Investors looking at the assets on Bank of America’s balance sheet got a good estimate of how much they are worth on Friday. Unfortunately, that estimate came coupled with an astonishingly frank admission from the bank that the bank continues to insist its loans will perform far better than the market expects.
On Friday, Bank of America filed its annual report witht the Securities and Exchange Commission. The bank admitted that it is carrying loans on its balance sheet marked at more than $44 billion above their fair value.T he bank said it ended 2008 with what it is calling $886.2 billion in loans. But estimated the mark-to-market pricing for these loans is just $841.6 billion.
How can Bank of America get away with this rose-coloured view of its assets? It says it plans to hold these loans to maturity, and it expects the ultimate pay off of these loans to be far higher than the market pricing would imply.
Why are we only finding this out now, two months after the worst year in credit market history began? Well, legally, banks are only required to disclose to investors the difference between the market values and the balance sheet values once a year. This is one of the primary reasons that no one trusts banks when attempt to offer assurance by saying they are “well capitalised.” All last year, Bank of America knew it was carrying assets at tens of billions of dollars above their market value but refused to tell anyone about this until now.
And people wonder why investors are so distrustful of bank balance sheets.
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