Banks: Fooled By Big Swinging Dicks Again?

No wonder that Swedbank misses the green shoots this spring. Bloomberg reports on Swedbank's earnings today:

April 23 (Bloomberg) -- Swedbank AB, the largest bank in the Baltic states, fell the most in six months in Stockholm trading after reported a first-quarter loss as bad loans increased in Ukraine and the Baltic states.

The loss of 3.36 billion kronor ($398 million) compared with a 2.9 billion-kronor profit in the year-earlier period, the Stockholm-based bank said in a statement. Swedbank was forecast to post net income of 1.12 billion kronor, according to the median estimate of six analysts surveyed by Bloomberg.

Swedbank, which makes 17 percent of its loans in the Baltic states, reported 6.85 billion kronor of loan impairments in the region and said it can’t rule out writedowns on investments there. Latvia’s economy may shrink 15 percent this year and Lithuania’s 8.5 percent, the bank has said, as the global financial crisis compounds a collapse in the real-estate market.

The recovery of share price is stunning, however:

Swedbank fell as much as 17 percent and was down 6.8 percent at 43.80 kronor as of 1:05 a.m. in Stockholm. That cut the lender’s market value to 22.8 billion kronor.

BTW, Danske maintains SELL recommendation on Swedbank's credit due to concerns of asset quality and worsening business outlook ...

Well, I have written about Wells Fargo Party, Earnings by Shorting Themselves and other cracks ... Edward Harrison at Credit Writedowns has nice post today, on how banks are dressing their books using accounting tricks. And I quote here the excerpt, but read the full story:

To sum up:

1. You just got the shaft because a recession has meant higher default rates generally.
2. You just got the shaft because of unexpected pre-payment and lower cash flows that result from this.
3. You just got the shaft because your pool of borrowers has been adversely impacted by the Fed’s interference in the MBS market

All of this is very bad for existing or so-called legacy assets. Moreover, these assets must be marked-to-market to reflect asset vale impairment. So, this will mean massive writedowns going forward.

But, wait a minute, didn’t we just change the accounting rules? Enter new mark-to-market accounting a.k.a. mark-to-make-believe. Because of the guidance on marked-to-market accounting in FAS 157-e, you can deem these changes to be temporary impairments. There is no need to mark to market. Problem solved.

Here’s what Wells Fargo had to say about its marking-to-market last quarter in their earnings release (PDF):

The net unrealized loss on securities available for sale declined to $4.7 billion at March 31, 2009, from $9.9 billion at December 31, 2008. Approximately $850 million of the improvement was due to declining interest rates and narrower credit spreads. The remainder was due to the early adoption of FAS FSP 157-4, which clarified the use of trading prices in determining fair value for distressed securities in illiquid markets, thus moderating the need to use excessively distressed prices in valuing these securities in illiquid markets as we had done in prior periods.

Nice.

And if you think people aren’t fooled by all of this, think again. Bank stocks are way, way up.

Enjoy the fool's party! Did you miss the story of Big Swinging Dicks?