Bank of America's stress test may be more stressful than most
As the government begins to stress test banks to see what might happen if unemployment rises sharply and housing prices plummet, Bank of America (BAC) may have put itself in a tough position before the game starts.
According to Reuters, "Bank of America Corp is carrying loans on its balance sheet marked at more than $44 billion above their fair value, the company said in its annual report filed with U.S. regulators on Friday." BAC said it did this because it intends to hold these loans until maturity, but it is not clear that at maturity they will still be worth their face value.
If regulators are looking for real weaknesses at banks, one of the issues should be whether they are realistic about how they account for assets. If the economy collapses, the value of loans based on mortgages or home values could fall further than the already have.
BAC is not doing itself any favors with the government or shareholders by using liberal accounting practices.
Douglas A. McIntyre is an editor at 24/7 Wall St.