The Fourteenth Banker Blog

October 21, 2010

Petty “Truthiness” Issues at Bank of America

Filed under: Running Commentary — thefourteenthbanker @ 2:40 PM

Bank of America is in the news these days for humongous foreclosure fraud issues, mortgage securitization fraud allegations, etc.  Perhaps as revealing to me is that they refuse to be truthful and transparent in even the most mundane matters.  B of A put out two information releases this week and neither one made sense to me. The big one was the earnings release in which they announced a write off of $10.4 Billion (with a “B”) in Goodwill. Goodwill is an accounting concept which attempts to capture “value” related to some sort of acquisition or transaction that cannot be properly assigned somewhere else. For example, if you buy a business for $1 million and the actual assets of the business (real estate, equipment, inventory, etc.) are only worth $700,000, the other $300,000 still has to be put on your financial statements and if it represents the intangible value of the business as a going concern, it can be booked as goodwill.

So back to this earnings release. What Bank of America said is:

We recorded a goodwill impairment charge. The $10.4 Billion non-cash charge does not impact regulatory capital ratios or liquidity. The charge is the result of recent legislation and expected impact on debit card business. Future debit card profitability is diminished.

So I wonder, how do you have $10.4 Billion in an asset account for “future debit card profitability”. I could not answer this question from their financial statements. But, the answer must be one of these two things. They either bought a business and paid way too much for it or, they have been booking future income from debit cards all in one lump sum when a revenue stream from debit cards is somehow “acquired”. In either case, they should not be downplaying it as basically nothing and should admit that it is a $10 Billion mistake or misrepresentation. In fact, if they had been transparent and explained how the goodwill came to be there in the first place, I would not have put the word “misrepresentation” into this post. But when you dissemble that is what you get. Neither the Merrill nor the Countrywide acquisitions should have resulted in a humongous booking of future debit card revenue, so I suspect there is funny bookkeeping going on. Probably legal, but still misleading.

The second petty truthiness issue has to do with this press release. Bank of America is announcing the hiring of 1000 Small Business Bankers. This should be a good thing. We need more effort on Small Business. So why do they have to let their marketing people put number into the release which misrepresents what Bank of America is doing in Small Business? What they said in their press release is that:

In the first half of 2010, Bank of America has provided $45.4 billion in credit to small and medium-sized companies and is expected to meet or exceed its pledge to increase lending to those businesses by $5 billion in 2010.

In Bank of America’s actual financial statements they break out Small Business Lending totals. In December, 2008 they had a total of $19.1 billion outstanding. In December, 2009 it had shrunk to $17.5 billion. In their earnings report for September, 1010 it had shrunk to $15.2 billion. Since these figures represent the gross loans outstanding, the $45.4 billion in supposed credit extended in the first half of the year really tells you that the vast majority of their lending is to medium-sized businesses, which are probably those with over $25 million in sales, and that they are hiding the small business credit production numbers in this big number. They are losing ground in small business lending. A further little snippet in the fine print says that “commercial credit extensions include a significant number of credit renewals”. In other words, they have told us nothing! These production number include credit renewals, which are not new loans at all.

Transparency? Apparently that is against policy. Come on guys, just tell us the truth and what you intend to do about it.



  1. I took a quick look at the massive Bof A 2009 Annual Report. Total Goodwill is carried at $86.314 bn. Global Card Services is carried within at $22.292 bn. Obviously, Bof A wrote off the debit card segment of every separate acquisition’s valuation of Debit Card Services values within the total Goodwill capitalized for each acquisition.

    Bank of America Corporation , the parent, has several major levels of holding companies including B Of A North America Holdings which owns Bank of America N.A and subsidiaries. Obviously , the N.A. and FSB I alluded to yesterday are owned by BA of North America Holdings with FSB having been the survivor of the merger of Countrywide FSB with itself. What I cannot find out, so far, is if the NA owns the FSB . Either way, all FSB activities are on the hook for put backs that once would have gone back to Countrywide FSB. They have given up a major firewall.

