Bad Bank of America

The biggest bank by deposits Bank of America Corp. reported it's fiscal first quarter 2009 earnings today in a sham and spectacle reminiscent of bubble years past, exaggerating the profits while hiding losses. It was an old page torn from the remarkably thin play book by which the Masters Shaft the Universe, proof that it's better to have a weak competition than be good.

The bank reported that it earned $4.2 billion net income — or 44 cents per share after preferred dividends including $402m to the U.S. government — in Q1-2009. By earning more in the first quarter than in all of fiscal 2008 the bank sent the clear implicit and false message that the worst of the credit crisis was past and it was safe to throw your money at Bank of America again. It was roughly the sort of thing that had always worked in days of credit bubbles past, but now a large public investor class shredded by the shock wave of the bubble burst would have none of it, immediately seizing upon the fact that the gains were nothing of substance or sustainability, and once it was laid bare the balance sheet was simply bad.

BofA reported better than expected earnings today, but a quick glance at the income statement shows those profits aren’t related to its core banking operations. Strip out trading and the company’s pretax profit disappears

BofA reported profit of 44¢ per share. Analysts had been expecting 4¢. But if you back out trading profits, earnings were a paltry 2¢ per share.

..., keeping in mind that it may be impossible to trust the company’s calculation of TCE, tangible leverage did improve slightly compared with last quarter, to 43x from 48x.*That’s still remarkably high. It means BofA still has a tiny cushion to absorb losses from the asset side of the balance sheet. Assets need only decline 2.3% in order to wipe out what’s left of tangible common equity…

What the profits are related to is one time profits on trading gains, proceeds from costly and divisive acquisitions of Merrill Lynch and Countrywide Financial. The bank dumped $2 billion worth of it's holding in China Construction Bank, Countrywide contributed mortgage refinancing volume and Merrill Lynch tacked on another $2 billion by seeing the value of it's structured notes take a beating.

But Bank of America’s results were helped by some one-time items that analysts said pushed results into positive territory from break-even. Those included a $1.9 billion pretax gain on the sale of shares in China Construction Bank shares, in which the bank continues to hold about a 17 percent stake.

Bank of America also benefited from changed valuations of some investments. In particular, it gained $2.2 billion from an adjustment to the value of structured notes at Merrill, and a benefit of about $1.5 billion in its trading books.

And as those structured notes burn on the balance sheet, management hopes the stench will blow away when the smoke lifts from the accounting forgery, but don't count on it.

Accounting rules enable Bank of America to book the gain on the expectation that it will eventually repurchase the debt at a lower price.

The accounting rule is SFAS 157 which says that the bank can't lose for losing, but even at the Bank of America they know better.

The provision for credit losses of $13.4 billion rose from $8.5 billion in the fourth quarter and included a $6.4 billion net addition to the allowance for loan and lease losses. Reserves were added across most consumer portfolios reflecting increasing economic stress on consumers. Reserves were also increased on commercial portfolios. Nonperforming assets were $25.7 billion compared with $18.2 billion at December 31, 2008 and $7.8 billion at March 31, 2008, reflecting the continued deterioration in portfolios tied to housing. The 2009 coverage ratios and amounts shown in the following table include Merrill Lynch.

The $6.4 billion build up loan loss reserves is action that speaks louder than any words implying a recovery. The build accompanied a $7 billion write-down on loans already non-performing, up 20 percent from the fourth quarter.

Merrill Lynch contributed $3.7 billion to Bank of America’s net income, but combined with Countrywide to force the build in loan loss reserves. The majority of the increase to the $25.7 billion of Bad Assets was due to Merrill Lynch's unfunded lending commitments "fairly valued" under SFAS 159. --footnote (7) page 35 of the report-- The report also credits Countrywide Financial with the no-interest expense increase to $2.7 billion after the acquisition. Let's not forget the $24 billion Dark Star bomb that Countrywide Financial dropped on the bank last year.

The Q1 numbers are bad! The numbers are bad for the bank and bad to Ken Lewis who must now, by explaining the risky high speed pursuit he pushed with such vehemence to cut the deal to take down Merrill Lynch in deal which made and makes no sense to the bottom line then or now. And even on the Street where the only line is the bottom line there are numbers that this time scream even louder. The $50 billion Bank of America overpaid for Merrill and the $40 million bonus number dedicated to Thain's bottom line, blew up in Lewis's face. Those numbers would not have made a peep in the halcyon days of the credit bubble, but in the shrapnel of the after burst they scream.

“That’s ludicrous,” said Mr. Finnegan, the chief executive of the Chubb Group of Insurance Companies. He thought that the lush bonus requests came across as greedy and insensitive — particularly because Wall Street was in such dire straits that it was likely taxpayer support would be needed to survive.

As Bank of America coughed up the $40 billion big fat ones to Thain they put the credit choke hold on Republic Windows and Doors denying the factory the same air it begged from the taxpayers who worked there. But the bank finally relented, giving the blue collars and their employer a little life, while refusing Thain the take from his bank heist.

The compensation committee has not reached a decision, but is leaning toward denying Mr. Thain and other senior executives bonuses for this year, The Journal said.

What's criminal in most hearts and minds is acceptable for a man like John Thain who believing more in himself than delivering to others, unrelenting in the callous pursuit of his higher bonus, got it.

"Merrill Lynch was an independent company until Jan 1. (Merrill CEO) John Thain decided to pay year-end incentives in December as opposed to their normal date in January. BofA was informed of his decision."

Getting it and sticking it to the US taxpayer at the same time. And as Thain counts his millions, Bank of America undergoes the government stress test. Despite the above mentioned appearance of a strong first-quarter and protestations to the contrary from Ken Lewis the bank will likely have many more losing quarters coming soon.

