Bank of America (BofA) announced yesterday that it recently identified an accounting slip-up relating to the treatment of structured notes originally issued by Merrill Lynch before it was acquired by the Charlotte, NC bank. That mistake had led to a miscalculation of what capital amounts and ratios BofA computed under Basel 1 and Basel 3 regulatory requirements. In both cases the amounts and ratios have been adjusted downward to compensate for the overestimation error.
Consequently, at the request of the Federal Reserve Board which oversees banks, BofA will suspend a $4bn stock repurchase plan and common stock dividend increase to five cents per share from one cent per share. According to BofA, the corrected calculations will not affect the bank’s consolidated financial statements which, it says, were properly stated in accordance with US Generally Accepted Accounting Principles (GAAP).
The error was made in “the fair value option to certain legacy Merrill Lynch structured notes resulting in an overstatement of its regulatory capital amounts and ratios,” the bank noted in a publicly released statement. While the bank correctly adjusted for the cumulative unrealised change on structured notes accounted for under the fair value option, “it incorrectly adjusted for cumulative realised losses of Merrill Lynch issued structured note that had matured or were redeemed by the company subsequent to the date of the Merrill Lynch acquisition.”
ML acquisition
BofA’s then chief executive Ken Lewis announced on September 15 2008, the same day that Lehman Brothers filed for Chapter 11 bankruptcy protection, that it would acquire Merrill Lynch & Co. in a $50bn all-stock deal. The transaction closed in 2009. At the time, BofA assumed all of the assets and liabilities of Merrill Lynch, including its outstanding previously issued structured products. An April 28 news article by The New York Times reported that BofA had assumed a $60bn portfolio of structured notes from Merrill Lynch as part of the acquisition.
BofA has also agreed to correct and resubmit its capital plan to the Federal Reserve Board within 30 days and hire a third party “to review the processes and the materials prior to submission”.
According to the SRP US product database, in 2013 BofA was the second highest-selling structured products issuer, with more than $6.4bn in sales across 183 products. JPMorgan led with cumulative sales of over $8.9bn. However, BofA has lost its leading position this year based on sales volume, falling to tenth place with $811m sold across 26 structured products.