New @Forbes: Bank of America Buys Time With Buffett Effect

By Francine • Aug 26th, 2011 • Category: You Can Quote Me On That

Forget the “Buffett effect.” I am now enjoying the “front page of Forbes.com” effect. Within an hour of posting this story on Forbes.com yesterday it had over 3,000 page views.  It is now my number one highest traffic post for my column, “Accounting Watchdog”.

True, it was a hot story yesterday. Anything with Buffett is an automatic traffic attractor, since people will read it whether it’s “for him” or “against him”. It was a no-brainer to write yesterday about the news of his investment in Bank of America.  I saw the Google Alert from the Wall Street Journal when I woke up, knew it was “the” news after the Steve Jobs resignation news of the night before, and emailed my editor at Forbes that I would put my two cents in.  That was 8:30 am Chicago time.

I thought I’d finish it sooner.  It’s always good to get my posts up for Forbes before 11 am CST or else they wallow in the east coast afternoon oblivion. But I wanted to get in something about John Hempton’s post.  Since we have now spoken on the phone, shared a radio program, and shared thoughts about Chinese reverse mergers and the auditors, I saw his thoughts as a good counterpoint to what I wanted to write.  His sin was to be on Australia time, so far ahead of the crowd he wrote about Bank of America’s stock slide from earlier in the week  - and the bloggers who are blamed for precipitating it – before the news of Buffett’s investment.

I published the post slightly after 2:oopm Chicago time, which is really late for the East Coast.  And they are totally preoccupied with Hurricane Irene. But within a minute it was on the front page.

No worries.  My points on what Hempton said were still valid and he had added an update later which, by then, was very late in the day for him. Or maybe it was already Wednesday there?  I get confused with the international date line…

The story of Bank of America is now one that I have a whole series of posts about – another Kindle e-book, maybe – all the way back to their purchase of Countrywide and their initial pain in realizing that mistake.  It’s obviously still haunting them.

Here’s a small look at “Bank of America Buys Time Via Buffett Effect.”

What Hempton ignores is the accounting. There are rules about when banks are supposed to be taking losses – they are not as flexible as some would have you believe – and how much they should reserve for those losses, whether due to bad loans, wrong trades,litigation contingencies, or falling asset valuations.

To suggest otherwise is to suggest banks are fraught with earnings manipulation.

Hempton, and others like him, bet on two things when continuing to place their confidence, and their money, in the big banks:

1. That the U.S. government will never let a big bank fail.

2. That the U.S. government and the banks’ regulators and auditors will be lenient in enforcing accounting standards that force earlier and more honest recognition of the true status of the banks’ balance sheets.

There is a way to measure working capital and regulatory capital. The banks do it every day and report it to regulators. As we have seen, this daily measurement is both possible and taken seriously. The decisions regarding Lehman, Merrill Lynch, and the other banks were taken over that fateful weekend in September of 2008 because some of them reported less than a few days of capital available to meet obligations. They know what they have to pay out each day and they know, and should know, how much capital they have of various types available to meet those obligations.

It’s a moving target but you still have to hit it at least once a day…

Please go read the rest at Forbes.com.  Leave a nice comment. If I do really well, maybe they will ask me to write someday for the magazine.  ;)

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