Radian Group reports $215.2M 1Q loss,
Philadelphia Inquirer, Mon, May 12, 2008
Radian Reports First Quarter Net Income of $195.6 Million,
MSN Money, May 12, 2008

One might scratch ones head about such contradictory headlines. But both are correct.

Radian Group Inc. RDN today reported net income of $195.6 million […] for the quarter ended March 31, 2008. Excluding the impact of net unrealized gains on derivatives and hybrid securities, the Company’s net operating loss was $215.2 million …

So Radian, a mortgage insurer with little other business, can report a
loss of $200 million while also reporting profits in the same range.
The trick in Wall Street language:

Given the significant widening of Radian’s credit default swap spread over the past year, the reduction in the valuation of the Company’s derivative liabilities related to non-performance risk more than offset the credit spread widening on underlying collateral for the current quarter.

The company has contract liabilities, credit default swaps, which have some nominal value and a market value. Radian changed the way it accounts for these obligations. Instead of their nominal value, Radian now uses the market value of its liabilities for accounting purposes.

Said differently: Because the market expects Radian not to fullfill its obligations, the company now accounts those obligations lower and thereby creates a nominal profit.

Last month you lent me $100 bucks against a paper that said "IOU $100." People later saw me in a casino, gambling that money away. They now believe that I’ll be unable to ever pay back those $100. They expect that I may eventually pay back $10. When now asked how much I own to you, I’ll say $10 because that is the current market value of the IOU I wrote. I’ll even brag that I made a profit of $90.

For normal persons such bevavior is seen as criminal. For companies it is not even illegal. One can actually argue, as the company does, that such accounting is demanded by the federal accounting standards "mark to market" rule.

Banks use other tricks to hide their losses:

Banks and securities firms, reeling from record losses resulting from the collapse of the mortgage securities market, are failing to acknowledge in their income statements at least $35 billion of additional writedowns included in their balance sheets, regulatory filings show.

Citigroup Inc. subtracted $2 billion from equity for the declining value of home-loan bonds in its quarterly report to the Securities and Exchange Commission on May 2 without mentioning the deduction in the earnings statement or conference call with investors that followed. …

Here again the trick is legal:

Taking losses on a balance sheet instead of an income statement is acceptable under accounting rules, which make a distinction between so-called trading books and long-term investments. Changes in value on the trading side go straight to revenue. Changes in the value of bonds held for the long haul can be marked down on the equity line of a balance sheet, as long as the declines aren’t considered permanent.

Citigroup and others simply pretend that the stuff everyone believes is junk, will be seen as artwork 20 years from now. Therefore, they say, the junk is actually quite valuable.

Radian reclassified some liabilities from face-value to mark-to-market value. Citibank reclassified some holdings from mark-to-market value to face-value.

Both moves are legal according to the rules (and there are even arguable sound reason for such rules). The problem is that companies can apply these rules in very discretionary fashion and the regulators don’t care to hold them to some consistent standard.

With such accounting it is no wonder they got us into this mess in the first place.