As Bank Shares Rally, FASB Ruling Presents New Threat to Citi, JP Morgan Earnings

(MoneyWatch) 
Just when it looked as if the Financial Accounting Standards Board (FASB) had lent a helping hand to America's big banks, the regulatory group seems to have slowed down on producing the punch.

Earlier today, FASB ruled that Citigroup and JP Morgan Chase will be required starting next year to add billions of dollars of assets and liabilities to their balance sheets. Among the liabilities could be as much as $70 billion of credit card receivables and another $90 billion of other loans for JP Morgan, according to Bloomberg.

Citigroup looks in no better shape: the bank says that the new ruling may well adversely affect its balance sheet. "This change may have a significant impact on Citigroup's consolidated financial statements as the company may lose sales treatment for certain assets," Citi said in its annual report in February.

The FASB announcement comes the same day that JP Morgan -- along with Morgan Stanley and Goldman Sachs -- applied to repay the $45 billion they borrowed under the U.S. government's TARP program, according to Reuters. The news in part sent banking shares rallying Monday, prompting a 235-point surge in the Dow Jones Index.

Discerning readers will recall that Citi's previous earnings quarter was helped by the bank's speculative bets against its own creditworthiness, where it recorded a $2.5 billion profit on the widening of its own credit default swap spreads. JP Morgan also recorded a fall in the price of its bonds as a profit in the first three months of this year.

This kind of loss-burying activity will become harder to sustain in light of the new FASB rules, which put derivatives accounting transparency front and center on quarterly reports. In other words, it looks as if Citi and JP Morgan now have a year to get themselves back in reasonable shape before the banks are forced to present less palatable news to investors.

In light of the recent rally in the banks' share prices, FASB's ruling presents a precarious thorn in the side of the green shoots debate, the argument which claims that a sustainable recovery in financial institutions is now underway. The real test then may be how efficiently Citi and JP Morgan can use their newly-increased shareholder capital to make operations more profitable, in order to offset a potential accounting storm in 2010.