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Tuesday, April 29, 2014

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BofA: Too big to fail a math test

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Bank of America has joined Citi in the dubious group of banks who have failed the Fed's stress test twice. The Federal Reserve announced yesterday that the bank would have to resubmit its capital plan due to incorrectly reported data.

While BofA made an accounting mistake, and a rather egregious one, the Fed also failed to spot the error the first time around. Ben White quotes an unnamed senior bank executive performing blame jujitsu: "Easy to blame BofA here but seems like some of the blame goes to the opaque design and implementation of stress testing by the Fed".

Last month, the Fed approved Bank of America's plan for a $4 billion share buyback and a $1.5 billion dividend increase. Now, after BofA found problems in its capital calculations, it is halting those plans and will submit a new plan to the Fed. The bank's error was in calculating the value of a set of structured notes issued by Merrill Lynch in 2009. The WSJ's Michael Rapoport explains the rule that tripped up BofA, called the "fair value option":

The issue goes back to the 2007 accounting rule that granted banks a "fair value option" – the opportunity to value some of their debt at market value, or the best approximation of it, instead of at their original cost.

When making the calculation to get from its capital under accounting rules to its regulatory capital, BofA stripped out "unrealized" changes on those structured notes – i.e., the paper gains and losses on notes it still held. But the bank also stripped out "realized" losses on structured notes that had matured or been redeemed – and it wasn't supposed to do so.

Bank of America isn't likely to find solace in the fact that the mistake it made won't even be a mistake much longer: Floyd Norris notes that just last week the "Financial Accounting Standards Board tentatively agreed, on a 5-to-2 vote, to end that practice at a date to be determined".

Peter Eavis and Michael Corkery write that while the banks submit their own calculations in the stress test, the "Fed is also meant to review the banks' numbers, using its own examination to identify potential red flags". Eavis and Corkery quote CLSA bank analyst Michael Mayo, who bluntly puts the onus on Bank of America: "It's a bank. It needs to get the numbers right". Actuarial sprezzatura may have been cool in Medici Florence, but it's shocking, and trust-depleting, at a modern global financial institution.

Matt Levine echoes Mayo's point. Bank of America overstated its capital, Levine estimates, by $2.7 billion under current rules, and $4 billion under the not yet implemented international Basel 3 regulation. While the rules that led to the mistake are complex and counterintuitive, Levine says, "the people doing your regulatory capital calculations really ought to know how to do regulatory capital calculations! 'The rules are hard' is not a good excuse for a $2 trillion bank". — Ben Walsh

On to today's links:

Earnings
Deutsche Bank delivered a solid set of earnings, if you ignore all the bad stuff - Quartz

Housing
Case-Shiller rises in line with expectations, other housing data looks weak - BI

They're Just Like Us
Steve Cohen waits in line for the restroom - CBNC

Newer Normal
Economic data is boring for the first time in seven years, and that's (sort of) a good thing - Neil Irwin

Tax Arcana
Pfizer's tax-dodging AstraZeneca acquisition - Bloomberg

Wonks
The evidence for a low-wage recovery isn't there - Justin Wolfers

Right On
"I rely on the links to do most of the work" - Rusty Foster

Big Brother
A woman tried to hide her pregnancy from big data and found it almost impossible - Think Progress

Tech
The problem with payments: terrible margins, "instant ubiquity, but massive competition" - Stratechery

Niche Markets
Winning the Pulitzer for poetry means a bump in book sales to 81 copies a week (from 11) - Tyler Cowen

Billionaire Whimsy
Carl Ichan read Piketty and concluded the world needs more shareholder activism - BI

Study Says
"Financial blogging is associated with a reduction in insider trading profits" - SSRN

So Hot Right Now
Venmo is the cool kids' social network - The Wire

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Business Today: Wall Street ends up on earnings, rebound in high-growth shares

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04/29/2014
Reuters Election 2012 Daily round-up of the day's top news from the campaign trail, the White House and all the politics in between
Wall Street ends up on earnings, rebound in high-growth shares
NEW YORK (Reuters) - U.S. stocks rose on Tuesday, boosted by upbeat results from companies including Merck & Co and a rebound in Facebook and other high-growth shares.
Twitter disappoints again on user growth and views; shares drop
SAN FRANCISCO (Reuters) - Twitter Inc on Tuesday reported 255 million monthly active users, up 5.8 percent from the previous quarter but not enough to satisfy investors increasingly concerned about its struggle to gain a mass following.
EBay's first-quarter profit tops Wall Street, but outlook disappoints
SAN FRANCISCO (Reuters) - EBay Inc posted a better-than-expected first-quarter profit on Tuesday, boosted by its PayPal payments unit, but the e-commerce giant's second-quarter forecast fell short of estimates.
U.S. consumer confidence near six-year high, home prices rise
NEW YORK (Reuters) - U.S. consumer confidence dipped in April but remained near a six-year high, while home prices rose in February, suggesting the economy continued to regain momentum after a winter lull.
Spring expected to usher in strong U.S. job growth
WASHINGTON (Reuters) - U.S. employment likely rose at its fastest clip in five months in April and the jobless rate probably dropped in a show of strong economic momentum after a gloomy winter.
Pimco equity chief plans hires as expansion picks up
LONDON (Reuters) - Pimco's new global equity chief plans a first batch of new hires that could see her investment team grow by half as the U.S. bond powerhouse boosts its stock offering - and one of those running money will be her.
Santander seeks Brazil unit buyout, sees Europe recovery
MADRID/SAO PAULO (Reuters) - Banco Santander SA launched a 4.7 billion euro ($6.5 billion) offer on Tuesday for the 25 percent of its Brazilian unit it does not already own, giving investors a chance to gain exposure to a budding recovery of the euro zone's largest bank.
Barclays dealmaker McGee quits as U.S. head
LONDON (Reuters) - Hugh 'Skip' McGee, one of the British bank Barclays' highest earners, has quit as head of its Americas business, the bank saying he did not want to oversee the task of establishing a new holding company required under tougher U.S. rules.
Siemens says to make Alstom offer if it can see its books
PARIS/FRANKFURT (Reuters) - Germany's Siemens said on Tuesday it would make an offer to French engineering group Alstom if it is given four weeks to examine its books and draw up a detailed plan to rival a move by General Electric .
Apple, Samsung make final pitches to U.S. jury in patent trial
SAN JOSE, California (Reuters) - Apple has vastly exaggerated the importance of its patented iPhone features, a Samsung attorney said on Tuesday as the two companies delivered closing arguments to jurors after a month-long trial over mobile technology.
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