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Stop Manipulating Bank Earnings With Loan-Loss Reserves, Currency Comptroller Warns

Tyler Durden's picture


Readers of Zero Hedge know well that one of the most abhorred (by us) accounting gimmicks employed by banks each and every quarter over the past 3 years to boost their bottom line, is to engage in loan-loss reserve releases: a process which has absolutely no associated cash flow benefit, but merely boosts EPS for GAAP purposes. In some cases, like this quarter's absolutely farcical JPM earnings release, the abuse is beyond the pale, as the offending bank releases reserves even as it reports surging non-performing loans: two processes which in a normal world can not coexist. Yet quarter after quarter banks keep on doing this, and in fact a big part of Q3's to date EPS outperformance is courtesy of financial company "earnings", of which, in turn, loan losses amount to about 50% of the entire blended financials bottom line. Yet while we can rage and warn, nothing usually happens until there is a market crash due to the gross manipulation of reality that such an activity entails. Luckily, this time someone with more clout in the legacy establishment has now stood up to warn about the mounting dangers associated with the relentless abuse of loan-loss reserve releases: none other than the US Comptroller of the Currency.

From WSJ:

The U.S. could stop banks from boosting their earnings by cutting back on reserves held against future loan losses, a top bank regulator said Monday, arguing that the economy remains too rocky for financial institutions to lower their cushions.


Comptroller of the Currency Thomas Curry has been warning for several months about the practice of bank-reserve releases, which occur when banks add less to their loan-loss reserves than they write off for uncollectible loans. The difference has bolstered banking profits in recent quarters.


Mr. Curry repeated his criticism in a speech before a group of bank risk managers in Dallas, citing the potential for future losses in residential and commercial real estate.


"I remain very concerned that too many institutions are continuing to reduce provisions solely to boost earnings," Mr. Curry said.

Yet, sadly, while the US "could" intervene, it won't for the simple reason that everyone in the US is beholden to these same banks whose ongoing fake profitability is critical to the status quo, the government and everyone in it. After all the, everyone has now gone all in on the massive systemic ponzi. And the Currency Comptoller will be the last to dare to pull the plug on what is a black capital hole amounting to trillions and trillions of dollars.

"We are ready to take action if and when it is needed," he said.


Regulators are concerned banks will suffer more losses from borrowers who took out home-equity loans from 2004 to 2008, as the housing bubble grew and then burst, Mr. Curry said. Most of those loans allowed borrowers to make only interest payments for seven to 10 years. When that period ends, some borrowers are unlikely to be able to meet monthly payments that are increased to include principal. And many likely won't be able to refinance.

Action is needed. Observe the billions in "profits" JPM alone has made from loan-loss reserve releases (blue bar):

Alas, no action will be taken. And it is this hypocrisy that makes a total mockery of all the so-called regulators in the US. Because at least the banks are honest in their ongoing manipulation and fraud: they benefit from it, and why not: after all nobody dares to stop them.

It is the regulators whose job is to put an end to this behavior. But they are afraid: for their jobs, for their legacy, for their petty egos.

As long as this doesn't change, the US economy, and its capital markets, just continue happily day after day, to the most epic crash every imagined. The good news is that only that terminal event has any hope of changing all these things that we, and even the regulators now, lament.

Everything else is hollow rhetoric.


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Tue, 10/30/2012 - 14:16 | 2932101 jeff314
jeff314's picture

fuck you bernanke and shapiro

Tue, 10/30/2012 - 14:20 | 2932115 old naughty
old naughty's picture

Good to know there is still someone in the profession who cares...

Tue, 10/30/2012 - 14:34 | 2932148 Dr. Richard Head
Dr. Richard Head's picture

Well how about Spire Law Group caring?

