- more than zero, or
- less than zero?
How did it make that $168 million or whatever? Well, you know, it's a bank, it makes loans and stuff, so it gets paid some interest. Specifically it got paid $12.9 billion in interest last quarter. Also it charges fees for credit cards and mergers or whatever; those fees probably came to around $8.1 billion. And it made about $2.9 billion in various trading-related ways, selling bonds and stuff, and other miscellanea. So total revenue was about $23.8 billion. So Bank of America's earnings, under generally accepted accounting principles, were about 0.7 percent of its total revenue.
Or put another way: Earnings is the change in value of your assets, minus the change in your liabilities. Bank of America has about $2.1 trillion of assets. (You gotta keep the m's and b's and tr's straight here.) So that $168 million of income was 0.008 percent of assets.
How much precision do you think that $168 million number has? Like, if I made $168 million, I would know about it. Depositing $168 million in my bank account would be a dramatic change to my bank account. If you asked me how much money I had in my bank account, I would say "$168 million!" though there would probably be more exclamation points. I would be wrong -- I have some money in my bank account now, so adding $168 million would produce a number that is ever so slightly more than $168 million -- but I'd also be close enough for any reasonable purposes. The money I have in my account now would be a rounding error.
Bank of America's earnings are a rounding error. If Bank of America's measurement of its revenue was off by one percent, then that would more than wipe out (or double) its net income for the quarter. If Bank of America's measurement of its assets was off by one percent of one percent, then that would more than wipe out (or double) its net income for the quarter.
Is it conceivable that Bank of America's measurement of its assets could be wrong? Well, as of June 30, Bank of America had $27.7 billion of "assets and liabilities where values are based on valuation techniques that require inputs that are both unobservable and are significant to the overall fair value measurement," a technical term meaning that Bank of America takes its best guess about how much those assets are worth. Again: If that guess was off by one percent, that would more than wipe out (or double) Bank of America's net income for the quarter.
Or: Bank of America has $891.3 billion of loans on its balance sheet. Some of those loans will go bad. Bank of America currently expects that about 1.69 percent of them, or $15.1 billion worth, will go bad, so it reduces its assets for accounting purposes by $15.1 billion. If in fact Bank of America should have increased that number to 1.72 percent, that would wipe out its net income for the quarter.
I submit to you that there is no answer to the quiz. It is not possible for a human to know whether Bank of America made money or lost money last quarter.
None of this is meant to make fun of Bank of America, really. This is true of every bank, every quarter, to a greater or lesser degree, though usually their earnings are a bit more distinguishable from zero. A bank is a collection of reasonable guesses about valuation. It is a purely statistical process. There is no objective reality. At best, there is a probability distribution, a reason to reject the null hypothesis with some level of confidence. If a $100 billion bank announces $5 billion of earnings this quarter, there is a high (not 100 percent!) probability that it made more than zero dollars. If a $2.1 trillion bank announces $168 million of earnings, that probability is like 50.1 percent. Did Bank of America make money last quarter? Maybe! It's an ever-so-slightly biased coin flip.
by Matt Levine, Bloomberg | Read more:
Image: Andrew Harrer
