Goldman, Citibank and Others Rely on Earnings Tricks -- But Not Revised Mark-to-Market Rules
Financial institutions have been using a whole array of tricks to boost earnings for the first quarter and beat analysts’ estimates, but the revised accounting rules on mark-to-market, which was supposed to smooth unrealized losses, hasn’t been one of them. Maybe for the simple reason that it won’t improve earnings results all that much, as some firms like State Street said this week.
Bank profits are appearing out of thin air, according to Andrew Ross Sorkin of the New York Times. There’s the Goldman Sachs maneuver that erased the impact of a $1.5 billion loss in December, and Bank of America’s big one-time profit linked to the sale of its share in China Construction Bank.
Oddly enough, though, the recent accounting changes appear to be providing little or no help so far with earnings. To be sure, it’s still early; General Electric, for instance, said it will only start implementing them in the second quarter. Even then, there’s no guarantee that the rules will magically improve earnings.
Take State Street. Its shares surged immediately after the Financial Accounting Standards Board announced the revised accounting rules at the beginning of April. “State Street was perceived to be a large beneficiary of the accounting rule changes, and now the market may be concluding that it overestimated that effect a little bit,” Murali Gopal, an analyst at Keefe, Bruyette & Woods, told Reuters last week.
State Street confirmed it this week. During a first-quarter earnings conference call, CFO Edward Resch said the big institutional investor elected to implement the accounting changes during the second quarter. But even then, he doesn’t anticipate there will be a significant impact on earnings or capital as a result of the adoption.
“This is because we believe that the FASB and its announcement on FAS 157 defined the price at which — the value which securities must be marked as the exit price, which is exactly the requirement of the current rule,” Resch said. “So, in our view, nothing changed.” (For more on why nothing changed, see my previous post on the revised accounting rules.)
State Street isn’t the only firm that has said the revised mark-to-market rules won’t improve earnings. Jefferies Group didn’t early adopt the recent changes in mark-to-market rules, but was quick to note — also in its first-quarter earnings conference call this week — that even if it did implement them in the first quarter, they wouldn’t have affected earnings results.
More on recent bank earnings at BNET Finance:
Marine Cole is a New York-based journalist who's written for Dow Jones Newswires and Crain Communications's Financial Week and has been published in the Wall Street Journal.
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