Accounting Statement 159

With many of the biggest banks expected to report second quarter earnings over the next two weeks, a significant portion of reported income may be the result of an accounting rule entitled “Statement 159”. Some quick facts about the rule are detailed below.

What is it?
Also referred to as an accounting “abomination,” Statement 159 is an accounting rule that allows banks to book profits when the value of bonds that they have issued declines.

Why is this allowed?
The rule expanded the daily marking of banks’ trading assets to their liabilities. The rationale is that a profit would be realized if the debt were bought back at a discount.

Who does this impact?
Second quarter results for the biggest lenders (Bank of America, JPMorgan Chase & Co., Citigroup and Wells Fargo & Co.) may include gains taken under this accounting rule. According to some analyst estimates, these gains may account for up to one-fifth of second quarter pre-tax earnings for the biggest lenders.

Why is this referred to as an accounting “abomination”?
Fluctuations in the market value of the bank’s debt do not affect what the banks actually owe. That is, the interest and principal payments due do not change as a result. Yet, the banks are allowed to book gains if the value of their bonds decline.

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