WSJ: Bank of America takes $109 Billion Q1 hit on bonds as interest rates rise

Gaius · 2024-10-21T11:13:05.633Z

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https://www.wsj.com/livecoverage/stock-market-today-earnings-04-16-2024/card/bank-of-america-earnings-drop-18-in-first-quarter-Xo3EVxcgSYhe2D71f7J5

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https://www.barrons.com/articles/bank-of-america-bond-losses-ce69bf86
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Total unbooked losses on securities at all U.S. banks rose to $559 billion in the second quarter of 2023, up from $516 billion in the first quarter of 2023

FAU | Data Analysis: Unbooked Losses at Banks Rise in Second Quarter
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Gaius · 2024-10-21T11:16:15.389Z

For reference:
As of their latest financial report, Bank of America had net tangible assets of $222,6b.

They just tool a $109b paper loss
against $222.6b in real assets.

Phew, well, good thing the “day of reckoning” will never come, eh?
https://finance.yahoo.com/quote/BAC/balance-sheet/

Gaius · 2024-10-21T11:36:42.088Z

Brian the banker pays $100 for a 30-year “instrument” that pays $2/year plus $100 at the end. ($160 total) That night he changes his mind and wants to sell it. No problem. Interest rates are still 2% so he an still sell if for $100.

But,
what if the next night interest rate rise to 4%?
If that happens then every potential buyer can now take $100 to the credit market and buy an “instrument” that pays $4/year plus $100 back at the end. $220 total)

No Way is anyone gonna pay Brian $100 for something that pays a total $160,
not when, for the same money they can buy a thing that pays $220. Nope, rates up, bond values down. No one’s gonna pay Brian $100 for that “instrument” anymore. Brian just lost value.

This could be bad because, um well, the money Brian used to buy the bonds wasn’t his. It was his depositers’ money, and Brian’s depositers could ask for their $100 back at any time.

Impenitent · 2024-10-21T13:34:51.826Z

losing money on mortgage bonds means they didn’t offer mortgages to the right voters…

Gaius · 2024-10-21T14:06:49.404Z

LOL

Well what happened is that as rates rise, bond values drop.

Wanna sell a $100 that pays $2/year when investors can buy a $100 bond that pays $4/year? Well you can do it, but you ain’t gonna get your $100 for it.

Rates up, bond down.

Gaius · 2024-10-21T16:02:49.539Z

Anyway, regular accounting procedures require that you (a company incl banks) carry an asset on your books at the lesser of cost or market.

If you buy a car for some price. When it is used or damaged and worth only $20k you have to report it as a $20k asset. The only value you can report is the value you can sell something for, otherwise, you are doing what Enron did.

But banks have special rules.
If they bought a bond for $100 they can keep claiming it is worth $100 because eventually one day they will get their $100. If it worth-less they have to talk about that fact (disclose it) but on their accounting statement they can still claim the bond is worth more than they could sell it for.

Thus Bank of America reports $222.6b in net assets even though if they sold those assets today they’d get $109b less than that. (Shhhh! Don’t tell anyone.)

Gaius · 2024-10-22T06:48:30.243Z

A hundred billion dollars here,
and a hundred billion dollars there,
and pretty soon it’s like the banks are losing real money.

History never repeats though, right?
It just kinda rhymes, right?

Impenitent · 2024-10-22T11:12:20.834Z

if the wrong person is elected, the ruble will take the place of the dollar in the world’s currency exchange