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.