Marked To Market

Now this is an interesting story. CNBC is going out of its way to promote the idea that the financials are legitimately solvent and stable because banks did NOT make mark-to-market accounting changes for Q1.

Accounting changes aimed at helping the balance sheets of banks with toxic assets appear to be providing little or no help so far with earnings reports.

The accounting rules, known as mark-to-market, were amended so that banks stuck with underperforming assets—particularly mortgage and other credit-related securities—could value them at their future projected worth and not at current value.

But the early earnings are showing that the rules probably won't be reflected until second-quarter results are reported. And that has some investors hoping that financial earnings, which have been better-than-expected so far, will do even better once market-to-market accounting takes effect.

"I hope we're going to see the financial system on an upward track," says former FDIC Chairman Bill Isaac, who helped draft the rule changes. "It's probably not going to be a straight line for all institutions. There will be some varied results. We are in a very favorable climate right now for banking institutions because they're cost of funding is so low."

Though the cost of lending for banks is near zero, a strong effort to reduce debt among financial firms and with the mark-to-market changes is providing an uncertain earnings environment.

"We have an accounting rule change and we're in the middle of the transition," David Kotok, chief investment officer at Cumberland Advisors, told CNBC. "We won't know the eventual impact of that until the June 30 quarter."

CNBC's Jeff Cox there would have you believe that not only are banks doing well, but that critics of mark-to-market like myself who said that banks were going to use mark-to-market to inflate assets have been completely discredited now. Could it have something to do with General Electric, owner of NBC-Universal, having one of the financial divisions in trouble? Naah. Course not.

But there's no mystery. We know exactly why the banks are reporting such fantastic earnings this quarter without mark-to-market. AIG's counter-party payments explain everything. AIG got billions to pay off their debts to other banks, the other banks got paid off through AIG. The banks are merely counting these billions in payments from AIG as assets for Q1.

And presto! Record quarterly earnings for bank after bank! And mark-to-market had nothing to do with it, so the banks are fine and profitable again and the economy has been fixed!

It's nothing more than three-card monte. Follow the red card...oh, that's too bad. You lose!

We all lose.