And when I analyze their financial statements and detailed explanations in their very lengthy 3Q 2012 Earnings Releases, there are clearly Five Clean Ones and Three Messy Ones.
The Five Clean Ones had their 3Q 2012 Total Pretax Earnings increase by a massive 48%. One main driver here for three of them were substantial increases in mortgage related income. Both JPMorgan Chase and Wells Fargo had increases in their mortgage-related income in the 3Q 2012 over 3Q 2011 of roughly $1 bil each. And US Bancorp had its mortgage banking income increase by $274 mil, or by 112%, in the 3Q 2012 over 3Q 2011.
Something doesn't seem fair here. So, these large financial institutions recorded massive increases in mortgage related income, but yet underwater homeowners are still suffering so much? In all fairness, why are the Republicans in the US Congress preventing underwater homeowners from having their high interest rate mortgages refinanced to the lower prevailing interest rates? And these same financial institutions played a key role in causing all of these underwater homeowners in the first place. That's not even close to being fair.
Another main driver here for this incredible 48% earnings growth of these Five Clean Ones was substantial earnings improvement at Goldman Sachs, which reversed its $730 mil Pretax Loss in the 3Q 2011 into a $2,298 mil Pretax Income in the 3Q 2012.
Which takes me to the other Three Messy Ones.
I have a very difficult time determining even a reasonable Ongoing, Core Pretax Earnings measure for any of the Three Messy Ones...Citigroup, Morgan Stanley and Bank of America. There are too many huge unusual items in both the 3Q 2012 and the 3Q 2011.
And the one that is a complete earnings mess is Bank of America. Frankly, I think it would be better for everyone if Bank of America were broken up. How can such a huge financial conglomerate, which is involved in a very large way in so many different complex financial disciplines, possibly be managed properly.
I do think something seems not exactly right with the huge swings in earnings caused by the Interest Rate Spread Hedge Adjustments, that seem to be marked to market each quarter, with a resultant immediate earnings increase or decrease. I can't believe that these huge accounting gains and losses recorded each quarter really reflect the same huge amount of real economic gains and losses in each quarter.
If they are speculative hedges, than they should hit earnings. But then frankly, I think that all speculative hedges should be outlawed.
But if they are not speculative hedges, then I have to wonder if the Financial Accounting Standards Board has the best accounting for these items. Aren't there future interest rate spread positive and negative effects related to these hedges? If so, shouldn't some of this mark-to-market accounting for these hedges get deferred on the balance sheet, rather than all getting reflected immediately in earnings each quarter. I think that with the present accounting on this issue, we are losing some of the accounting credibility with the investment community.
Below here is the Pretax Income or Loss of the Five Clean Big Financial Corps and of the Three Messy Ones. And some of the huge unusual items included in earnings of the Three Messy Ones are also included below.
| Pretax | Pretax | ||||
| Income | Income | Increase | Increase | ||
| State | (Loss) | (Loss) | (Decrease) | (Decrease) | |
| HQs | 3Q 2012 | 3Q 2011 | Amount | % | |
| mils $s | mils $s | mils $s | |||
| US Big 8 Financial | |||||
| Five Clean Ones | |||||
| JPMorgan Chase | NY | 7,986 | 5,818 | 2,168 | 37% |
| Wells Fargo | CA | 7,510 | 6,140 | 1,370 | 22% |
| Goldman Sachs | NY | 2,298 | (730) | 3,028 | 415% |
| US Bancorp | MN | 2,025 | 1,742 | 283 | 16% |
| GE Capital Services | CT | 1,777 | 1,616 | 161 | 10% |
| Total All 5 Clean Ones | 21,596 | 14,586 | 7,010 | 48% | |
| Three Messy Ones | |||||
| Citigroup | NY | ||||
| Reported Pretax Income(Loss) | (964) | 3,702 | |||
| Unusual Items Included in Earnings: | |||||
| …Positive (Negative) Interest Rate Spread Hedge | (776) | 1,900 | |||
| …Loss on Morgan Stanley Smith Barney Valuation | (4,700) | ||||
| Morgan Stanley | NY | ||||
| Reported Pretax Income(Loss) | (1,480) | 3,685 | |||
| Unusual Items Included in Earnings: | |||||
| …Positive (Negative) Interest Rate Spread Hedge | (2,300) | 3,400 | |||
| Bank of America | NC | ||||
| Reported Pretax Income(Loss) | 1,110 | 7,433 | |||
| …Positive (Negative) Interest Rate Spread Hedge | (1,900) | 6,200 | |||
| …Higher Litigation Reserve Increase | (1,000) | ||||
| …Lower Provision for Credit Losses | 1,633 | ||||
| …Gain on Investment in China Construction Bank | 3,600 | ||||
| …Loss on Other Investments | (2,200) |
