04 March 2011

Honesty in Banking; The Lack Thereof

This piece by Jonathan Weil is quite interesting in detailing some insight into honesty in banking (or if you are like me, what you believe to be the lack thereof).  

The biggest thing we should take away from this article?  Simple.  More banks were reporting revised financial statements in the years preceding the finance meltdown than they have in the last year or two. 

I don't know about you, but to me if things aren't getting better (without the fictions flotation of the Federal Reserve's POMO printing and pumping), wouldn't we see more banks revising earnings statements and not less?  Unless, as Weil speculates, things like Sarbanes-Oxley caused institutions to clean up their internal controls and financial statements before the cash (and thus contributing to it), it might make some sense.  This individual still isn't buying the smell however. 

The simple man looks for the simple explanation.  Or, even when dealing with complex issues, a prudent smart man should apply Occam's razor and look for the simplest solution, and even more so when the situation is complex and multifaceted.  That said, there are too many variables to truly know whether or not banks and financial institutions have been properly recording earnings through the muddy waters of the current Great Recession.  But just looking at the sheer numbers (lack thereof must be my favorite words today), one would think that as this recession wears on, and companies "come clean" to their investors, we would see those numbers rise to attest to some level of reliability in the financial reporting.

Until these things occur with enough saturation, banks and other companies will continue to carry their investments at mark to fiction.  Even as an accountant who is supposed to play that game, something is very morally wrong with the basis of this story. 

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