Creative accounting in Germany?

shortchanged_2

http://www.bbc.co.uk/news/business-15503097

Looks like someone left a couple of noughts off the end of a calculation. :eek:

However it should go well towards helping bail out Greece. :whistle:

CLAPTON

easy mistake to make
just like those people saying Greece was OK to join the Euro

RenovationMan

These so called 'bad banks' all seem to be doing better than the good ones. Didn't the Northern Rock bad bank post better results than the good one?

MacMickster

Whilst some will regard this as fortuitous for the Germans and others will regard the news with a great deal of suspicion, it worries me that auditors could have signed off a set of accounts as not only true and fair, but balanced, when they contain a £50,000,000,000 error. That should also worry the investors of any major business around the world.

Wookster

Hold on, I'll just check my back pocket...


.. oh look, just found £50bn

vivatifosi

Wookster wrote: »

Hold on, I'll just check my back pocket...


.. oh look, just found £50bn

Wow. To paraphrase Harry Enfield "You're significantly richer than me".

Generali

RenovationMan wrote: »

These so called 'bad banks' all seem to be doing better than the good ones. Didn't the Northern Rock bad bank post better results than the good one?

It's down to accounting.

If a bank decides its assets (loans) are worth £1 more than they were last year then that's a pound of profit.

Any profit or loss on a loan book that isn't being added to is merely a result of more or fewer people defaulting than previously assumed.

That's slightly loony. What is really mental is that for many banks (Bank of America for example), a downgrade in their own creditworthiness can be booked as a profit!

shortchanged_2

Well to suddenly find an amount the equivalent of the the UK's annual budget for defence is incredible to say the least.

That is one hell of a miscalculation!

And there's me thinking that the Germans were always good at maths.

Wookster

Generali wrote: »

IThat's slightly loony. What is really mental is that for many banks (Bank of America for example), a downgrade in their own creditworthiness can be booked as a profit!

This is actually quite bizarre. No doubt IAS 39 coming into force and while technically it is correct, the real world impact is perverse. Accounting standards have really taken actual results away from sensible results. Its almost like all these rules have come out and no one has really thought if they pass the sniff test.

The IFRS on Share based payments is another semi fuzzy logic standard.

John_Pierpoint

There are some weird and wonderful effects with HMRC having overlapping taxes, and in this world of funny money (created by printing presses) a rigid insistence that "income" is a different sort of money from "capital", no wonder the hedge funds can make a fortune round tripping money from country to country, from tax to tax and hopefully from income to capital.
I doubt this activity actually increases the supply of goods and services and makes the world a happier place.

I have been sorting out an estate, and of course the cuckoo in the nest (HMRC IHT section) has to be fed first.
Let us pretend that the average for the estate is 10% tax.
So you then have a bizarre conversation about the assets, where the cost of disposal is not an allowable expense:
"I've got some money for you beneficiaries; does anyone want the old £500 quid car, well that was what is was meant to be worth a year ago. Oh by the way in theory, if you take the car I'm meant to charge you £550 quid because its value has been enhanced by the 50 quid tax charged on it.
I don't think so - in reality it is now worth next to nothing, with no MOT, no Car Tax etc, so I have to get the agreement of the other beneficiaries as to what we will let it go for.

Can you explain how the Bank of America becomes more valuable as a result of an impaired credit rating?
e

Generali

John_Pierpoint wrote: »

Can you explain how the Bank of America becomes more valuable as a result of an impaired credit rating?

I can try. This is quite complicated but I think I have it right.

Let's say that you go into the North Olmstead, OH. branch of Bank of America and buy yourself a product. This product gives you the dividends and capital returns of the S&P500 ('the stock market' for want of a better term) in return for a fee of say 1.5% of your capital invested.

Congratulations! You just bought yourself a derivative back asset, in this case a debt for equity swap.

In the olden days, Bank of America would have gone out with your and your fellow investors' money and bought a bunch of shares that make up the S&P500. As they received the dividends they would have paid them to you and if you wanted your money back they'd sell some shares to pay you back.

Now clearly that is very tedious and time consuming from a banker's POV and probably gets in the way of spending his bonus. As a result, rather than all that messing around with shares BoA go into the markets and buy what's called a debt for equity swap, that is a derivative where BoA pays the returns payable on their debt and the other party in the trade pays to BoA the returns from the stock market. This swap is for a defined period of time after which the parties go back to their original position.

This is what is called a 'hedge' because as the value of BoA's liability to you changes with the value of the stock market, so the value of the hedge changes at the same time.

Most assets planned to be held to maturity rather than traded don't need to be marked to market (revalued at the current market price on the bank's books), If the credit quality of BoA deteriorates, that debt becomes worth less and BoA has to pay out more in interest to borrow money (the 2 things are the same when it comes to debt, just 2 sides of the same coin).

Now comes the dodgy bit. BoA will now have to pay more out on the swap because their debt pays more interest now because of the higher risk caused by them being less credit worth. That means the swap is worth less to them. However, as BoA plans to hold that swap to maturity it doesn't have to mark it to market (revalue it in its books). However, BoA can revalue the liability to you. The value of that liability is implied to have been reduced as a result of BoA's reduced credit score despite BoA's actual liability to you being wholly unchanged.

The result? Asset value remains the same, total liabilities fall. The difference is booked as profit. For BoA in the last quarter that was about $1,500,000,000 from memory which I think was most or all of their profits. Citibank and others are also performing the same tricks.

You could argue (although it wouldn't be quite right to do so IMHO) that having gone from making money by shorting their own client's assets they have now started making money by shorting themselves!

I'm happy to go through any of that with anyone that wants to ask. Otherwise FT Alphaville has had some stuff on this in the past few weeks. They assume more knowledge than I do but as a result their explanation is more concise so perhaps easier to understand.