Those Amazing, Magic Bank Profits

Slate is reporting today what the markets told us yesterday: U.S. banks are somehow returning to profitability. But not so fast.

Scroll back less than two weeks to Congressional pressure on the Financial Accounting Standards Board to retreat on fair-value accounting, particularly mark-to-market requirements. On March 30, Bloomberg reported that

Four days after U.S. lawmakers berated Financial Accounting Standards Board Chairman Robert Herz and threatened to take rulemaking out of his hands, FASB proposed an overhaul of fair-value accounting that may improve profits at banks such as Citigroup Inc. by more than 20 percent.

So now, Wells Fargo is reporting a 27% rise in profits. As Howard Cosell used to say: amazing!

Of course, as I noted on March 4, Canadian banks achieved a similar miraculous return to profitability following changes in fair value accounting standards, issued last fall but backdated to the summer, so that fourth quarter profits would shine.

What I cannot understand is how and why sophisticated investors believe this. Putting lipstick on the pig of toxic assets does not alter their pig-like character.