Brain… hurts…

So, my employer says to me yesterday, “Heh, guess not all the banks are doing well,” referring to Morgan Stanley’s poor earnings announcement and comparing it to that of Citi’s positive reports.

“Heh,” indeed.

Turns out that Paul Krugman had just tipped me off to what was really going on (yeah, we talk sometimes, it’s no big deal), so I hunted around for a little more information on this and found this article that explains the situation pretty well. Are you sitting down? Here’s how it shakes out:

Basically, Citi was able to report a profit because of the $4.69 billion it made from its trading desks. The rest of Citi’s major operations all reported declining revenues. Specifically, Citi’s trading profits were ballooned by Citi investing in its own credit default swaps (essentially “insurance” contracts that make a bet on whether or not a company will default on its bonds– this is simplistic, but I’m not interested in going into deep detail here). Even more specifically, Citi was profiting from the spread of its credit default swaps widening, which is what happens when people expect a company to go broke.

Citi reported profits because it was betting on itself to default.

Savvy trading strategy? You could say that. But the fact remains that they made this money because they’re becoming more likely (or, at least, they’re perceived as more likely) to die. Krugman hinted to me that perhaps Lewis Carroll had something to do with writing these accounting rules.

At any rate, the opposite is more or less true for Morgan Stanley– they reported poorer earnings because their credit default swap spreads narrowed as it’s becoming more clear that they’re in much better shape than, say, Citi. As Morgan says in their report:

In fact, Morgan Stanley would have been profitable this quarter if not for the dramatic improvement in our credit spreads – which is a significant positive development, but had a near-term negative impact on our revenues.

Got it?

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2 Responses to Brain… hurts…

  1. Zack! says:

    Hey–if your brain hurts, maybe you should take it out and grill it…maybe with some teriyaki and mushrooms? Maybe a brain kebab? Or make a pesto out of it? That might be delicious.

    In other news, some random guy bit me today. WTF is up with that? I didn’t even DO anything to him–he just walked (very slowly) up to me and bit me. Whatever. Society sucks sometimes, huh?

    • nutmeg says:

      It wasn’t a zombie paparazzi was it? There might be a movie script here somewhere. What about a pâté? That could be nice and quick.

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