Building a Big Giant Enron

Option ARMageddon is claiming that a large portion of Wells Fargo's celebrated earnings report last week is due to accounting changes (ht Naked Capitalism). In other words, there has been no change in the underlying profitability of the firm.

And over at Goldman Sachs, who, praise be, have also returned to profitability. NYT blogger Floyd Norris suggests how they have done this

Goldman Sachs reported a profit of $1.8 billion in the first quarter, and plans to sell $5 billion in stock and get out of the government’s clutches, if it can.

How did it do that? One way was to hide a lot of losses in not-so-plain sight.

Goldman’s 2008 fiscal year ended Nov. 30. This year the company is switching to a calendar year. The leaves December as an orphan month, one that will be largely ignored. In Goldman’s earnings statement, and in most of the news reports, the quarter ended March 31 is compared to the quarter last year that ended in February.

The orphan month featured — surprise — lots of write-offs. The pretax loss was $1.3 billion, and the after-tax loss was $780 million.

Would the firm have had a profit if it stuck to its old calendar, and had to include December and exclude March?

This, of course, was Enron's scam -- to use accounting sleight of hand to turn losses into profits. And now the U.S. is doing it for their whole economy. And there is a good possibility that with changes to accounting rules in Canada, we are doing it to.