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So-So Citi: Citigroup's third-quarter profit jumped almost three-quarters from a year earlier, but much of that pop came from a debt valuation adjustment. The papers make much of the paradoxical nature of this fair-value accounting quirk: investors perceive a company as riskier, so its bonds fall below par, so the firm books a gain on the possibility that it could make money if it were to repurchase the paper at a discount. In short, banks make money by "everyone betting against them," as Business Insider put it in a story about JPMorgan Chase's results last week. (For some reason an explanatory piece in the Journal calls it a "debit valuation adjustment.") DVAs are also sometimes called "credit valuation adjustments," and a commenter on the Financial Times' "Alphaville" blog points out that same initials stand for "company voluntary arrangement" (a British alternative to bankruptcy) then quips, "I am sure after boosting earnings several quarters by this CVA we are soon going to hear about the other CVA too." Back to Citi: Whether you call it a CVA or DVA, strip that paper profit away and you get a less heroic performance. "Core revenues at Citicorp, the operating business, fell 2 per cent to $15.8bn, with declines in investment banking and North American consumer banking offset by growth in overseas consumer banking and transaction services," the FT reports. Revenues fell sharply in the investment bank, particularly in the proprietary trading line that Citi is winding down per the Volcker rule. The paper's "Lex" column homes in on Citi's emerging markets business (once again a relative bright spot in the bank's report), warning of two risks: "Either that these regions are cooling or, if they are not, that US banks are not expanding fast enough there, given the still-dreadful economic outlook at home." Citi's stock tumbled along with other financials, but the Journal's "Heard on the Street" concluded that all things considered, the results were "respectable, given a tough market environment and slowing of global economic growth." Citi also said it had decided to keep its private-label card business, which it had put on the block two years ago.
Not Feeling Wells: Wells Fargo's results also disappointed the markets. The main issue here is the bank's net interest margin — it got mightily squeezed as Wells took in more deposits than it could lend out. A story in the FT notes that consumer loan delinquencies worsened at both Wells and Citi, in both cases for the first time in more than a year. On the bright side, the Times' "DealBook" notes that both banks' reports showed loan growth. Wall Street Journal, New York Times, Financial Times
Deloitte Dinged: The Public Company Accounting Oversight Board issued a scathing report on Deloitte, saying the accounting firm deferred too much to the management teams of the companies it audited. "The report was written in 2008 and covered audits conducted in 2007," the Times says. "It was kept private under rules that say such criticisms must remain confidential for a year, and then may be released only if the firm has failed to make sufficient progress in correcting the problems." So logic would dictate Deloitte hasn't improved much. If you look at the "hall of shame" on the PCOAB's website, you'll see that Deloitte is the only one of the Big Four auditing firms to receive one of these embarrassing report cards; all the other names on the list are obscurities (including the firm of "Stan J. Lee," which presumably uses the middle initial to avoid confusion with the creator of "Spider-Man"). Deloitte's CEO is quoted in multiple papers acknowledging that there's "always" room for improvement. The PCAOB's report doesn't identify the audit clients that Deloitte allegedly coddled, but according to the Post at least one of those companies held mortgage-backed securities. We look forward to the parlor games of guessing the identities of "Issuer A," "Issuer B" and so forth. New York Times, Washington Post
Occupy Wall Street: We're going to limit ourselves to giving you highlights, or else this is going to turn into the Evening Scan. In The New Yorker's "Talk of the Town," Lizzie Widdicombe paints a vivid portrait of the scene at Zuccotti Park, the epicenter of the demonstrations. The Times' "DealBook" profiles a successful retired Wall Street trader who helped start the protests. Also in "DealBook," Oliver Stone says that Jamie Dimon "should be spending three weeks on a park bench, homeless, and get a taste of what it's like on the other side," but the director of "Wall Street" expresses only qualified support for Occupy Wall Street: "I'm rooting for them, I love what they stand for, I think there are many good things that might come of it, but it's no Egypt. They got a long way to go, these kids." The Times' "Economix" blog looks at a study that found financial services professionals make up slightly less than 14% of the richest 1% of the population (the ones whom "the 99 percent" rail against); nonfinancial executives and doctors have bigger shares of this elite class. Finally, we're reconsidering our initial impression of the protestors as lacking in concrete goals after watching thisWashington Post slideshow of "The wonkiest signs from Occupy Wall Street" ("End Naked Credit Default Swaps" being one of the catchier ones).
