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An RX for Banks


Financials can no longer afford to simply mask the symptoms.

"I was feelin' so bad. I asked my family doctor just what I had." --The Rascals

The dictionary informs us that a stress test will determine how much pressure, tension or wear a given product or material can withstand. By May 4th, 2009, we'll know how U.S. financial institutions measure up against this standard.

Seven short weeks ago, the banking system was under siege with the specter of nationalization front and center. The icons of American prowess were brought to their knees and popular perception suggested the cancer was bigger than the patient. Since that stressful stretch, the banking sector effectively doubled as the path of maximum frustration skinned the bears.

Minyan Peter, our resident bank expert and the former treasurer of one of the largest banks in the Midwest, asked last week on Minyanville if financial service firms have forgotten the difference between facts and the truth. Just because lawyers and accountants offer that disclosures are accurate, he opined, doesn't make them true.

His hope was that these institutions would exhibit some humility when weighing the systemic progress made since the fourth quarter with concern for our economic future, all the while ensuring that adequate reserves are in place. He offered the following advice to narrow the gap between facts and the truth:

To Wells Fargo (WFC): You should have never used the word "record." While technically correct for the legal entity that is Wells Fargo, the first quarter 2009 results were hardly a record if we look at the combined past quarterly earnings of Wachovia and Wells. You should have said that during the first quarter of 2009, the firm benefited from billions of dollars due to write-downs at Wachovia prior to year-end.

You could have also acknowledged that Wells Fargo is a clear beneficiary of the mortgage-refinancing wave but you aren't sure how long that will last as it's entirely reliant on the Federal Reserve's ability to manage the 10-year Treasury yield through quantitative easing. As long as you're being forthright, some realistic comments about future credit losses would have been nice.

To Goldman Sachs (GS): You should have looked at the quarterly disclosure offered by JP Morgan (JPM) as a model for the kind of detail we should expect in good times and in bad.

And how about acknowledging upfront and in detail what the "stub month" of December looked like? Details about other comprehensive income would have been helpful as well since there's a meaningful gap between what was reported as earnings since November and changes to the firm's common equity levels. Additionally, a balanced offering of why the U.S. government might not be eager to permit you to repay TARP would have been constructive.

And finally, a little humility would have been welcome. Suggesting that the government programs offered to Goldman Sachs are an a la carte menu isn't going to win you any friends on Main Street or Constitution Avenue and you may someday need help from both of them.

To Bank America (BAC): In response to your communication that, "Non-interest income included $2.2 billion in gains related to mark-to-market adjustments on certain Merrill Lynch structured notes as a result of credit spreads widening," you could have included a translation for non-accountants. Perhaps something along the lines of, "Because the market is now more doubtful of our ability to meet our obligations on these structured notes than it was at the end of December, we recognized a $2.2 billion gain this quarter."

To Citigroup (C): Your earnings statement read like a scavenger hunt and trying to put "like" things together such as increases in earnings due to FASB sanctioned "write ups" in liabilities and the FAS 115 rule change doesn't exactly scream "transparency." And to suggest that you're "pleased with performance" while reporting a loss for the quarter makes one wonder whether management is grounded in reality.

Fuller disclosure regarding the "ratchet" contained in the January 2008 convertible preferred stock offering would have been nice back in January 2008 when management bet the common shareholders' farm that it wouldn't need to raise more capital. Worse, suggesting to those same common shareholders in your earnings headline that the cost of the reset should be "excluded" hardly seems contrite given the related dilution.

Finally, a comment regarding why Citigroup is consolidating over $80 billion in heretofore off-balance-sheet credit-card balances for regulatory purposes, but not GAAP purposes, would have been a nice touch.

My grandfather Ruby taught me that all we have is our name and our word. If the central players in the capital market construct are to ever redeem themselves on a global stage, the integrity of their spoken word and confidence in corporate accounting cannot be open to interpretation.

For if we've learned anything from the grand experiment of financial engineering, it's that the truth will eventually show itself for all to see.

Minyan Peter has position in JPM and other financial proxies.


In memory of our fallen friend and trusted colleague, Bennet Sedacca, 100% of the donations made to the RP Foundation through April will be channeled to philanthropic endeavors consistent with the RP mission, working closely with the Sedacca clan in the distribution of those funds. We thank you kindly for your support as we strive to effect positive change in the lives of children.

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