Want to hear something crazy? An insane accounting rule lets some companies book a profit when credit default spreads on their own debt widen, even though it's a sign that investors are worried. A company could theoretically -- the thought goes -- repurchase its own debt at a discount, leaving the difference as a gain. Even if it doesn't repurchase the debt, it still gets to book the spread as net income.
Conversely, when a company's default spreads tighten -- a sign that investors are feeling confident about its future -- it's often forced to book a loss. Follow that? Bad news = profit. Good news = loss. Accountants can be funny people.
Morgan Stanley's second-quarter earnings came in at a net loss of $1.10 per share, compared with a gain of $1.02 per share last year. But the results included $2.3 billion -- or $1.32 per share -- in charges related to tightening credit default spreads. Without this one-time, and utterly absurd, charge, a nice quarterly profit would emerge. There was also a $0.74-per-share charge related to repaying TARP funds to taxpayers -- a nonrecurring expense, of course.
In truth, most of the bank earnings reported over the past week don't reflect anything close to reality. Bank of America and Citigroup's income was made up of selling assets. Goldman Sachs
For related Foolishness: