Bad Bank of America

Bank of America reported its fiscal first quarter 2009 earnings today in a fraudulent sham and spectacle rigged to exaggerate profits while hiding losses. It was an old page torn from the remarkably thin play book called Masters Shaft the Universe. Once again, America's decrepit financial sector has proved that it's better to have weak competition than good business practices.

The bank reported that it earned $4.2 billion net income — or 44 cents per share after preferred dividends, including $402 million 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 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. They immediately seized 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 trading gains, proceeds from costly and divisive acquisitions of Merrill Lynch and Countrywide Financial. The bank dumped $2 billion worth of its 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 that permits this kind of fraud is SFAS 157. It says  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 in loan loss reserves speaks louder than any talk of recovery. The build up accompanied a $7 billion write-down on non-performing loans, up 20 percent from the fourth quarter.

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