Banks Risk Reporting Too-Good Earnings


Last week, Wells Fargo (WFC) said it will report record Q1 earnings. It caused the stock to shoot up, but it also raised a few eyebrows as analysts wondered how realistic the company is being with respect to loan losses.

Goldman Sachs (GS) reports earnings later this week, and there’s talk that it may be the company’s second-best quarter ever. Karl Denninger believes any Goldman profit will purely to do the AIG (AIG) conduit, and since the company has ostensibly hedged its exposure to the insurer, it’s getting paid twice for its failure. Barry Ritholtz chimes in, calling it “theft on a grand cale” and that it’s “time for the guillotine.”

Meanwhile, banks are reporting earnings with mark-to-market rules having been relaxed, giving them broader leeway in valuing assets.

The bottom line is that if bank earnings are across-the-board too strong, then it looks like the game is just totally rigged. The economy is still going to crap, defaults are still increasing rapidly, and commercial real estate is finally set to teeter — how does it make sense for banks to be reporting anything near record earnings?

It doesn’t.

Unless Wells Fargo and Goldman Sachs can explain exactly how they had such amazing quarters against the current backdrop, the only conclusion will be that the banks are still fundamentally black holes that can’t be trusted or valued by investors and counterparties.

And when you factor in the stress test results — which however ridiculous they may be could result in forced capital raises — the bloom could come off this rose pretty fast.

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