Once again, the banks are booking big profits based on DVA -- debt valuation adjustment -- because their creditworthiness has deteriorated. Once again, this accounting gimmickry makes absolutely no sense.
The rationale for booking DVA gains: the debt you have issued becomes cheaper as your credit risk rises, so theoretically you can buy it back at a lower price, saving money.
This is ridiculous because it ignores the fact, as I explain in this post from two and a half years ago, that it costs more to raise the money to buy back the debt.
The gains don't exist. They're completely illusionary.
The DVA accounting convention is a sham. It shouldn't be allowed. Isn't there an accountant out there bright enough to see the inherent absurdity in it?