    Compare this to JPM! JPM bought assets of Wamu FSB and took over Deposits to pay for the assets from the FDIC. Put Backs to Wamu almost surely are foreclosed in comparison. Jamie Dimon knows you only buy assets no matter the temptation in compromised situations. Do not do the deal if you are not offered assets and a total severance from imported liability. Hence, we do not read of suits against JPM relating to Wamu about put backs.

    So the bigger question is what kind of structural losses will wind up at Bof A from put back litigation. Since even the Federal Reserve Bank of NY is pursuibg put backs , I should think this is the most important question about liability of the big banks. Can Bof A jettison Merrill Lynch into the heavenly realms if need be or is the whole corporate complex risked?

    It must have galled Bof A that they had to take this impairment charge.

    Over the years they must have bought many card issuing operations.

    Comment by Jerry J — October 21, 2010 @ 5:13 PM | Reply

    • The Global Credit Card Services segment of Goodwill typically must have been an allocation of the excess puchase cost over the value of underlying other assets in buying out local and regional groups of banks. These bank groups had the expensed software, expensed credit agreements with merchants in place, expensed employee training, ATM distribution agreements and a host of other items that can be used to justify total goodwill. All these items were going concern expenses of the operations purchased over the years but are priced into the premium paid in an acquistion.

      What is really being said is that card services income outside of lending to purchase will be heavily reduced in the future. The fee bonanza is gone or expected to be gone. What continues is the ability to charge a very heavy vig.

      Comment by Jerry J — October 21, 2010 @ 5:51 PM | Reply

  2. On the goodwill issue – this is standard fare. Yes they paid too much. But they paid too much in stock priced at (memory here) about $50. The business was MBNA.

    If you were to value consideration paid at the current stock price ($11 and change) then they got a screaming bargain.

    Its a quirk of accounting that if a company trading at book value buys another at book value for stock no goodwill is created. If the same companies in a different market (where everything is trading at 3x book value) were to buy each other massive goodwill is created.

    You are merging the same buisnesses for different accounting effect.

    When the world wakes up to the fact that NEITHER business is worth 3x book then the goodwill gets written off.

    It was a non-cash asset and its write off is a non-cash charge.

    There are plenty of things that the banks have lied about. This is not one of them.


    Comment by John Hempton — October 21, 2010 @ 6:55 PM | Reply

    • I did a quick check of the MBNA acquisition. The Bof A 2005 report in Footnote 3 estimates the MBNA Goodwill at $20.730bn.

      They wrote off half. Half relating to credit activities and half related to Debit Card activities. The stock price used. $45.856 per share of Common.

      Comment by Jerry J — October 21, 2010 @ 8:45 PM | Reply

  3. None of these banks can do small business lending because small business loans require trained loan officers. Used car sales people cannot make loan decisions. I’m not trying to be disrespectful of that profession, it’s just that to make loans requires an ability to quickly analyze a business’ credit needs and that requires training to make loans not sell sell sell and sell some more.

    All banks want, and actually they so far successfully have, is business and consumer deposits and products that can then be cross sold to generate fees. Loans don’t make anyone rich.

    As for lies, every single one of them lies because the truth is way too ugly to tell.

    And the ones that are actually making some new loans are basically extending cash secured, short term lines that will hardly be drawn. Zero hedge had the analyst calls for Comerica and Wells Fargo. No amount of pressing by analysts to get an idea of expected outstandings on lines of credits got any real response from the executives…. They know the answer is maybe 10%, they just won’t give it. And these lines are not made to small businesses btw, these are to filthy rich guys who are able to get any terms they want. Btw, the lender gets their bonus regardless of whether the bank makes money or not. This is how money is funnelled from the shareholders to the insiders. It makes me sick when I see bank stocks in people’s portfolios….. If only they knew how we screw people.

    Banks can never be honest from now on. It’s like riding a tiger, you get off, you get eaten!

    Comment by Vocalbanker — October 21, 2010 @ 8:32 PM | Reply

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