Bank of America's $4 billion mistake is neither complicated nor trivial

Bank of America’s $4 billion mistake:  The error is not trivial compared to BAC’s $145.2 billion in regulatory capital or $11.8 billion increase yoy.  Accounting rules cause banks to mark to market assets and liabilities.  So when a liability falls in value, the bank books a gain, but when they rise, it books a loss.  These gains and losses, if unrealized, can only be applied to earnings but not to regulatory capital. An unrealized gain was properly applied to earnings but improperly also applied to capital.

Bank of America paid PWC $94 million to do last year’s auditing.  BAC’s board’s audit committee is chaired by Sharon Allen, former chairman of DeLoitte.  The risk committee is headed by Frank Bramble, former vice chairman of MBNA, and includes former Fed governor Susan Bies, and Clayton Rose, a Harvard Business School professor.

My wife teaches algebra to 14-year-olds.  She says they often make mistakes like this.