PIG-Sity, here we come

| October 21, 2011 | 2 Comments

Credit: Kevin Hutchinson

This week the big U.S. banks released their 3rd quarter earnings. The information provided stood out for two reasons:

  1. The banks juiced their earnings by using a perfectly legal accounting rule known as CVA DVA, or credit debt value adjustment. CVA allows the banks to look at how their own debt is trading and to book a gain if the price of that debt has gone down. All because the banks could theoretically buy their own bonds back at a price lower than what they originally sold it for. With this trick all 4 of the big banks–Bank of America, Citigroup, JP Morgan Chase and Morgan Stanley–actually benefitted from investors’ worries about whether they’ll be repaid. One report claims that CVA accounted for 54% of the profits reported across the 4. A bit perverse, no?
  2. The other interesting bit about the 3Q releases is that it gave us a good look at how exposed the banks are to eurozone crisis that started at the edges but has steadily been creeping into the core. Let’s call this group PIG-Sity, for Portugal, Ireland, Greece, Spain and Italy. Here’s a graph of the U.S. banks’ exposure to PIG-Sity:

Some observations:
  1. The exposure disclosed looks, on balance, to be much less dire than feared. Surprisingly, Morgan Stanley looks like the winner of this particular beauty contest. Citi also comes out much better than expected.
  2. Goldman Sachs distinguished itself by not making detailed info on its PIG-Sity exposure available in the info viewable on its site. (At least, I couldn’t find it; please shout if you find otherwise.)
  3. Morgan Stanley went the extra mile by addressing the counterparty risk if faces by having purchased credit protection on troubled countries from banks based in those same countries. It was the only bank that included this amount in the estimate of its total exposure. I’ve stripped it back out in order to make MS’ figures comparable to the other banks’ so it’s not reflected in the above graph.Morgan Stanley continued to follow its more-Catholic-than-the-Pope inclinations by also disclosing that “the Company had European peripheral country exposure for overnight deposits with banks of approximately $386 million and unfunded loans to corporations in the European peripheral countries and France of $904 million and $1,774 million, respectively.” Citi asserts that its hedges are also predominantly outside of the region, but doesn’t give any figures.
  4. The list of vulnerable European countries is definitely expanding: Morgan Stanley felt the need to disclose its exposure to France ($-871 million ought to answer those who’ve been frightened and speculating a much worse figure, while Citi disclosed a combined figure for its exposure to both Belgium and France ($2 billion.)
  5. JP Morgan Chase’s data was as of 9/29/2011, as opposed to the expected 9/30/2011. I’ve no idea why they neglected the extra day. Any thoughts?
  6. Bank of America disclosed the precise break-down of sovereign vs. non-sovereign exposure to the PIG-Sity countries. Here’s what it looks like:

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Category: Banking