This Is Why The $1.6 Billion MBIA Settlement Will Have Zero Impact On Bank Of America's Q2 Earnings

Tyler Durden's picture

Moments ago, Bank of America and MBIA both formally announced the earlier leaked settlement that sees the bank pay the monoline a long-overdue $1.6 billion in cash plus the issuance of MBIA warrants to buy 9.94 million shares, or 4.9%, of MBI stock at an exercise prices of $9.59/share, which may be exercised at any time prior to May 2018. It is perhaps worth point out that the settlement took place with nearly half of the second quarter already in the books. In addition, BAC will also provide a $500MM credit facility to MBIA. End result: a $1.6 billion pretax charge for Bank of America. And yet, none of this settlement will impact any Bank of America Q2 numbers. Why? The press release explains.

Bank of America will record $1.6 billion in additional pretax charges in the first quarter of 2013, of which $1.3 billion is related to the settlement and the remainder is related to other monolines. The after-tax effect of the additional charges will reduce the company's first-quarter 2013 net income to $1.5 billion, or $0.10 per diluted common share, from the $2.6 billion, or $0.20 per diluted common share reported on April 17, 2013

And the punchline:

As the settlement occurred prior to filing the company's Quarterly Report on Form 10-Q for the period ended March 31, 2013, generally accepted accounting principles require Bank of America to apply the additional charges to the financial results for the quarter ended March 31, 2013.

In other words, had the settlement come a week from today, when BAC's 10-Q would have been filed, the impact would have driven the firm's Q2 earnings lower by about 50%, or have had a $1.1 billion net income impact to the second quarter.

Instead, what just happened, is that the firm will cram the retroactive adverse impact from the settlement into a quarter in which none of what just transpired had even been contemplated. But because the algos will not care one bit about Q1 earnings when Q2 results are announced some time in July, and in fact BAC will be able to show an even higher jump (!) to whatever meaningless number it reports, it will be ordinary course of business for the bank as if today's had never happened.

In accordance with GAAP of course.

Naturally, in a country in which "promises" are now part of GDP, this kind of "Delorian at 88 MPH" back to the future-type of adjustment to financial statements is not only allowed but perfectly expected.