Are Banks Really Coming Back?
Jul 7th, 2009 | By Andrew Gordon | Category: Financial NewsFirst-quarter earnings reports for the big banks weren’t bad on the surface. But banks had to pull some rabbits out of the hat to do it. For example, Goldman Sachs skipped December in order to post improved numbers.
And Bank of America arbitrarily assigned a higher value to its Merrill Lynch assets. Earnings reports this quarter may also impress investors. Trade revenue is up on the big spread between treasury and other bonds. And the banks earned fees in May helping each other raise capital.
But all the important stuff is down. Mergers and acquisitions dropped 56 percent from last year. And equity underwriting also fell in June after the boom in May. Underwriting of bonds also dipped. Companies issued 22 percent less investment grade debt than last year and 40 percent less junk bond debt.
But the banks’ latest magic trick is a beauty. Banks recently began buying more mortgage-backed securities as new accounting rules went into effect (just in time for the second quarter). These rules allow banks to place a higher paper value on these assets than what they paid for them. And, yes, these are the same troubled assets that got banks into big trouble to begin with.
Whatever you do, don’t let better-than-expected earnings reports convince you to invest in banks. Their profits aren’t real. But their growing pool of bad mortgage-backed assets is very real.
Source: Are Banks Really Coming Back?
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Andrew is currently the Editor-in-Chief of two monthly investment research services INCOME and The Wealth Advantage. He has also become a leading expert in utilizing Exchange Traded Funds to profit from rising and falling market sectors.
