A Pocketful of Nothing

by Mitch Feierstein about 11 years 10 months ago

Everyone in the entire world knows that European banks are in trouble … except, you’d think, the European banks themselves.

After all, as this comment by Jonathan Weil of Bloomberg shows, stockmarkets value the average Euro bank at just 44% of book value. That is, the accounts of those European banks show a figure for net assets that is almost 2.5 times greater than the figure believed by the market.

That’s crazy. And when, every now and then, you see a Euro bank trying to be truthful, the thing that really comes across is a painful attempt to use a little truth a disguise a mountain of lies.

Take Italian bank, UniCredit, for example. Its most recent quarterly accounts show a $14 billion loss and, yes, $14 billion is a lot of money. Yes, the management’s job is to make money not lose $14 billion worth of it. Yes, you can bet that those involved in losing these vast quantities will not go to jail or even lose their jobs and forfeit their pensions. But this is the financial sector. You have to be grateful for small mercies. At least they told the truth! Nearly all other Euro banks claimed to make quarterly profits – a claim about as plausible as me telling you I’m going to win next year’s Masters at Augusta.

Or did they? Thing is though, UniCredit didn’t tell the truth, not really.

About $15 billion of its reported assets – that’s almost 1/4 of its net asset figure – comprises ‘deferred tax assets’: basically a belief that future taxation might be lower than you’d otherwise expect, assuming that the bank is generating profits at all. Which given that they’re losing $14 billion in a quarter is not exactly an assumption you’d want to hang your hat on. And bear in mind that those ‘deferred tax assets’ are valued dollar for dollar like cash. So: which would you rather have in your wallet: $100 of cash? Or $100 of ‘deferred tax assets’. Yes, precisely.

What $100 looks like

A short accountancy refresher - can you spot the difference?

And it doesn’t stop there. The balance sheet also includes a figure of around $15 billion for goodwill, an accountancy concept representing an asset with a sale value of $0. The asset can’t be bought or sold. It can’t be valued. You can’t use it to buy stuff with. It’s worthless. And the idea that a massively loss-making bank located in the eye of the Eurozone storm has ANY goodwill whatsoever is just bananas.

Goodwill image

Have you spotted the difference yet?

And what do you want to bet that Unicredit is not valuing its holdings of Italian government bonds at their current market values? Becauuse those current market values are at rock-bottom prices and ones which would probably blow yet more holes through the bank’s balance sheet.

But this isn’t about UniCredit. At least that bank has the candor to admit some losses. Its Eurozone peers aren’t remotely as truthful. Bad as the situation is, it’s about to get worse.