“New FDIC data shows Bank of America, $BAC, faces $100+ BILLION in bond market paper losses.
$BAC claims it’s not an issue as they don’t plan to sell.
Sound familiar? That’s because it is.
Both Silicon Valley Bank and First Republic collapsed for this reason.
Some background:
Bank of America is bearing the cost of decisions made three years ago.
They decided to pump the majority of $670 billion in pandemic-era deposit inflows into debt markets.
This was at a time when bonds traded at historically high prices and low yields.
As interest rate rise at their fastest pace in history, these bonds are facing $109 billion in paper losses.
Both Silicon Valley Bank and First Republic collapsed for the same reason.
When depositors wanted their money, they were forced to sell these bonds at a loss.
It’s also worth noting that unrealized bond market losses are an INDUSTRY-WIDE issue.
Total unrealized losses are at a record $620 billion at US banks.
This is well beyond the peak of ~$75 billion in 2008.”
Some background:
Bank of America is bearing the cost of decisions made three years ago.
They decided to pump the majority of $670 billion in pandemic-era deposit inflows into debt markets.
This was at a time when bonds traded at historically high prices and low yields.
2/12 pic.twitter.com/DqUs2XZl6F
— The Kobeissi Letter (@KobeissiLetter) July 2, 2023
It's also worth noting that unrealized bond market losses are an INDUSTRY-WIDE issue.
Total unrealized losses are at a record $620 billion at US banks.
This is well beyond the peak of ~$75 billion in 2008.
4/12 pic.twitter.com/hP8PMlrjiQ
— The Kobeissi Letter (@KobeissiLetter) July 2, 2023
An interesting comparison between Bank of America and JP Morgan stands out.
While BofA CEO Brian Moynihan was nonchalant about capital allocation, JP Morgan's CEO Jamie Dimon was not.
Dimon was very reluctant to move excess cash into low-yielding treasuries in 2020-2021.
6/12
— The Kobeissi Letter (@KobeissiLetter) July 2, 2023
Building on this, the ~$109B in losses don’t account for credit which the bank only made ~$931m of provisions in the last quarter.
This amounts to a total of ~$14B of Credit Loss Provisions for the quarter.
But here's where it gets interesting.
These provisions seem low.
8/12
— The Kobeissi Letter (@KobeissiLetter) July 2, 2023
Even if a borrower doesn’t meet the payments, $BAC considers a loan “performing” if they foresee modifying loan terms will enable the borrower to pay.
In other words, if they think the borrower will pay in the future based on terms up in the air, the loan is performing.
10/12 pic.twitter.com/FPVqIuWcPP
— The Kobeissi Letter (@KobeissiLetter) July 2, 2023
Only time will tell if industry-wide losses in bonds will come with more bank failures.
However, it's clear that the system is broken and something needs to change.
As rates rise, so do these paper losses.
Follow us @KobeissiLetter for more analysis as this develops.
12/12
— The Kobeissi Letter (@KobeissiLetter) July 2, 2023
Bank Of America: $109 Billion Of Paper Losses Spell Earnings Trouble
h/t RedditIsOwendByTheWS