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.

CHANGING PLANS

This is going to be quite short. I was going to continue our discussion on the re-regulation of the financial system but today's events intervened. Rep. Darrell Issa, Rep. of Ca issued a statement today to the effect that the Fed and its Chairman, Mr. Bernanke used undue pressure against our buddy Ken to force him to complete the acquisition of Merrill Lynch and then covered up their actions as well as the information concerning the true state of affairs at Merrill for a number of weeks. On the face of it, this is a serious charge and one which certainly got a good deal of press for Rep. Issa.

Speculation was immediate as to what motivated Rep. Issa to come out so publicly at this time just before the on-going hearings of the committee on which he sits is scheduled to continue tomorrow. The speculation has taken two directions: one is that it is the opening salvo in an attempt to unseat Mr. Bernanke which, to me at least, seems a bit foolish coming from a Republican as the next logical choice would be Larry Summers who one would think would be anathema to the GOP. The other, in which I put more credence, is that it is an opening salvo against the Fed who, at this stage at least has emerged as the clear winner in the great regulatory raffle. By denigrating the role of the Fed during the crisis, this would appear to reopen the discussion of who does what to whom going forward. Of course it also puts a serious hurt on Brother Ben to the point that if he is to be replaced the independence of the institution is brought into even greater question. And that, I promise, will be the subject of tomorrow's discussion. As for my opinion on the entire mess, I think they scared the livin' hell out of our buddy Ken. Given what they believed to be the severity of the situation I probably wodda done the same. Don't make me a bad person either. We'll be watchin' things for ya.

HERE COME THE JUDGE

Wooo-ee! Billy-Bob here! Did you our good ol' boy Ken up thar on the Hill again today talkin' about what happened when he went out and bought Merrill Lynch? Damn iffin are neighbor didn't look like a Coon up a tree with a bunch ah hound dawgs a yappin' and ascratchin down below. Cept wasn't no dawg there but this little piss-ant fella from O hi o Nama Kuncinich wit a whole bunch ah question written by some damn lawyer designed to do nuttin but get good ol' Ken on the record so that they can come after him later fo' lying to Congress bout who the hell knows what and who the hell cares. I think this Kuncinich boy--or whatever his name be--lives in Cleveland, which shows you how smart he is; All kinds of people be FROM Cleveland but hell, I don't know nobody who still LIVES there!

Anyway it seems that when our Ken be going after Merrill, the damn situation there and everywhere was goin' down faster than a man comin' out of a bedroom winda when the husband come home early. Now ever-damn-body in the world it seems wants to know what Ken knew and when did he know it. And if he knowed Merrill was riper than a two day cow paddy in August, why the hell didn't he back out? Seems that this deal had what these boys was callin' a MAC attached to it. Now I'm askin' my self what in hell does a hamburger got to do with buyin' a bank but it turns out it aint that kind of MAC. No siree, this here MAC is a Material Adverse Change Clause which I guess lets you walk away if stuff happens. So the question was why didn't you walk away Ken, but it turns out that the #1 revenuer--some boy by the name of Paulson and this here Bernanke guy plus the guy who's the head revenuer now, that be Geithner, said un uh. Seems like they said to our boy Ken: "Ken, now you listen up, you hear? It may be material and it may be adverse, but IT AIN'T MATERIALLY ADVERSE! Well, I'll tell you whats the truth; you in this business and those sorts start tellin' you to jump, I figger the onliest thing you better be thinkin' 'bout is where the hell you gonna land when you come down...IF you come down. So poor ol' Ken and his boys figgure these guys got us by the shorts so we better do what they want and they go ahead and buy the damn thing. 'Corse in a month or two they gotta write down some hellacious amount of money so they wind up with the whole world and then some pissed off to all get-out.

Well, that would be bad enough but it seems that the piss-ant and all of his buddies not only want a piece of Ken but they wants a piece of everybody else too! All of a sudden they realize that they don't know who to get 'cause the politics are a little mixed up here. Other thing be if they get this Bernanke guy they might wind up with some fella named Summers who 'parentky pisses off HALF the world jest by wakin' up in the morning. But they stay at it and ask Ken if he felt at all in-tim-a-dated by the revenuers. I'll be damned if Ken don't take a bullet right then and there!!! Didn't say he wasn't but didn't say was neither. Now I got me this Eye-talian friend who would call Ken a stand-up guy. Meebe he's right but could be that he ain't too bright either. It didn't go well fo' Ken but what saved him was that most of those boys along for the ride with the piss-ant were as thick as two fence posts and where I comes from, THAT'S THICK. Anyway I got this here friend of mine who be livin' in the mid-west somewhere and knows something 'bout this. I'm gonna give him a call and find out what he thinks happened. Damned if I can figger it out.