Appar­ently if credit default risk widens on a bank, and its bonds get hit, the bank can count that as income.  Gosh you have to love U.S. account­ing standards.

From Busi­ness Insider:

The one item every­one is rais­ing red flags about is the $1.9 bil­lion pre­tax DVA gain.  DVA is short for debt val­u­a­tion adjustment.

Bloomberg explains the DVA:

In other words, when investors and traders bet against a banks' bonds, caus­ing credit default swap spreads to soar, the bank is allowed to book a mark-to-market gain.

Last year, Bloomberg spoke to Oppen­heimer ana­lyst Chris Kotowski who called the DVA an "abom­i­na­tion." He explains, "Just because Morgan’s credit spreads widened out this quar­ter doesn’t mean that their ulti­mate inter­est and prin­ci­pal pay­ments changed one iota."

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Appar­ently this rule was passed by FASB in 2007.  I won­der who lob­byied for it?  More impor­tantly what sort of account­ing stan­dard do you have when lob­by­ing is part of it.  What a joke.

....a U.S. account­ing rule known as State­ment 159, adopted by the Finan­cial Account­ing Stan­dards Board in 2007, which allows banks to book prof­its when the value of their bonds falls from par.

Iron­i­cally these same banks went to cry to the account­ing board that mark to mar­ket should go away (which FASB did in April 2009), since its unfair — and really what does the mar­ket know about fair value pricing.

But appar­ently not in this case.

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