Another mass-refinancing plan for underwater homeowners has been floated. This one has come up during the talks between state attorneys general and mortgage servicers. According to an above-the-fold front page story, the refi plan was designed to win back California AG Kamala Harris, who quit the talks a few weeks ago.
"Credit-card issuers, looking for ways to expand their business amid stiff competition, are knocking on familiar if potentially troublesome doors: those of subprime borrowers." Subprime here is defined as credit scores under 660, which we suppose is reassuring since in the mid-aughts some put the bar for "prime" as low as 620.
The paper took a look at Morgan Stanley's woes, much of it related to deals with MBIA, a bond insurer that was hit hard by the financial crisis and is currently rated below investment grade.
New York Times
Harvey Golub, the former CEO of American Express, is joining Miller Buckfire, a boutique investment bank, as the chairman.
Columnist Joe Nocera describes a partnership with Starbucks and community development financial institutions, in which the coffee chain's customers can donate as little as $5 to serve as capital for small businesses. The donated equity can then be leveraged with loans from the CDFIs. "If 10 million Starbucks customers donate $5, that will support $350 million worth of lending." We imagine this will have greater job-creating multiplier effects than spending that $5 on a scone, and it won't make us fatter. OK, sold.
Fortune: Veteran bank analyst Dick Bove skewers the New York Attorney General's Office and Senator Dick Durbin in an interview. He calls the former suicidal ("Does the attorney general of Texas attack the oil industry? Does the AG of California try to put Hollywood out of business?") and accuses the latter of encouraging "a run on Bank of America," referring to Durbin's recent Senate floor speech in which the Illinois Democrat said customers should "get the heck out of that bank" and "find yourself a bank or credit union that won't gouge you for $5 a month." Our two cents: Bove is well within his rights to ask if Durbin has "lost his mind." (Many bankers would probably say the Senator lost it a while ago.) But for the record, even if he had, Durbin is also within his rights to speak said mind. Bove, who has made admirable sacrifices for free speech, surely sees this.
And Lastly ...
BetaBeat: This tech-news site reports that the price of BitCoin — the alternative virtual currency that blew our minds a few weeks ago when we read about it in The New Yorker — is plummeting. The gossip site Gawker, not known for its earnestness, has a schadenfreude field day with this news about what it calls "the digital cash useful for buying drugs on a [sic] underground website and not much else." But a Bitcoin fan who commented on the BetaBeat story is unfazed by the decline in the exchange rate, or by the haters: "We'll still be in business even if Bitcoin goes to $0.01. It's a good way to take payments, there's no overhead and no fees, and it keeps us free of the banking system. Put another way, it's worth at least 10 cents on the dollar to avoid all that overhead; in normal terms, that's split between merchants bearing the cost and what they pass on in higher prices to their consumers, so, there's a basement price to Bitcoin that's based on how rapacious and greedy payment processors are; and as long as they stay greedy, there'll be value in a virtual currency." If you need a refresher in how Bitcoin works, we recommend this video; just be prepared to forgive the anchorperson for mispronouncing "fiat currency" as "flat currency."
We get our New England states mixed up sometimes, like when we tried to order coffee milk at Fenway Park or asked a perplexed-looking hedge fund manager in Greenwich for directions to the T. So forgive us chowdaheads for misidentifying the state where Elizabeth Warren is running for Senate in the email edition of yesterday's Scan. It's Massachusetts, not Connecticut.