The Delusion May Be Greater than First Thought Michael Panzner Yesterday, I mentioned the curiously detached-from-reality perspective of investors in regard to the poor results from Citigroup, among others. People somehow got the impression -- no doubt encouraged by management -- that the news was some sort of one-off, throw-everything-in-the-kitchen-sink type of event, and that everything would be hunky-dorey next time around. Leaving aside the question of what causes people to experience such levels of cognitive dissonance in the face of overwhelming facts to the contrary, it's possible the delusion may be even greater than first thought. In "First Brokers, Now Banks: More Fictitious Gains," Barry Ritholtz, my friend and must-read publisher of The Big Picture blog, elaborates further on the latest in a long series of scams that may give some stock investors what they crave most: fundamentals that are always positive or that can always be spun in a bullish fashion. Yesterday's surprisingly bad news out of Citibank and then UBS sent us back to the research archives looking for information about the quality of Banks earnings. As we noted last week, much of the Brokers' gains were fictitious. It turned out that a decrease in the value of the B/D's own debt was offset with a phantom accounting entry. These are presented in the earnings as if they are actual gains, not accounting phantasms. But don't think its just the big Brokers. The Banks are now getting in on the scam act: "Now some banks may be set to similarly benefit from their own misfortune. Financial titans such as Citigroup Inc., Bank of America Corp., and J.P. Morgan Chase & Co., which will report third-quarter results next month, all opted earlier this year to start applying market values to some of their own liabilities, according to the research service the Analyst's Accounting Observer. This means they, too, might see a boost to profit from declines in the value of their debts during the summer credit crunch. "It might not be unusual at all to be seeing gains on debt issued hitting earnings in the third quarter," the Analyst's Accounting Observer said. Officials at Citigroup, J.P. Morgan and Bank of America declined to comment. The brokers and banks are doing nothing wrong or improper in booking such gains. The accounting rules as they stand allow the practice. But some investors are crying foul, saying the rules shouldn't have been changed to allow for such gains . . ." So much for gains in earnings quality . . .   Michael J. Panzner When the stock market bubble burst in 2000, the collapse that followed wiped out over two-thirds of the value of the Nasdaq Index and decimated the hopes and dreams of millions of Americans. Now, imagine not one, but four such disasters looming on the horizon, all poised to erupt in a massive economic firestorm that will wreak widespread havoc in the months and years to come. The author identifies the most pressing financial risks we face today: First, a burgeoning tower of public and private debt wobbling precariously on a foundation of excess and fraud; second, a multi-trillion-dollar house of cards to which all Americans are exposed but few understand; third, a vast array of largely hidden government promises that will ultimately go unkept; and fourth, a retirement mirage that will leave millions enslaved to the workplace until the day they die.