The recent rally in the stock market has been led by the very same financial sector that dragged down the market. Thanks to the modified mark-to-market accounting rules, several banks have seen much improved balance sheets and reported better than expected earnings for the first quarter of 2009.
What's the magic about "the modified market accounting rules"? Here is the excerpt from Barron's:
Dick Bove, the dean of bank analysts, now with Rochdale Securities, explains how mark-to-market accounting can thoroughly distort profits. To wit:
"Bank A sees the quality of its debt deteriorate. That means, under mark-to-market accounting, that it is able to buy the liabilities back at a discount and report a big profit.
"Bank B sees the quality of its debt improve. That means it is not able to purchase its debt at a discount because its debt has risen in price and this results in a big loss.
"In sum, the bank with weakening quality reports a profit and the bank with improving quality reports a loss. This, of course, makes no sense."
Thanks to the new accounting rules, investors on Wall Street who are hungry for good news appear to have seen "glimmers of hope" for our economy as highlighted in President Obama's speech.