Tags: bank | profits | illusion

Experts: Bank Profits a Dangerous Illusion

Monday, 08 Jun 2009 01:22 PM

By Dan Weil

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While banks have reported improved earnings in recent weeks, things aren’t as rosy as they appear, experts warn.

The five biggest banks posted profits in the first quarter, rebounding from billions in losses last year.

That has sent bank stock prices soaring, with the KBW Bank Index up 100 percent from early March.

But much of the earnings improvement stems from a relaxation of accounting rules and optimistic assumptions, some say.

The accounting changes include a loosening of mark-to-market rules. The adjustment allows banks to value their toxic assets at higher levels than before.

“These changes will help the banks hide their losses or push them off to the future,” David Sherman, a Northeastern University accounting professor, tells Bloomberg News.

Financial author Martin Weiss of Weiss Research harshly criticizes banks.

“The big banks’ profits were totally bogus,” he tells Bloomberg. “The new accounting rules, the stress tests: They’re all part of a major effort to put lipstick on a pig.”

Many critics say the government was overly optimistic in its bank stress tests. The Obama administration is trying to restore confidence in banks, says Nobel laureate economist Joseph Stiglitz.

If that works, “they’ll look like the brilliant general,” he tells Bloomberg.

“But all these efforts also bank on the economy recovering and housing prices not falling too much further. Those are not safe assumptions.”

Not everyone is bearish on banks. Analyst Dick Bove wrote in a report cited by Forbes last month that bank stocks could triple in five years.

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