It looks as if Spire is launching a $43T lawsuit against the banksters?  The only outlet to publish this article, CNBC, took the story down shortly after the children of Kevin Krim, SVP/GM of CBNC Digital, were found murdered

Kevin's LinkedIn Profile -*1_*1_*1_*1_*1_*1_*2_*1_Y_*1_*1_*1_false_1_R_*1_*51_*1_*51_true_*2_*2_*2_*2_*2_*2_*2_*2_*2_*2_*2_*2_*2_*2_*2_*2_*2_*2_*2_*2_*2&pvs=ps&trk=pp_profile_name_link


Tue, 10/30/2012 - 15:17 | 2932332 janus
janus's picture

wow.  thanks for that.

the introduction reads like a ZH article.  and then it goes on to name some pretty big names.  ZHelaots, even if you don't enjoy reading torts, motions or complaints, the table of contents alone is worth a scan.

it's tightly composed; gonna be tough for a judge to dismiss it outright...especially in the current political climate. 

Tue, 10/30/2012 - 23:47 | 2933669 Muppet
Muppet's picture

"it's tightly composed.... table of contents alone is worth a scan"   Really?    Contents like  "The Nixonian enemies list"  won't get too far in front of a judge IMO.

Wed, 10/31/2012 - 12:22 | 2934792 TruthInSunshine
TruthInSunshine's picture

This just proves that Enron-style accounting works so long as it's let allowed to, bitchez.

Tue, 10/30/2012 - 15:59 | 2932527 GAAPpreNixon
GAAPpreNixon's picture

Thanks for the heads up on the 43T lawsuit. Excellent!

I hope info on this goes viral.

Tue, 10/30/2012 - 16:35 | 2932677 WarPony
WarPony's picture

a riddle wrapped in a mystery inside an enigma - or, just more BS ..

Tue, 10/30/2012 - 17:36 | 2932854 Winston Churchill
Winston Churchill's picture

While the suit has valid and provable claims,its very unfornuate that the principles in the Spire

group have a few clouds over their name.

Squeeeze play probably.and they will sell their clients up the river.

Tue, 10/30/2012 - 18:01 | 2932921 The Monkey
The Monkey's picture

Financials actually look pretty good.  Check out the chart on XLF.  Close to breaking out.

Tue, 10/30/2012 - 20:03 | 2933136 LMAOLORI
LMAOLORI's picture



Gee if we only had a president who wasn't a paid off pig and whose attorney general wasn't a paid off pig we might see real criminal charges. If that lawsuit actually makes it through and they pay anything the rest of us will be hit with the charges because they will pass the costs on!

Oliver Stone rips Obama


Politico cites some of the critiques of Obama made by Stone and Kuznick:

On Wall Street reform: "The biggest winner under Obama was Wall Street."

Why Does the SEC Protect Banks’ Dirty Secrets?

Tue, 10/30/2012 - 23:39 | 2933658 Muppet
Muppet's picture

The complaint reads poorly.  Can't imagine it getting far.

Tue, 10/30/2012 - 14:30 | 2932149 redpill
redpill's picture


Tue, 10/30/2012 - 15:35 | 2932413 banksterhater
banksterhater's picture

Has as much teeth as Bart Chilton!

Tue, 10/30/2012 - 14:29 | 2932147 Bansters-in-my-...
Bansters-in-my- feces's picture

Watch out jeff314,Tyler(s) will spank you if he (they) is(are)having a bad hair day.

Tue, 10/30/2012 - 15:25 | 2932362 vamoose1
vamoose1's picture

the  whole  world   hated\s  america   you  dignify  rabid  dogs    fuck   you  guys  are  aweful    you  filthy   dead  fucks     you   filthy  american   cunts    supperate    bleed  a  and  die  you  repulsive  dogs

Tue, 10/30/2012 - 17:12 | 2932787 lasvegaspersona
lasvegaspersona's picture

nother drink for my fiend here...

Wed, 10/31/2012 - 12:43 | 2932499 True.North
True.North's picture

Financial engineering at its finest.

