The Magic of Accounting - Debt value adjustment

Historical Archive

This article is preserved as part of the historical record of this blog. It was originally written by Dr Willie (The Golden Jackass) and is republished here with permission as part of an ongoing effort to preserve historical economic commentary that has since become unavailable. The content has not been substantively altered, although the HTML, accessibility and formatting have been updated to meet modern web standards.

Readers interested in Dr Willie's more recent writings can visit www.golden-jackass.com.

---

JPMorgan is a wreck, their businesses are tanking. Their tight grip on the silver market could be loosened in time, helping to end price fixing and allowing silver to rise to its true value.

Profits announced by the big US banks are phony. A laundry list of tainted supposed profits came in the last two weeks for the entire crew of giant insolvent US banks. The Debt Value Adjustment (DVA) deception is the main common thread.

The accounting fraud committed by JPMorgan is typical. Instead of taking a loss on their own declining corporate bonds, or doing nothing, they posted a supposed profit through a Debt Value Adjustment of $1.9 billion, equal to 29 cents per share. The JPM bond yield spread widened by 200 basis points versus the US Treasury Bond. The bank paid out $1 billion in legal expenses, raided $96 million from loan loss reserves, cut 1,100 staff, and reported a $700 million decline in investment banking profit. Their largest reported profit came from the fictional gain on their own decaying corporate bonds.

It is not a profit-and-loss event at all. If they defaulted on the corporate bond, the accounting profit could theoretically be maximised. Only in American bank accounting, blessed by the Financial Accounting Standards Board and the US Congress.

Citigroup also posted $1.9 billion in Debt Value Adjustments. The principle is simple: the bank values its own debt lower, assumes it could repurchase it more cheaply, and books the difference as profit without actually buying anything back. If the debt ultimately became worthless, the accounting "profit" would become even larger. In my view, that demonstrates the flaw in the method.

Bank of America reported a $1.7 billion DVA profit, while Morgan Stanley, facing even greater market concerns, reported $3.4 billion from the same accounting adjustment.

Without these adjustments, the major US banks would have revealed far weaker financial results. Several institutions also reduced their loan loss reserves despite ongoing mortgage losses and litigation, further inflating reported profits.

Amazingly, Bloomberg identified the practice as questionable but legal, describing the results as "poor quality profits". Poor quality indeed. They are too kind.

---

Historical Archive Update

This page was updated on 27 July 2026. The content has been preserved as originally published. This update was undertaken solely to modernise the HTML markup, improve accessibility, correct obvious spelling mistakes and grammatical slips, update obsolete links where appropriate, and bring the page into line with current web standards.

Author: Dr Willie (The Golden Jackass). Republished with permission for historical preservation.