You’ve heard the whispered allegations about how GE used to manage their earnings, setting aside that extra penny-per-share in case they needed it to get through a future quarterly report? I have no idea whether or not that’s true, but that seems to be the common knock on Jack Welch’s legacy among the chattering classes.
Anyway, how about if an entire country’s worth of banks decides to play that game with their P&Ls? According to Bloomberg’s Jonathan Weil, that’s exactly what happened:
Only a few years ago, Spain’s banks were seen in some policy-making circles as a model for the rest of the world. This may be hard to fathom now, considering that Spain is seeking $125 billion to bail out its ailing lenders.
But back in 2008 and early 2009, Spanish regulators were riding high after their country’s banks seemed to have dodged the financial crisis with minimal losses. A big reason for their success, the regulators said, was an accounting technique called dynamic provisioning.
By this, they meant that Spain’s banks had set aside rainy- day loan-loss reserves on their books during boom years. The purpose, they said, was to build up a buffer in good times for use in bad times.
This isn’t the way accounting standards usually work…