Earlier today, Bank of America surprised the market with its n-th consecutive profit beat in many quarters. Ironically that same profit, of $4,012 MM to be precise, should have been a loss of $221 MM.
Why wasn't it? Because in early 2009 Mark-To-Market died, [7]and when that happened a key component of bank balance sheet holdings - securities with exposure to interest rates - were "defined" as being Available For Sale as per FAS115, which in turn prevented any profits or losses from hitting the income statement even if they did impact retained equity via the AOCI line.
As we reported in late June [8], what happened in Q2 was an absolute devastation to bank balance sheets courtesy of the surge in interest rates, and the result would be a huge impact on bank AFS holdings, which as we said would soon exude major losses. Or rather "would exude losses" had Mark-To-Market still been around (and which at least initially was supposed to be offline until the recovery arrives, which begs the question: where is this recovery that so many have said already took place since MTM is nowhere to be found?). Instead we get Mark-To-Unicorn.
Page 5 of BAC's Financial Supplement [9]lays it out for all to see: the "Net change In available-for-sale debt and marketable equity securities" in Q2 was $4.233 billion. How does this compare to the firm's reported Net Income of $4 billion? It compares as follows:
[10]
Or, in other words, absent Mark-To-Unicorn, Bank of America's "Net Income" of $4 billion would have been a loss of $200 million.
Which, incidentally, is what BAC reveals is its Comprehensive Income at ($209)MM.
Of course, since every other firm is in the same boat of hiding epic losses the second the market stop acting according to every whim of the central planners, nobody cares and certainly nobody wants to bring attention to this little fact.
Finally this is how BAC's AFS line has changed over time.
[11]
Net result: since Q4 2011, BAC has effectively swept under the rug some $7.6 billion in cumulative losses, which are not losses only thanks to the death of MTM.
Accounting magic for everyone.