C and WFC “Profits” in Question

I don’t like to accuse people of lying. Those are fighting words. But after last night’s 60 Minutes interview with Fed Chief Ben Bernanke I am compelled to say that I don’t think he’s telling the truth about America’s banks. 
The interviewer asked point blank if Bernanke believed our banks are solvent. Bernanke responded with an unblinking, unflinching "yes." 
Of course he used the recently performed "stress tests" as his measuring stick. And that’s where the problems begin… 
*****The stress tests were supposed to assess each bank’s viability if economic conditions worsen from where they are now. So you would expect for inputs into the formulas to reflect an even more dire economy – unemployment at 12% instead of 9%, mortgage default rates of 7% instead of 4%, that kind of thing. 
Unfortunately, the stress tests didn’t do that. The unemployment rate used in the tests was reported to be 8%. We passed that a month ago. The stress tests used a loss rate for subprime mortgages of 21% to 28%. But 40% of subprime mortgages are currently over 30 days late. And they could hit 55% according to one industry expert, a far cry from 21%… 
So when the Fed required banks to raise an additional $75 billion to strengthen their capital base, it wasn’t so the banks could stay afloat if things get worse, it was so they could survive right now. 
Seems to me, the economy could easily get worse. Then what? The Fed will require the banks to raise more money? 
*****In early March it was Citigroup (NYSE:C) that really got this rally going. You may recall Citi CEO Vikram Pandit announcing gleefully that Citi was going to turn a profit for the first quarter. There’s been much rejoicing ever since.
At the time, I speculated that Citi was, um, full of it. I surmised their profits were based on mortgage modifications, credit card debt modifications and such. In other words, I believed at the time that Citi wasn’t feeling the positive effects of new lending business, but rather, was creating revenue by re-casting existing loans. In other words, I thought it was basically an accounting trick. 
(Of course, just because I was skeptical didn’t stop me from squeezing substantial gains from stocks as they rallied. All of my advisory services, SmallCapInvestor PRO, Top Stock Insights, TradeMaster Daily Stock Alerts and Recovery Portfolio thoroughly beat the market so far this year.) 
*****Good ol’ Bloomberg. They ran an article on Friday that not only confirmed my suspicions about banks accounting practices, but now, I’m considering a bank or two, which would have been inconceivable just a week ago. 
The change came on April 2nd, just three weeks into the rally. The Financial Accounting Standards Board changed the rules. Banks now have greater freedom to value assets how they choose. And what’s more, banks can recognize losses on some assets without counting the write-downs against earnings. And you’ll recall it was the write-downs that were a big issue for banks starting at the end of last summer. 
Banks are also helped when the value of its own debt falls. So when the bonds they’ve sold go in the tank, the banks can actually record the difference between the issues price and the current price as income, because they could theoretically buy the debt back at a lower price. Of course, no banks are doing this, but it’s estimated that Citi generated $2.7 billion in pre-tax revenue from its own impaired debt. (Think about it, your assets go down and you book it as a profit? Try that with your home and a friendly I.R.S. man will pay you a visit.) 
One of my colleagues, Martin Weiss, estimates that without these and other accounting rule changes, Citi would actually have lost $2.5 billion for the 1st Quarter. 
And it’s not just Citi. Bloomberg also reports that Wells Fargo (NYSE:WFC) boosted its capital base by $2.8 billion by simply re-valuing $40 billion of bonds. 
Joseph Stiglitz, economist at Columbia University, believes the government is trying to buy the banks time to earn their way out of this mess. Clearly, he doesn’t believe Bernanke is telling the truth. But it’s worse. 
If banks’ ability to hide losses is enhanced, and nothing is really done about the losses on the books that remain, banks will remain unwilling to do much lending, which will keep them from increasing earnings and also impair the economic recovery. 
*****Jason Cimpl, technical analyst at TradeMaster Daily Stock Alerts, took 5% gains on the iShares China ETF (NYSE:FXI). This is one of the investments he covered in the video I gave you last week. You’ll recall I promised to tell you when he sold… 
You can find out more about TradeMaster Daily Stock Alerts HERE
P.S. If you’re interested in discovering profits from more China opportunities, be sure to request your own copy of my new report, "Going for Growth: 3 Top Chinese Stocks to Buy NOW". It’s available HERE.

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