Tue, 10/30/2012 - 14:20 | 2932113 mick68
mick68's picture

When this thing pops, it'll be heard as far as Pluto.

Tue, 10/30/2012 - 14:23 | 2932126 Nothing To See Here
Nothing To See Here's picture

Nancy Pelosi should be able to hear it then?

Tue, 10/30/2012 - 15:58 | 2932525 imbrbing
imbrbing's picture

That would be (h)uranus then

Tue, 10/30/2012 - 14:22 | 2932117 Dr. Engali
Dr. Engali's picture

There are so many manipulations and distortions of data  in this economy and markets that they have to have an algo dedicated  to keeping the manipulators of the manipulations in line. 

Tue, 10/30/2012 - 15:39 | 2932430 GAAPpreNixon
GAAPpreNixon's picture

Yep. This is the epitome of moral hazard. There are NO consequences for criminal behavior so even potential criminals previously kept in check by risk reward calculations become criminal.

Consider what the effect would be of all those fancy restaurants in NYC adopting exactly the same criminal behavior in regard to what ingredients are put in the food or whether earthworms are labelled as $300 exotic eels. How do those criminals that eat at the high priced joints know they aren't eating stray dog when they are told it is $500 veal fettuccini?

What goes around really does come around, even for the world capital of criminality.

Tue, 10/30/2012 - 14:21 | 2932118 Confundido
Confundido's picture

It's like complaining to a fairy for using her magic wand...makes no sense! On the other hand....I always loved fairy tales. Too bad I have grown up! 

Tue, 10/30/2012 - 14:33 | 2932163 steelhead23
steelhead23's picture

We've all heard the saying "the adults in the room."  The basic meaning of this idiom is that it is all fine and good to daydream, to imagine, to play, but eventually it is time to put aside childish things and step up to the challenges we face.  Used to be, men like the Chairman of the Federal Reserve was an adult in the room.  No more.  Now the Chairman recites fairy tales and sprinkles fairy dust (to his very bestest friends).  But don't worry your little heads.  We're all gonna live happily ever after.

Tue, 10/30/2012 - 14:22 | 2932121 Nothing To See Here
Nothing To See Here's picture

Well the purpose of QEtc becomes quite clear. With his massive MBS bailout, Helicopter Ben has assured the banks that they will be able to release massive loan loss reserves for some time.

But rest assured, the Fed's objective is to help the 99%.

Tue, 10/30/2012 - 15:34 | 2932401 DeadFred
DeadFred's picture

Someone I know and trust has a friend working in the innards of a large, unnamed bank, one that now has assets country-wide. The word is that the foreclosure overhang will will start coming on the market Q2 of next year.  Why not sooner was a question. "It is an election year after all and Q1 is a bad market time"

What would this do to loan loss reserves I ask myself

Tue, 10/30/2012 - 15:49 | 2932477 Nothing To See Here
Nothing To See Here's picture

Actually, my understanding is that the more relevant question would now be "what would this do to banks balance sheets". With their loan loss reserves now released, the banks are gambling that the foreclosures wont hit them. But if they do, they're exposed. But again, they know the Fed's got their back...

Moral hazard 101.

Tue, 10/30/2012 - 14:22 | 2932122 Pairadimes
Pairadimes's picture

Bullish hookers and blow.

Tue, 10/30/2012 - 14:25 | 2932135 Darkness
Darkness's picture

The state in which the rulers are the most reluctant to govern is always the best and most quietly governed; and the state in which they are the most eager, the worst.

Tue, 10/30/2012 - 16:24 | 2932631 I Feel a little...
I Feel a little Qeasy's picture

Love your homespun completely baseless bulshit, keep it up, moron.

Tue, 10/30/2012 - 16:26 | 2932640 Pairadimes
Pairadimes's picture

Yea, that Plato. He was a crazy motherfucker.

Tue, 10/30/2012 - 17:03 | 2932762 lasvegaspersona
lasvegaspersona's picture

Cicero too if I'm not too far off on 'the Greatest Quotes in Western History.'

