From Portfolio.com's Market Movers:
It's not quite as laughable as it might seem at first glance that the latest tranche of investment-bank earnings reports showed hundreds of millions of dollars in profits from the fact that those banks' bonds had fallen in value. Morgan Stanley alone booked $390 million, or about 26% of its third-quarter profit, from the fact that its bonds are now worth substantially less than they were when they were issued.
That kind of profit might not, as Moody's says, constitute "high-quality, core earnings". But it's not entirely an accounting fiction, either. After all, a bank can make money on the asset side of its balance sheet if it buys assets at a low price and then they rise in value: it's called mark-to-market accounting. So the same bank sells bonds at a high price and then they fall in value, there's a mark-to-market profit there, as well....MORE