September 20, 2019

Underpants Gnomes Accounting Will Make for Great Bank Earnings This Quarter

Wells Fargo analysts are raising estimates for some of the biggest players on Wall Street, but don't go thinking that business is going well:   

The increased earnings estimates on Bank of America, Citigroup, Goldman Sachs and Morgan Stanley are not due to underlying business improvements. Wells Fargo remains convinced that the quarter will be down quarter from an investment banking and trading perspective. Instead, the firm decided to increase its estimates because of the increased likelihood that the banks will record accounting gains tied to the value of their outstanding debts. These accounting moves, known as DVA and CVA, are adjustments the banks make each quarter based on the hypothetical amount it would cost them to repurchase their debt on the open markets. When the debt becomes cheaper in the markets, which implies the markets have slightly less confidence in the debt, the banks actually book a gain.

Isn't GAAP beautiful?

Wells Fargo Boosts Bank Earnings Views (On Accounting Moves) [Deal Journal/WSJ]

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