Woolnough: Can you trust results from US banks?

M&G's Richard Woolnough said he is uneasy at the way US banks have been able to book significant profits relating to the value of their debt in Q3 earnings figures.

Morgan Stanley, Bank of America, Citigroup and J.P. Morgan all booked billions of dollars worth of gains via ‘debt value adjusting' (DVA) accounting in the third quarter, but Woolnough questioned the logic of the practice. The DVA gains relate to the value of a bank's debt falling as the quality of its credit deteriorates, with banks booking the loss to bondholders as a profit on their balance sheets. "The oddity is that as the outlook for the bank deteriorates, its credit spreads widen, and it is able to book the spread widening on its own debt as a profit," Woolnough said. The ma...