Accretable Yield – Tuesday’s Term Of The Week
Didn’t you know? The financial system is doing pretty darn good these days.
First there was the Citigroup (NYSE: C) memo back in March; a “leaked” bit of information that preceded their actual quarterly and claimed that they had made a $2.5 billion gain.
That wowed everybody and the markets went up.
Then we had the government conducting its “stress tests,” which determined that only ten out of the nineteen banks it studied needed more Federal aid. Of course since then, nobody has been officially allowed to pay back their loans, and U.S. Treasury Secretary Timothy Geithner has imposed other rules and regulations on all of them, but that’s beside the point. Right? Of course!
The main point was that it wowed everybody and the markets went up.
Now we have reports that Bank of America Corp. (NYSE: BAC), JPMorgan Chase & Co. (NYSE: JPM) and a few other big banks have managed to raise over $19 billion.
Surprisingly enough, the markets aren’t going up all that much, but that’s just because several of those same banks have announced stock offerings. You can bet your bottom dollar that investor hopes - unfounded though they might be - will recover soon enough.
I say unfounded, because of the details behind the financial system’s seeming good business. In order to understand where these banks’ profits are really coming from, you have to understand two words: Accretable Yield.
Never heard of it? Join the crowd.
The Beautiful Absurdity Of Accretable Yields
Put simply, it is “the difference between the value of the loans on the banks’ balance sheets and the cash flow they’re expected to produce,” as Bloomberg so aptly put it. Note the key word here: “expected.”
To give you an even clearer idea, here’s Money Morning’s Keith Fitz-Gerald on the subject:
Called “accretable yield,” these mega banks will book income on loans that have “reduced credit quality” by recognizing - hang with me on this one, it’s tough to believe - the value of the bonds on their balance sheets and the cash flow those securities are expected to earn. Please understand, we’re not talking about cash that’s already been earned, and not cash in the bank … we’re talking about cash flow those banks are expected to earn.
At the risk of sounding like a conspiracy theorist, I’m guessing that the government is somehow behind this one too. After all, they’ve been acting quietly behind the scenes this whole time, forcing one bank’s hand, twisting another, and intimidating everybody else.
You’d think that after months of manipulation and chicanery, the American public might start showing a little more distrust in both the government and the financial sector, but we continue to amble along relatively happily with our hands over our eyes.
Then again, who wouldn’t want to trust such nice, big words such as “Accretable Yield?” Or at least, who has time to actually research it?
Tuesday, June 02, 2009 - by Jeannette Di Louie, Assistant Editor, Mt. Vernon Research
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