Tuesday, October 18, 2011

Bank of America Takes Accounting Fraud A Step Further

Bank of America's earnings report is more confusing than a Jackson Pollack painting.  It certainly shows the chaos and subjectiveness reflected by Pollack's most famous works.
                                                                  - Dave in Denver

Bank of America reported net income of $6.2 billion this morning.  As explained in my posts on JPM and Citigroup, the banks are using non-cash, non-economic accounting loopholes that allow them to basically create paper income in order to dress up their earnings reports and make them look good to the majority of investors and analysts who only look at headlines and/or only analyze the useless GAAP income, balance sheet and cash flow statements. 

In brief, here's what BAC did: of the $6.2 billion in net income, $4.5 billion was derived from their "fair value adjustment of structured liabilities" and $1.7 billion from the good old debt valuation adjustment.  The "fair value adjustment" is the revaluation of those nefarious Level 3 assets and liabilities that we really have no way of determining what they are worth because there are not really any observable markets in them.  They are the toxic crap that sunk AIG.  Here's the description from a recent BAC 10K:
Financial assets and liabilities whose values are based on prices or valuation techniques that require inputs that are both unobservable and are significant to the overall fair value measurement are classified as Level 3 under the fair value hierarchy established in SFAS 157. The Level 3 financial assets and liabilities include private equity investments, consumer MSRs, ABS, highly structured, complex or long-dated derivative contracts and certain CDOs, for which there is not an active market for identical assets from which to determine fair value or where sufficient, current market information about similar assets to use as observable, corroborated data for all significant inputs into a valuation model is not available. In these cases, the fair values of these Level 3 financial assets and liabilities are determined using pricing models, discounted cash flow methodologies, a net asset value approach for certain structured securities, or similar techniques, for which the determination of fair value requires significant management judgment or estimation.
So this "fair value" technique of "guessing" provided 72% of BAC's reported net income.   The DVA of course is the income BAC is permitted to record when BAC's ability to repay its debt obligations declines. Both of those accounting tricks combined created BAC's $6.2 in reported net income. So BAC's entire reported income was the product of bullshit accounting maneuvers.  Bonus compensation will be paid to upper management based on bullshit.

The bottom line is that using my "however" adjustments, Bank of America had zero net income.  BAC also included a $3.6 billion one-time gain from the sale of China Construction Bank stock, which was used to more than offset a "mark to market" loss on its private equity portfolio.  Again, the loss on the latter is completely arbitrary and subjective.  If we net out the one-time gain and the private equity write-down, Bank of America actually would have reported a loss.  In other words, netting out all the one-time arbitrary and capricious accounting gimmicks, Bank of America's core operations LOST money.

These accounting rules that enable the banks to report a bunch of fantasy income were put in place after 2008 with the intent to protect these too big to fail banks from the ravages of the marketplace.  The people creating and enforcing these rules are the same people who have, do or will benefit from them.  The people who pay for the damage these rules hide are the Taxpayers.  It's getting really corrupt out there...


  1. Aren't all these accounting manipulations just different flavors of what David Einhorn outlined in Fooling some of the people on what occurred in the sbac portfolio of allied...just on a monstrous scale?

  2. (Dave)

    These accounting manipulations are legalized fraud. Put in place in order to permit the banks to report profits on a GAAP basis despite the reality of the deteriorating financial health beneath the surface. This was done systematically for that purpose. None of these accounting rules reflect even remotely economic reality, which is what "accrual" accounting is supposed to do. "Accrual" accounting is GAAP.

    It's a textbook example of Orwellian doctrine.

  3. We need Hammurabi's Code:)

    Nassim Taleb on Wall Street Protest, Banking


    which bridge should they use?

  4. Its going on everywhere...ie. the rot on the balance sheets.

    James Turk

  5. Are all these guys part of a secret fraternity...how do they get away with this crap?

    HOLY BAILOUT - Federal Reserve Now Backstopping $75 Trillion Of Bank Of America's Derivatives Trades

    This means that the investment bank's European derivatives exposure is now backstopped by U.S. taxpayers. Bank of America didn't get regulatory approval to do this, they just did it at the request of frightened counterparties. Now the Fed and the FDIC are fighting as to whether this was sound. The Fed wants to "give relief" to the bank holding company, which is under heavy pressure.

    This is a direct transfer of risk to the taxpayer done by the bank without approval by regulators and without public input. You will also read below that JP Morgan is apparently doing the same thing with $79 trillion of notional derivatives guaranteed by the FDIC and Federal Reserve.


  6. Greg said...Dave, is this accounting trick that BofA, Citi, and other TBTF banks are doing a "one time" deal or can they continue this charade each quarter?

  7. (Dave)

    they'll run out tricks at some point.

    I knew about the ones they are using up to this point. it was FASB and regulatory changes put in place right after the 2008 de facto banking collapse.

    I'm sure there's a few tricks left in the bag

  8. Dave, thanks for staying on top of this issue. Your blog is invaluable.

  9. B of A isn't just using Enron accounting, they are using Quantum mechanics accounting, where every possible outcome can and does occur all at once, though in the realm we call reality the only possible outcome is insolvency.

  10. while they boa cooking books they still in courts stealing people homes by way of fraud
    with the help of us judges that go along with them and refusing to give people due process
    of law

  11. Its going on everywhere...ie. the rot on the balance sheets.