HOW'S THAT AGAIN?

Finally, after a long wait filled with speculation, we all received the "explanation" of what happened over at B of A today in the Case of the Missing $4 Billion.  Try as I might, I can't understand a word of it.  The fact were reported to be that the issue involved special debt instruments that had been issued by Merrill Lynch and assumed by B Of A as part of the merger agreement.  They were booked on the balance sheet apparently at fair market value which to me is curious in the first place because as a liability the value should have been the face amount.  Question: who allowed this to happen?  Answer: that's a really good question.

Apparently, as things settled down the market value of these notes rose in price ans at some point, B of A undertook a buy-back campaign, retiring many of these instruments but a at price than that at which they had been valued at acquisition, in effect creating a loss.  Question:  In what manner were these instruments held?  As assumed liabilities they could not be in an investment account.  If held in some form of trading account they would undergo a daily mark to market but as liabilities the "value" is always par because they are YOUR liabilities now and that's what you owe upon maturity.

One day, the bank decides, for whatever reason, to redeem these notes and they engage in a buy-back program through open market operations (I assume) to accomplish the same.  However, the overall outlook having improved since their acquisition, the price at which the bonds were redeemed was higher than that at the time of acquisition indication that somewhere in this tangle, a loss of some kind had occurred.  Question: Was there really a loss?

It seems to me that the instruments being liabilities, should have been booked at par at the time of the original acquisition, meaning that the mistake to the balance sheet was to show fewer liabilities than was in fact the case and in restating the balance sheet to reflect the earlier error really would have meant that the capital ratios that had been reported throughout the years would themselves have to be restated.  But, Bank of America having survived throughout this trying period I ask myself who the hell would care and the answer I get back from self is, "no one."  In addition, on another one-time basis involving the repos of each individual note could, with the new retroactive revaluation, be booked as a reduction in liabilities at the difference of the then price from par and you would have basically a wash.  Instead, we get this quite unbelievable situation that in the end impacts on no one else than the shareholders.

Now, I may be dead wrong about all of this and if there is anyone out there who can set me straight, please do so.  But for the life of me I cannot understand how the regulators, who desperately wanted B Of A to save Merrill from collapse, could miss one of the most important pieces of accounting and valuation as is this.  But they did and so did everybody else.  I guess it's my suspicious nature, but I get the very distinct impression that there is a whole lot of ass-covering going on (read, Federal Reserve) and very little thinking that went before it.  I also think that B of A is being forced to take the fall for most of the oversight and shareholders be damned.  As I said, I may be dead wrong but if I am only partially correct it is a sad commentary on what we have become.