Denninger: US Banks Reporting Phantom Income on $1.4 Trillion

01-12-2011 • Market-ticker.org

What am I talking about? Booking non-existent income that will NEVER be realized. The giant US banks have been bailed out again from huge potential writeoffs by loosey-goosey accounting accepted by the accounting profession and the regulators. They are allowed to accrue interest on non-performing mortgages ” until the actual foreclosure takes place, which on average takes about 16 months. All the phantom interest that is not actually collected is booked as income until the actual act of foreclosure. As a resullt, many bank financial statements actually look much better than they actually are. At foreclosure all the phantom income comes off gthe books of the banks. Do you remember why I started writing The Ticker? It was over this exact issue. Bogus and intentionally-misleading accounting by the banks that was "accepted practice" - specifically, I caught Washington Mutual (which has since failed) paying dividends with non-existent money - they were paying those dividends out of capitalized interest on Option ARM loans - money they had no reasonable expectation of ever collecting and which in fact they never did collect. On 4/18/2007 I wrote one of many Tickers over the months to come that explained why this was destined to blow up in their face and destroy them. It did. It also destroyed Wachovia, Countrywide, Downey Savings and Loan and many other banks. They're doing it again folks - we have in fact learned and changed nothing. The banks are counting as "income" money they have not actually received and never will as the loan that is "accruing interest" is in default and will eventually foreclose! This has to be stopped and the phantom "income" must be forced out of their books or we will have another explosion exactly like we had in 2008. We argue only over when, not what. I'm warning you all right now - a mere four years after the first time they did it and I caught them at it, they're doing it again and it will lead to exactly the same outcome. It has to, because the mathematics on it are exactly identical to what happened the last time.