Tue, 10/30/2012 - 14:28 | 2932144 disabledvet
disabledvet's picture

I find it interesting now that the Eastern Seaboard has been "taken down for the forseeable future" the news flow has a sudden upsurge in "seriousness." not that the clowns in the MSM don't want anything but "all the stupid part of the storm" (no this won't cost money. No this won't money...well, "maybe ten billion.") which of course makes times like these the best time to troll for food info. (head of Apple map department fired, UBS lays off 10,000, Spanish consumption completely collapses, ... Stories that normally Zero Hedge would be reporting on but interestingly is not. Storms over folks! Move along!) it will be intersting to see how the 100's of billions in damage claims are in fact disbursed. Government is excited of course cuz "it's time to take it to the man"...and since Insurance companies are sitting on trillions in cap gains from Fed policy over the past many decades...these Governors should be licking their jops. I will say this: the entire trucking industry is on the move. Will gasoline spike to ten bucks a in Jersey? We shall see...

Tue, 10/30/2012 - 14:32 | 2932155 101 years and c...
101 years and counting's picture

i expect obama will be firing this guy soon enough.  afterall, it was obama that guided the banks to load up their BS in Q1, 2009 with loss provisions (take a HUGE 1 time hit) and then release over time to give illusion of recovery. 

Tue, 10/30/2012 - 14:56 | 2932248 disabledvet
disabledvet's picture

Good point actually. At least "until the Storm came ashore." now you have an iNSURANCE event. And of course the first thing the banks insure "in case of catastrophe" is the mortgage on the property. And unlike MBS that is NOT done in house...but "by that company over there." hence "First Claim" has already been paid to...

Tue, 10/30/2012 - 15:51 | 2932491 Rainman
Rainman's picture

There's something about that Comptroller's job that encourages honest analysis. Dave Walker ranted about ponzi government accounting and the baby boom crisis for a decade as US Comptroller and beyond. He was totally ignored too.

Tue, 10/30/2012 - 14:32 | 2932157 buzzsaw99
buzzsaw99's picture

Those loan loss reserves go right into bonus checks. Looting the company in plain sight of everyone is okay these days I guess.

Tue, 10/30/2012 - 16:28 | 2932645 Pairadimes
Pairadimes's picture

Ding ding ding ding! we have a winner. Hence, bullish hookers and blow.

Tue, 10/30/2012 - 14:33 | 2932162 Clowns on Acid
Clowns on Acid's picture

Tyler - The banks are only doing what BenDover wants them to. It's all part of the Ponzi. Fed buys the long dated from banks, ponzi's up the real estate market, allows banks to mark to model their RE positions higher, then encourages banks to tale less loan loss reserves.

In theory, this helps to prop up equity and corporate bond prices and Voila ! the "Wealth Effect" remains in play for the consumers to consume.

The margin for error is getting sliver thin....BenDover is all in on this theory.

Tue, 10/30/2012 - 14:44 | 2932200 chinaboy
chinaboy's picture

It does not bother the market. The market is made up of computer chips in majority and human gambler who are playing with someone else's money (in monority).

It bothers the regulators but we know they are not going to do anything to upset status quo.

So roll on, step on the gas on a car without brakes, until ...

Tue, 10/30/2012 - 15:19 | 2932223 Robslob
Robslob's picture

Bank earnings and feces have a lot in common.

Unfortunately Bankers, Regulators and Politicians also have a lot in common with feces, so like bank earnings, it is all wash in the end.

Tue, 10/30/2012 - 14:50 | 2932225 JPM Hater001
JPM Hater001's picture

What's he gonna do, write em a ticket?

He sure as hell isn't going to send any of them to jail...

Tue, 10/30/2012 - 14:51 | 2932230 Flakmeister
Flakmeister's picture

Its like the tree in the forest that falls...

