BNY Mellon’s massaged earnings reports

December 6, 2010
pulls no punches today:

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With Peter Eavis having left the WSJ, who will take on the job of poring over banks’ balance sheets to expose their crazy accounting? Aaron Elstein, that’s who! He pulls no punches today:

BNY Mellon spins the numbers to make its results look better.

Consider the way the company reports earnings. In quarterly releases, BNY Mellon prefers to highlight income from continuing operations, because it feels that’s the best way to show underlying performance. But its definition of “continuing operations” is always changing, according to a review by Crain’s New York Business of all the bank’s releases for the past three years.

BNY Mellon sometimes excluded investment write-downs from operating results or assessment fees imposed by the Federal Deposit Insurance Corp. At other times, it didn’t include certain taxes or the costs of settling a dispute with the IRS over leases. In one quarter, BNY Mellon excluded litigation reserves; in two others, it called them “special” litigation reserves.

Additionally, the 48,000-employee company routinely excludes costs associated with relocating staffers and merger-related items, even though it often moves people and does M&A deals—26 over the past three years…

“They’re definitely playing games, cherry-picking to inflate their numbers,” says Douglas Carmichael, an accounting professor at Baruch College and a former chief auditor of the Public Company Accounting Oversight Board…

Longtime banking analyst Nancy Bush of NAB Research says BNY Mellon’s frequent changes in defining earnings make it difficult for investors to figure out how well the bank is doing. “You never get the same figures twice,” she says. “It’s very frustrating.”

Yes, BNY reports GAAP figures—but at banks, GAAP figures tell you very little, and it’s crucial that the reported numbers allow analysts to make apples-to-apples comparisons. Bank earnings are extremely opaque at the best of times, which is one of the reasons that banks tend to trade at lower multiples than other industries: no one really knows what might be buried within them. And as a rule, the more that senior management is spinning its earnings rather than reporting them as transparently as it can, the less trust that markets will have in the bank.

I do wonder, though. Is this a tactical decision by BNY’s Bob Kelly? Has he calculated that the boost in share price he gets from reporting artificially-rosy earnings is greater than the decline in share price he gets from leading analysts on a wild goose chase every quarter to try to work out what he’s doing? Does he reckon that analysts’ opinions don’t actually matter that much, and that his shareholders—including Warren Buffett—would rather just see something pretty and massaged?

Or is it simply that once he started down this road he couldn’t stop? It might make sense to switch to a more transparent and consistent set of reporting standards, but that would mean reporting lower earnings, and it’s hard for any CEO to admit that prior earnings figures were massaged in any way. So we might have to wait for a new BNY CEO before we see any changes on this front. After all, the chairman of the board—one Robert Kelly—is not about to rock the boat at all.


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