Yesterday, Zions Bancorporation
(NASDAQ:ZION) reported that it will take a "pro forma" $629 pre-tax charge
as a result of the Volcker Rule.
Under the rule, CDOs that it holds have become disallowed investments. The charge reflects the difference between held-to-maturity and fair-value accounting -- which had already been charged through to capital through Other Comprehensive Income, but not run through the P&L. As the company notes, the upcoming P&L charge will be effectively reversed through Other Comprehensive Income, leaving GAAP capital essentially unchanged. Even more, due to strong fixed income markets in Q4, the actual charge is likely to be far less than the pro forma September figures management provided.
Over the past five years I have watched as bank after bank has moved assets back and forth between held-to-maturity and fair-value accounting, in all cases stating that things have changed. While the accounting industry and the regulators have at least made the reclassifications largely capital-neutral, I still struggle with held-to-maturity accounting for investments of a highly leveraged, highly economically cyclical, highly regulated, and highly trust-correlated industry like banking.
For banks, when times are good, the whole balance sheet is permanent. When mood falls, the balance sheet becomes a garage sale -- anything that can be sold, particularly at a gain, will be.
Today, Other Comprehensive Income has become the morgue for bodies yet to be buried by the light of day in quarterly earnings.
Yesterday, Zions offered yet another example.
Why analysts and investors continue to forgive these repeated "one-time non-cash" charges is beyond me.
From my perspective, Zions made two clear mistakes: It bought securities at a price that was too high (and rates rose and/or spreads widened), and it woefully misread the regulatory environment.
Interest rate and regulatory risks are two bread-and-butter risks of banking, and yet in yesterday's news about Zions, the banks' management asks, "Who would ever have imagined this?!"
Blaming the Volcker Rule for yesterday's outcome feels pretty wimpy to me. Then again, accountability in the banking industry seems to be in very short supply.
Never have I seen a group claim "brilliance" when times are good and "victim" when times are bad like the current leaders of America's banks.
Peter Atwater's groundbreaking book "Moods and Markets" is now available on Amazon and Barnes & Noble.
“Peter Atwater brilliantly provides a framework for understanding both the socioeconomic hubris that led to the great credit bubble of the past decade and the dark social-psychological hangover that has resulted from its collapse. In so doing, he offers an invaluable guide to what promises to be a very difficult and turbulent period ahead as we experience what he calls the ‘me, here, and now’ behavioral tendencies of the post-crash world.” —Sherle R. Schwenninger, Director, Economic Growth Program, New America Foundation
Position in SH and JPM
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