Re: Bank Of America. Remember The Lessons From Cyprus
Submitted by Tyler Durden on 04/28/2014 19:47 -0400
Submitted by Simon Black of Sovereign Man blog,
And another one bites the dust. Now it’s Bank of America, one of the largest banks in the Land of the Free, that is inadequately capitalized.
Last month, Bank of America made a lot of noise about how they were going to buy back up to $5 billion worth of common shares.
As CEO Brian Moynihan stated, “We have simplified our company and we have more than adequate capital to support our strategic plans. We are well positioned to return excess capital to our shareholders.”
Needless to say, investors cheered the announcement, and BofA’s stock price rose nicely as a result.
Fast forward 45 days… and boy what a difference reality makes.
This morning Bank of America rather embarrassingly said it would suspend the stock buyback, stating that they had been ordered to do so by the Federal Reserve.
Moreover, the company must suspend its planned quarterly dividend increase.
All of this because of a supposed arithmetic error in how the bank calculates its regulatory capital. Apparently Bank of America is nowhere near the level of capitalization they thought they had… or had been telling everyone.
And given that the mistake is attributed to the Merril Lynch acquisition from 2009, the errors likely go back for YEARS.
In the words of the once future US Presidential candidate Rick Perry, “Oops…”
This is a big deal; capital is a bank’s lifeblood and a measure of its safety.
A bank with strong levels of capital (which can be thought of as equity, or its total assets minus liabilities) has a vast margin of safety and can withstand major financial shocks like market crashes and bank runs.
Banks with weak levels of capital will perish. Quickly.
Remember the lessons from Cyprus: last March, people went to bed on a Friday night thinking everything was just fine. The next morning they woke up to find that their entire banking system was insolvent and that the government had frozen their accounts.
This was all rather curious given that, literally just days before, they could log on to their bank’s website and check their balances.
It turns out, though, that there’s a huge difference between a number printed on a screen, and the bank actually HAVING the money.
Bottom line, just because they tell you the money’s there doesn’t mean the money’s there. Just because they tell you they’re well capitalized doesn’t mean they’re well capitalized.
And Bank of America is not. Neither is Citigroup (and many others), which recently failed Fed-mandated stress tests.
So in the Land of the Free, you now have inadequately capitalized banks backed by the inadequately capitalized FDIC insurance fund, which is backed by the highly insolvent US federal government, all of which is supported by the nearly insolvent Federal Reserve.
This is hardly a consequence-free environment. Do you have your seatbelt on?
BofA "Finds" Capital Calculation Math Error, Halts Capital Action Plan, $4 Billion Buyback
Submitted by Tyler Durden on 04/28/2014 08:43 -0400
Just weeks after the Fed signed off on CCAR and ackowledged how great the US banking system is, Bank of America (after being slapped with another $13bn RMBS suit demand) has ackowledged things are not quite as risy as they appeared...
- BOFA HAD INCORRECT ADJUSTMENT ON TREATMENT OF SOME NOTES
- BOFA SUSPENDS CAPITAL ACTION PLAN ON CHANGE IN CAPITAL RATIOS
- BAC SEES REVISED CAPITAL ACTIONS LESS THAN PREVIOUSLY ANNOUNCED
- BAC WILL ENGAGE THIRD PARTY TO REVIEW PROCESSES
So no buyback boost... no dividend boost... The question now is - how do we (or The Fed) trust any of the numbers?
Subsequent to the press release, the Corporation discovered an incorrect adjustment being applied in the determination of regulatory capital related to the treatment of the fair value option adjustment for structured notes assumed in the Merrill Lynch & Co, Inc. acquisition in 2009, resulting in an overstatement of regulatory capital amounts and ratios.
- BAC: MARCH 31 PRELIM TIER 1 LEVERAGE RATIO 7.6%, REVISED 7.4%
- BAC: BASEL 3 EQUITY TIER 1 9.0% FULLY PHASED, DOWN 27 BP
- BAC CUTS 1Q EST. PRELIM TIER 1 CAPITAL 21 BASIS PTS TO 11.9%
From the release:
Bank of America Corporation today announced a downward revision to the company’s previously disclosed regulatory capital amounts and ratios due to an incorrect adjustment related to the treatment of certain structured notes assumed in the Merrill Lynch & Co., Inc. acquisition in 2009. The reduction in the regulatory capital amounts and ratios has no impact on the company’s historical consolidated financial statements or shareholders’ equity, which were properly stated in accordance with accounting principles generally accepted in the United States of America (GAAP).On April 16, the company issued a press release announcing preliminary financial results for the quarter ended March 31, 2014. As part of such release, the company included estimated preliminary Basel 3 capital amounts and ratios as well as Basel 1 capital amounts and ratios for 2013. Subsequent to the press release, the company discovered an incorrect adjustment being applied in the determination of regulatory capital related to the application of the fair value option to certain legacy Merrill Lynch structured notes resulting in an overstatement of its regulatory capital amounts and ratios. The company correctly adjusted for the cumulative unrealized change on structured notes accounted for under the fair value option, but it incorrectly adjusted for cumulative realized losses on Merrill Lynch issued structured notes that had matured or were redeemed by the company subsequent to the date of the Merrill Lynch acquisition.As a result, the company is making the following adjustments to the previously announced estimated preliminary capital ratios for the first quarter ended March 31, 2014: the estimated Basel 3 Standardized transition common equity tier 1 capital ratio was revised to 11.8 percent, down 5 basis points; the estimated tier 1 capital ratio was revised to 11.9 percent, down 21 basis points; the estimated total capital ratio was revised to 14.8 percent, down 21 basis points; and the estimated tier 1 leverage ratio was revised to 7.4 percent, down 12 basis points.Although not required by GAAP, the company has in prior periods, including the first quarter of 2014, disclosed estimates for its Basel 3 fully phased-in common equity tier 1 ratios in quarterly earnings releases. On a fully phased-in basis, Bank of America estimates that for the first quarter ended March 31, 2014, the common equity tier 1 capital ratio under the Basel 3 Standardized approach decreased 27 basis points to 9.0 percent from the previously reported estimated ratio, and the estimate for the common equity tier 1 capital ratio under the Basel 3 Advanced approaches decreased 29 basis points to 9.6 percent from the previously reported estimated ratio. These ratios exceed the company’s estimated 2019 minimum common equity tier 1 ratio requirement, including buffers, of 8.5 percent.* * *Bank of America promptly notified the Federal Reserve Board (FRB) of the revisions and has been in close communication with the FRB regarding the effects of the revisions. The FRB has directed the company to resubmit its data templates and requested capital actions contained in the 2014 Comprehensive Capital Analysis and Review (CCAR). As part of this process, Bank of America will engage a third party to review processes and the materials prior to resubmission.At the FRB’s request, the company is suspending its previously announced 2014 capital actions, including the $4.0 billion common stock repurchase authorization and the planned increase in the quarterly common stock dividend from $0.01 per common share to $0.05 per share. Subject to completion of the third-party review and approval from the Bank of America Board of Directors, the company will expeditiously resubmit its data templates and requested capital actions in the 2014 CCAR plan for FRB approval. The company expects the requested capital actions to be contained in the revised CCAR submission will be less than the company’s previously announced 2014 capital actions.
The good news: at least Bank of America has no error in its $55.7 trillion in total derivative exposure notional:
And now, presenting... The Brian Moynihan Center for bankers who can't do math good and want to fudge other numbers good too.