A default only occurs when someone actaully claims not to have been paid....

Tue, 10/30/2012 - 14:53 | 2932236 grid-b-gone
grid-b-gone's picture

Yeah, boost bank earnings the old-fashioned way.... suspend mark-to-market.

Tue, 10/30/2012 - 14:59 | 2932257 asteroids
asteroids's picture

I totally agree. All the off balance sheet crap should be clearly stated and marked to market every month/quarter. This would instantly provide badly needed clarity and cause a lot of banks to implode.

Tue, 10/30/2012 - 17:06 | 2932772 lasvegaspersona
lasvegaspersona's picture

By the time this clears to the market , hyperinflation will push notional prices so high that all houses will be 'investments' again.

Tue, 10/30/2012 - 14:55 | 2932244 I am more equal...
I am more equal than others's picture

Banks are also playing games with RE valuations.  They ask for leased fee instead of fee simple values.   The avoids the reality of realty.... market rents are less than contract rents.  Tenants are being smart and threaten to walk if there are no concessions yet the leased fee value is used to 'mark to market.'  Its all a farce that hopes to extend until reailty meets hope.

Tue, 10/30/2012 - 15:15 | 2932321 El Gordo
El Gordo's picture

But if banks can't manipulate their earnings by jiggering the ALLL, how do you expect them to manipulate them at all?  Aren't they required to manipulate earnings somehow?

Tue, 10/30/2012 - 15:23 | 2932355 Duke Dog
Duke Dog's picture

Oh, don't worry - the OCC will definitely take action. Unfortunately it will be action taken against the regional and community banks in the country, not the large international banks such as Citi/JPMC/BOA etc...The plan since the early 80's was to allow the regionals/community banks to develop the smaller markets and then strangle them with regulation thereby forcing the consolidation that has been going on since the early 90s. The large banks have been in complete control of the regulators for well over 30 years.

Tue, 10/30/2012 - 15:25 | 2932363 newworldorder
newworldorder's picture

Ha - Ha!!

Timmy, Bennie and Jaime would not be caught in the same room with this person, accepting any financial advice. He is spitting into the wind as no one is listening, least of all the "well respected" accounting profession.

Tue, 10/30/2012 - 15:31 | 2932391 vamoose1
vamoose1's picture

look  you  cunts         pease  die    you  are  un\quely   repulsive    vomit  material        the  whole  worrld    despises  you    you  are   warm  vomit      hitler  in  37    you  niggers  are  revolting     the  worst  people  on  the  planet     revolting  bleeding   cunts      get  off the  planet

Tue, 10/30/2012 - 15:36 | 2932422 vamoose1
vamoose1's picture

the  whole  world  hates  america       its   universal  acceptance     you  will  be   taken  in  toledo   stunned  in  spokane      6  point  7  million  want  you  dead  you   fucking  diogs  we  will  barbecue    on the  family  spit     you  horrors

Tue, 10/30/2012 - 15:40 | 2932439 vamoose1
vamoose1's picture

  you  are  the  worst   creatures  on  this  planet   you   repulsive  arrogant  dogs    you  have  managed  to  offend  the  entire  word   you  witless   coons      kindlnn y  die      get  gome

Tue, 10/30/2012 - 17:09 | 2932780 lasvegaspersona
lasvegaspersona's picture

say again

Tue, 10/30/2012 - 15:43 | 2932455 unununium
unununium's picture

The OCC has shown signs of wanting to properly regulate banks.  No wonder Henry Paulson submitted this serious proposal to eliminate it


Tue, 10/30/2012 - 15:52 | 2932495 straightershooter
straightershooter's picture

Queue in  and get ready to sue AUDITORS when ......


