Bank of America Corp's Dividend Suspension Is Far More Costly Than You Think

On Monday, Bank of America (NYSE: BAC  ) announced the suspension of a dividend and share buyback plan when it came out that its capital calculations have been incorrect since 2009. The plan had been approved by the Fed following annual stress testing earlier this year.

The capital change was small, reducing Common Equity Tier 1 by just $4 billion to $130 billion. So why is it such a big deal?

"What else could be lurking?"
As CEO Sam Pappas of Mystic Asset Management, put it, "It's positive that Bank of America found the mistake and reported it to the Fed. But it also makes you wonder what else could be lurking."

The concern is that this relatively small but strangely persistent error could be just one of many. The fact that it took five years to discover is no small thing, especially when you consider that it's not just internal accounting staff who look at such numbers -- auditors and regulators are also responsible for making sense of the books.

It also doesn't help that the mistake affects Common Equity Tier 1, which presumably should be the simplest and most reliable measure of bank capital. Where else might we find such errors, and how big might they be? 

Too big to manage?
The second glaring issue in all of this is manageability. Not only could there be other mistakes floating around unnoticed, but the fact that this oversight persisted for so long could be a sign that large banks like Bank of America are simply too big to manage. Maybe the operational complexity is making it impossible to properly catch all the potential problems. 

Jim Cramer, who is admittedly not known for understatement, has expressed his own frustrations on the matter, which, despite a degree of hyperbole, reveal a lot about the difficulty investors are facing: 

This is a disgrace. Is the bank too big to run? Do they have any idea what's going on? ...I'm looking at it and I'm saying, 'How could I have been so stupid?' They're just hard to understand, these banks. It's too hard.

Too big to regulate?
Finally, the Fed will not come away unscathed in all of this. It's of course a bit much to expect the regulator to look at every single financial line item in its reviews. On the other hand, computations of Tier 1 capital have obviously been under-scrutinized. 

The implication is that the Fed's blessings regarding capital adequacy and shareholder plans might not be as reliable as they should be. Could stress tests be giving investors a false sense of security? The thought is especially troubling because Common Equity Tier 1 is the foundation of capital adequacy requirements by the Fed; it isn't an insignificant variable. 

It's worth noting that this news is uncomfortably close on the heels of the Fed restating the stress test results. It was also Bank of America, and not the Fed, which discovered the mistake.

Perhaps the Fed is too dependent on banks to understand their own operations and provide reliable data. But if the bank's can't understand themselves either, we have a serious problem. Either way, this new headache does not instill a great deal of confidence in either the banks or their overseers. 

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  • Report this Comment On May 01, 2014, at 8:34 AM, baltimoreaureole wrote:

    It's kind of astoninshg that MF and most other pundits are ignoring the elephant in the room. Banks are regulated by alphabet soup of at least 5 government agencies, each with thousands of pages of rules - too complex for their regulators follow, even.

    Whatever happend to straighforward GAAP, and clear english regulations about reserves and audits?

    This is a congressional/regulatory made problem. As everyone admits, B of A inherited the accounting error from Merrill Lynch. The real question should be - are regulations too complex and voluminous to be complied with?

  • Report this Comment On May 01, 2014, at 9:12 AM, lencerisano4453 wrote:

    the blame can be spun into any direction one so chooses to. in its simplest form the bank is extremely profitable because of an excellent management team rectifying systemic problems amidst a barrage of a legal attacks and regulatory condemnation. also keep in mind this management team inherited, the size and structure of this bank. yes all other big banks have performed comparatively well and they should all be commended.

    so why does this problem surface now?

    if I were to take a guess?... finally it is the BAC CEO, setting up to make a power play against the legal and regulatory zealots.

  • Report this Comment On May 01, 2014, at 9:20 AM, Oregonboy wrote:

    There is not a person alive that understands the US tax code, same with the Bank regulations. The Government is to blame. Again the US citizens are paying for the best incompetent people money can buy.

  • Report this Comment On May 01, 2014, at 9:48 AM, funfundvierzig wrote:

    It is one nasty surprise after another for hapless BAC shareholders. What will be the next fraud or criminal misconduct to surface, fracked from the deep seams of this corrupt enterprise by regulatory probes or discovery in the massive quantity of litigation confronting this bank? ...funfun..

  • Report this Comment On May 01, 2014, at 1:13 PM, SkepikI wrote:

    At some point, BAC shareholders will need to seriously consider if the bank is run by Dolts and Charlatans. Firing the top dog DOES NOT correct the tidal wave of mistakes made by mid level careerists, analysts and others in the froth of BAC. Those people are still there.

    Do you seriously believe after the Fourth? Fifth? Sixth? important mistake critical to the management of the bank that its "a one off...just one of those things"?

    I neither own nor short BAC... I just watch all this from the sidelines in rapt amazement

  • Report this Comment On May 01, 2014, at 2:31 PM, joker1912 wrote:

    MF really knows how to exaggerate with that title.

    BAC shareholders who are in it for the next 5-10 years should hope that the share price comes down even further. That way, when the Fed re-assesses BAC and re-approves their plan to buyback shares they'll be able to buy back more at lower prices.

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Anna Wroblewska

Anna began her career in finance as a college intern at a hedge fund, and she hasn’t been able to escape its siren song ever since. She’s done academic research at Harvard Business School and UCLA, was the COO of a wealth management firm, and now writes about finance, economics, behavior, and business.

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8/31/2015 11:34 AM
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Bank of America CAPS Rating: ****