Bank of America Says $10.7 Billion of Trades Wrongly Classified

Bank of America Corp., the largest U.S. bank by assets, said it wrongly classified as much as $10.7 billion of short-term repurchase and lending transactions as sales from 2007 to 2009 to reduce its end-of-quarter assets.

Bank of America said the inaccuracies aren’t material and “don’t stem from any intentional misstatement of the Corporation’s financial statements and was not related to any fraud or deliberate error,” according to a May 13 letter released yesterday from the U.S. Securities and Exchange Commission.

“A $10.7 billion accounting error would be a material event for about 99.9 percent” of U.S. banks, said Cornelius Hurley, director of the Morin Center for Banking and Financial Law at Boston University School of Law. “It’s hard to see how the SEC can accept BofA’s rejoinder as being sufficient.”

SEC spokesman John Nester declined to comment.

The SEC sent letters to finance chiefs at about two dozen firms in March asking whether they employed accounting strategies like those at Lehman Brothers Holdings Inc. The bankrupt securities firm was accused of using repurchase agreements called Repo 105s to move assets off its balance sheet to hide leverage, thereby improving its capital ratios.

$2.3 Trillion

Bank of America had disclosed in a March 31 financial filing that “certain sales of agency mortgage-backed securities should have been recorded as secured borrowings rather than sales,” bank spokesman Jerry Dubrowski said. “The handful of transactions did not have a material impact on the company’s balance sheet or earnings. They need to be viewed in the context of our $2.3 trillion balance sheet.”

In April, the SEC asked Bank of America to disclose whether its transactions were intentionally mislabeled, and to prove that the trades were immaterial. The Charlotte, North Carolina- based bank said in an April 13 letter that it stopped the transactions after the first quarter of 2009, the SEC said.

The Bank of America transactions involved six so-called dollar-roll trades completed during 2007, 2008 and 2009. The amount of the trades represented 0.1 percent of total assets in the December 2008 quarter and improved the company’s Tier 1 capital leverage ratio by one basis point, or one-hundredth of a percentage point, during the September 2008 quarter, the bank said.

Bank Review

The bank said in its May 13 letter it did an “extensive review” of repurchase agreements and similar transactions and didn’t find more errors. The mistakes didn’t affect credit ratings or management compensation, hide any failure to meet analysts’ consensus estimates, “mask” other trends or put the bank out of compliance with loan and capital requirements, the bank said.

Bank of America was led by Chief Executive Officer Kenneth D. Lewis from 2001 through the end of 2009, when he retired and was succeeded by Brian Moynihan. In January, Moynihan moved Joe Price, the chief financial officer since January 2007, to run the company’s consumer banking unit. In May, the bank hired former Northrup Grumman Corp. executive Charles Noski as CFO.

The bank transferred mortgage-backed securities to a trading partner with the idea of receiving different securities later and classifying the deals as sales, the Wall Street Journal reported yesterday. The securities the bank received were similar to those it got rid of, meaning the transactions can’t be considered sales, the newspaper said.

To contact the reporters on this story: Dakin Campbell in San Francisco at dcampbell27@bloomberg.net David Mildenberg in Charlotte at dmildenberg@bloomberg.net

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