If you read one thing about Bank of America today, I hope it will be Francine McKenna's fine column in Forbes.
She notes that the Bank of America bulls, including the estimable John Hempton of Australia's Bronte Capital, seem to be counting on is: 1) that the government will backstop any bank as big as Bank of America and 2) that accountants will never make Bank of America deliver seriously bad news about the value of its assets or the likely costs of its legal liabilities.
What Hempton and others may be able to count on, however, is the continued cooperation of bank auditors — in Bank of America’s case PricewaterhouseCoopers — in perpetuating the myth that the bank’s assets are worth more than they are and their liabilities are less than we suspect. For PricewaterhouseCoopers to do otherwise would be to cause the opposite of the “Buffett effect.” Issuing a going-concern warning — saying that the bank may not make it through the next year — is unthinkable. Are the auditors having conversations with the government, too, to make sure the bank will be backstopped if all else fails?
If PricewaterhouseCoopers were to force Bank of America to tell the truth, and possibly fail, the audit firm would probably lose $124 million annually in fees. They’d also be the bad guys blamed for whatever happens to the rest of the system as a result.
Now before anyone jumps on McKenna for bashing Bank of America, you should keep in mind that this analysis should be very, very bullish for the bank. If she is right, Bank of America can extend and pretend forever. That's a very comforting thought if you are a shareholder in the bank.
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