Tue, 10/30/2012 - 16:01 | 2932535 vamoose1
vamoose1's picture

 die  and  get  gone  you  a  americann  cunts     the  entire  world    viciously   hates  you    55  percent  of  your   chickenshit  co  nountry  on  social  assistamce   you   comedians     you  reside  in  fuck  city  on  borrwed  money


   the  jig  is  up    feed  your  coonds  in  the  back  door   like  the  old  days \  155  million  on  borrowed  social  assistance 

  n  the  back  door    you  dream      go  die       fucking  begone   you   preposterous  poseurs

Tue, 10/30/2012 - 16:13 | 2932594 vamoose1
vamoose1's picture

   you  people  are  spe ac ctularly   clues  ess   fuck  you  americans  are   wild  dumb         you  are  witless   dumbed   down  bipeds   in    fur     the  dumbest    bipeds  on  this  planet    walking  armageddons     and  stay  tuned    you  go   decidly   badly       meet  rufus     organize  some  chitlngs      you  hapless   fucks 

Tue, 10/30/2012 - 16:13 | 2932595 vamoose1
vamoose1's picture

   you  people  are  spe ac ctularly   clues  ess   fuck  you  americans  are   wild  dumb         you  are  witless   dumbed   down  bipeds   in    fur     the  dumbest    bipeds  on  this  planet    walking  armageddons     and  stay  tuned    you  go   decidly   badly       meet  rufus     organize  some  chitlngs      you  hapless   fucks 

Tue, 10/30/2012 - 17:10 | 2932782 lasvegaspersona
lasvegaspersona's picture

yeah Triffin said something like that, though he made sense

Tue, 10/30/2012 - 22:00 | 2933420 Orly
Orly's picture

What?  Y'all frying up some chit'lins?  And didn't invite me?

Tue, 10/30/2012 - 16:43 | 2932636 Threeggg
Threeggg's picture

What a riot! Just wait until the Corporations start breaking out the "Loss Carry Forwards" that sit on the balance sheets of "C" corps and on the pass-through K-1 long tax forms of CEO's and Owners due to the deflation the last 5 years. These loss carry forwards amount to hundreds of billions of dollars worth of offsets against future tax liabilities. Large corporations and financial institutions have amassed such a large reserve of these credits that it will guarantee that they will not pay taxes for the next decade; no matter how much they increase taxes. These loss carry forwards are transferable through acquisition as a profitable business can buy a non profitable business, with large carry forwards on their balance sheets and import them to the profitable balance sheet, offsetting any taxes that may be due. Debt cannot be vaporized out of existance as past losses must be written off against future gains through tax levy accounting.


Tue, 10/30/2012 - 16:28 | 2932648 vamoose1
vamoose1's picture

  you  are  hitler  redux   about   1936     dumb  beyind  comprehension     6  point  seven   billion  people   mortally  hate  your   guts    you  are   viciously   dspised   you  are  germany  1936   you  filthy   fucking  animals   have  your  laugh  comedians     make  it   fucking   hearty   get  your  affairs    un   order

Tue, 10/30/2012 - 16:41 | 2932675 Pairadimes
Pairadimes's picture

"I'll take 'visible symptoms of fetal alcohol syndrome' for $400, Alex."

Tue, 10/30/2012 - 16:38 | 2932688 EscapingProgress
EscapingProgress's picture

Nobody will have seen the next financial crisis coming.

Tue, 10/30/2012 - 17:03 | 2932761 Hindsight2020
Hindsight2020's picture

Are there any stats about the number of open interest only loans?  Duration would be icing on the cake but I was thinking of something like this.

Tue, 10/30/2012 - 17:26 | 2932831 R_J
R_J's picture

hmm....  -a group of bank risk managers in Dallas.


Risk?  What Risk?

Tue, 10/30/2012 - 18:47 | 2933013 jimmyjames
jimmyjames's picture

And the Currency Comptoller will be the last to dare to pull the plug on what is a black capital hole amounting to trillions and trillions of dollars.


Ewwwww--marked to market?

Can't have that or Bernanke's "I will make sure deflation  never happens here" quote would go for shit at warp speed-

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