Bank of America Corp, the largest US bank by assets, said it wrongly classified as much as US$10.7 billion of short-term repurchase and lending transactions as sales from 2007 to last year to reduce its end-of-quarter assets.
Bank of America said the inaccuracies are not material and “don’t stem from any intentional misstatement of the Corporation’s financial statements and was not related to any fraud or deliberate error,” according to a May 13 letter released on Friday from the US Securities and Exchange Commission (SEC).
“A US$10.7 billion accounting error would be a material event for about 99.9 percent” of US banks, said Cornelius Hurley, director of the Morin Center for Banking and Financial Law at Boston University School of Law.
“It’s hard to see how the SEC can accept Bank of America’s rejoinder as being sufficient,” Hurley said.
SEC spokesman John Nester declined to comment.
The SEC sent letters to finance chiefs at about two dozen firms in March asking whether they employed accounting strategies like those at Lehman Brothers Holdings Inc.
The bankrupt securities firm was accused of using repurchase agreements called Repo 105s to move assets off its balance sheet to hide leverage, thereby improving its capital ratios.
Bank of America had disclosed in a March 31 financial filing that “certain sales of agency mortgage-backed securities should have been recorded as secured borrowings rather than sales,” bank spokesman Jerry Dubrowski said.
“The handful of transactions did not have a material impact on the company’s balance sheet or earnings,” Dubrowski said.
“They need to be viewed in the context of our US$2.3 trillion balance sheet,” he said.
In April, the SEC asked Bank of America to disclose whether its transactions were intentionally mislabeled, and to prove that the trades were immaterial.
The Charlotte, North Carolina-based bank said in an April 13 letter that it stopped the transactions after the first quarter of last year, the SEC said.
The Bank of America transactions involved six so-called dollar-roll trades completed during 2007, 2008 and last year.
The amount of the trades represented 0.1 percent of total assets in the December 2008 quarter and improved the company’s Tier 1 capital leverage ratio by one basis point, or one-hundredth of a percentage point, during the September 2008 quarter, the bank said.
The bank said in its May 13 letter it did an “extensive review” of repurchase agreements and similar transactions and didn’t find more errors.
The mistakes didn’t affect credit ratings or management compensation, hide any failure to meet analysts’ consensus estimates, “mask” other trends or put the bank out of compliance with loan and capital requirements, the bank said.
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