Although Bank of America announced a first-quarter profit that exceeded expectations, analysts say that rising loan losses across its portfolio may threaten its health. If so, the bank may be forced to convert part of the government’s investment into common stock, over the objections of its chief executive, Kenneth D. Lewis.

But Lewis could lose a lot more than just a few quarters profit. Due to Andrew Cuomo's belated due diligence the game has changed and the stakes were suddenly ratchet higher than ever imagined and Lewis who had just been facing an investor and employee revolt now faces a possible stroll through the slammer door.

An activist Bank of America Corp investor said on Thursday he expects shareholders to demand that Chief Executive Kenneth Lewis give up his job as chairman, and that management at the largest U.S. bank is preparing for such an outcome.

Jonathan Finger said Lewis and other senior bank officials rebuffed reforms, including appointing an independent chairman, that he and his father, Jerry, proposed in three meetings in the Fingers' offices in Houston. The meetings followed the bank's troubled purchase of Merrill Lynch & Co.

The $50 billion swindle that brought Merrill Lynch's troubles onto Bank of America's balance sheet, while stealthily keeping Merrill's fourth quarter write-downs and $15 billion loss under wraps, was a gift from Lewis. And as investors say thanks a lot, Lewis swears that he had to do it.

Mr. Lewis said that as Merrill’s fourth-quarter losses mounted, he did re-evaluate whether he should close the deal and whether he could renegotiate the price for Merrill. But, he said, regulators implored him to complete the transaction and said they would provide support.

“The government was firmly of the view that terminating or delaying the closing of the transaction could lead to significant concerns and could result in significant systemic concerns,” Mr. Lewis said. “We did think we were doing the right thing for the country.”

You don't believe that. Ken if you want to do the right thing for the country, give us back the money right now. But now we'll see how Kenny boy was not only a liar, but only ever in for himself, not the bank and certainly not the country.

Ken was certainly pressured by the Feds, which he denied at the time.

“There was no pressure from regulators, absolutely no pressure,” said Mr Lewis, who described the deal as “the strategic opportunity of a lifetime”. He said: “The first contact came on Saturday morning and we put the transaction together in 48 hours. The instant we talked it made sense.”

But with Cuomo turning the screws and under oath Lewis swore out loud, "I swear I'm lying".

Bank of America's attempt to exit the merger came to a halt on December 21, 2008. That day, Lewis informed Secretary Paulson that Bank of America still wanted to exit the merger agreement. According to Lewis, Secretary Paulson then advised Lewis that, if Bank of America invoked the MAC, its management and Board would be replaced.

In an interview with this Office, Secretary Paulson largely corroborated Lewis's account. On the issue of terminating management and the Board, Secretary Paulson indicated that he told Lewis that if Bank of America were to back out of the Merrill Lynch deal, the government either could or would remove the Board and management.

Secretary Paulson's threat swayed Lewis. According to Secretary Paulson, after he stated that the management and the Board could be removed, Lewis replied, "that makes it simple. Let's deescalate." Lewis admits that Secretary Paulson's threat changed his mind about invoking that MAC clause and terminating the deal.

So, lying or not the government, aint no band leader, and made Lewis the offer he couldn't refuse.

Lewis had little choice but to follow the Fed’s direction, Hugh McColl Jr., Lewis’s predecessor as Bank of America’s CEO, said in a telephone interview yesterday.“Anyone who has ever run a big national bank knows that when the Fed tells you to do something, you will do it,” McColl said. “It’s an order.”

But just as he had with Republic windows and Doors Lewis pushed back, hard. Pushing back and begging the question, who's pushing who?

In the conference call, Bank of America executives also discussed the government assistance that was announced overnight to help them complete the merger with Merrill.

Two weeks after closing its purchase of Merrill Lynch at the urging of federal regulators, the government cemented a deal at midnight Thursday to supply Bank of America with a fresh $20 billion capital injection and absorb as much as $98.2 billion in losses on toxic assets, according to people involved in the transaction.

The bank had been pressing the government for help after it was surprised to learn that Merrill would be taking a fourth-quarter write-down of $15 billion to $20 billion, according to two people who have been briefed on the situation, in addition to Bank of America’s rising consumer loan losses.

Question answered. Not only was Lewis lyng to someone, but "the bank had been pressing the government", too. Then when push came to shove Lewis jumped ship signing the deal which transferred 40 million taxpayer dollars to Thain and threatens to sink Bank of America, all for the sake of his pathetic job. To be sure investors had a right to expect more, a lot more from the man charged with protecting their interests.

“Mr. Lewis and the board owe their fiduciary obligation to the corporation and shareholders, not to the regulators who reportedly pressed them to close the deal,” Michael Garland, research director at CtW Investment Group, said in an e-mailed statement.

It was Paulson who cleared the way coping to Lewis accusation, but if you think Paulson or anyone who's anyone is going to jail, think again. Paulson publicly pleaded guilty because he can and can get away with it. Paulson and the (banking) system he serves controls the process which can prosecute them. And that system will now go to work full time to protect itself from that process and by using an ambitions New York State Attorney with a proven track record of caving in that process has already demonstrated progress.

As usual it all works out nicely, the conduit was set and everybody who was somebody got his, anyone who wasn't got the shaft. Lewis is for now the CEO, Thain will have his $40 million bonus and Angelo Mozillio his billions. As the economy worsens into a depression and the credit crunch grips tighter still, saddled with the dead weight of Lewis's prize acquisitions Bank of America can only go from bad to worse.