replies, "we would, but we need the eggs." Here is how Citigroup needed the eggs as reported by Eric Dash of the NYTimes;

"Citigroup posted its first profitable quarter in 18 months, in part because of unusually strong trading results. It also made progress in reducing expenses and improving its capital position.

But the long-struggling company also employed several common accounting tactics — gimmicks, critics call them — to increase its reported earnings.

One of the maneuvers, widely used since the financial crisis erupted last spring, involves the way Citigroup accounted for a decline in the value of its own debt, a move known as a credit value adjustment. The strategy added $2.7 billion to the company’s bottom line during the quarter, a figure that dwarfed Citigroup’s reported net income. Here is how it worked:

Citigroup’s debt has lost value in the bond market because of concerns about the company’s financial health. But under accounting rules, Citigroup was allowed to book a one-time gain approximately equivalent to that decline because, in theory, it could buy back its debt cheaply in the open market. Citigroup did not actually do that, however." Full Article

The banks and the markets want to believe and with the stress tests coming up on May 4th, an all out effort is being made to spin the accounting.