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Reading this story/opinion artical in HP this morning really made me mad as it is a typical misapplication of how Goodwill is valued in any company and I am sure it will be picked up by the usual suspects as evidence that the end is near for certain TBTF banks...

http://www.bloomberg.com/...

So in typical fashion the opinion makes this statement...

Here’s how Bank of America allocated the purchase price for that deal. First, it determined that the fair value of the liabilities at Countrywide exceeded the mortgage lender’s assets by $200 million. Then it recorded $4.4 billion of goodwill, a ledger entry representing the difference between Countrywide’s net asset value and the purchase price.

So do you want to know how valuation of goodwill works in the real accounting...if so then keep reading...if you want to keep on believing the negative hype...then stop reading...

So goodwill by definition is the difference between the purchase price and the fair value of the total net assets of the company being purchased.

Then goodwill must be re-valued and determinations must be made for impairment whenever situations change that would make that premium worth less...

So the opinion author then states this false fact...

Since completing that acquisition, Bank of America has dropped the Countrywide brand. The company’s home-loan division has reported $13.5 billion of pretax losses. Yet Bank of America still hasn’t written off any of its Countrywide goodwill.

The value of goodwill is not related to a brand, it is related to cash-flow and/or profits from the group of assets acquired.  Indeed if any amount of the purchase price had been allocated to the trademarked/copywrighted name "Countrywide" then that amount would need to be written off immediately upon the decision to retire use of that name.

So the question becomes not how are the assets performing but how are they performing compared to when the assets were purchased and the goodwill was established?  So if the current income/loss is in line with the original projections then the goodwill is not impaired.

Finally, during the quarters, there is a less rigorous test for goodwill impairment than at year end which requires outside valuations.  So the details of the goodwill on the books for BOA will be evaluated at year end and any impairment will be booked...

Finally it is important to note (and to his credit the opinion author makes this point) that goodwill has no bearing on the strength of the bank from a solvency POV and is not counted towards capital requirements.  Similarly when goodwill is impaired it is a non-cash charge that while it affects earnings it does not change their liquidity cash position.  Frankly it is irrelevant to the bank's solvency and is only relevant to investors...

The final point is that BOA's working capital and bank rating are solid by independent agency ratings...

http://www.bankrate.com/...

http://www.bankrate.com/...

And the opinion artical that BOA is basically about to fail is hyperbole at its worse...

Originally posted to dvogel001 on Sat Nov 06, 2010 at 08:32 PM PDT.

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Comment Preferences

  •  Tip Jar (8+ / 0-)

    Obama - Change I still believe in

    by dvogel001 on Sat Nov 06, 2010 at 08:32:18 PM PDT

    •  Solid, informative Diary (3+ / 0-)
      Recommended by:
      burrow owl, dvogel001, Rich in PA

      I've read the GW term for years and always misunderstood it's meaning until now. This is in the spirit of that guy Bonddad that nobody remembers here at Dkos. He gave me the first heads-up about the Housing Bubble back in 2004.

      One night in Bangkok makes a hard man humble ... Murray Head

      by virginislandsguy on Sun Nov 07, 2010 at 01:36:52 AM PST

      [ Parent ]

      •  Yes, I thought it was way worse than it is (1+ / 0-)
        Recommended by:
        burrow owl

        I thought it literally meant a wholly subjective attempt to put a dollar value on society's good feelings toward the company!

        The most impressive thing about man [...] is the fact that he has invented the concept of that which does not exist--Glenn Gould

        by Rich in PA on Sun Nov 07, 2010 at 03:39:31 AM PST

        [ Parent ]

  •  Huffpo is like a famous bs (bs) diarist here (2+ / 0-)
    Recommended by:
    burrow owl, dvogel001

    with a never-ending vendetta against private banking.

    Just move your fucking money if you hate the mega-banks and get the fuck over it.

    "The way to see by faith is to shut the eye of reason." - Thomas Paine

    by shrike on Sat Nov 06, 2010 at 08:46:32 PM PDT

  •  btw - what triggers good will impairment? (1+ / 0-)
    Recommended by:
    burrow owl

    Tyco was a famous roll-up company with lots of b/s goodwill due to many acquisitions.

    Then they were forced to write it down.

    Why?

    Can a company grow into its goodwill?

    "The way to see by faith is to shut the eye of reason." - Thomas Paine

    by shrike on Sat Nov 06, 2010 at 08:51:35 PM PDT

    •  It's an Accounting Concept (0+ / 0-)

      The auditors help decide whether goodwill has been permanently impaired.

      Learn about Centrist Economics, learn about Robert Rubin's Hamilton Project. http://www1.hamiltonproject.org/es/hamilton/hamilton_hp.htm

      by PatriciaVa on Sat Nov 06, 2010 at 08:54:30 PM PDT

      [ Parent ]

      •  That I know - but when? (0+ / 0-)

        I see goodwill sit for years.

        "The way to see by faith is to shut the eye of reason." - Thomas Paine

        by shrike on Sat Nov 06, 2010 at 08:59:10 PM PDT

        [ Parent ]

        •  Indeed when goodwill is on the books for years... (1+ / 0-)
          Recommended by:
          shrike

          it means the value of the initial purchased asset is over its initial book value...so the reason why you see it for years and decades is that when an acquisition is successful, the value is actually greater than the original goodwill...but GAAP forbids writing up the value...only writing it down (impairing)

          Obama - Change I still believe in

          by dvogel001 on Sat Nov 06, 2010 at 09:03:37 PM PDT

          [ Parent ]

    •  There are lots of factors... (2+ / 0-)
      Recommended by:
      burrow owl, shrike

      that could lead to an impairment of goodwill:

      • a.  Whether the assumption is consistent with those that marketplace participants would incorporate into their estimates of fair value
      • b.  The feasibility of the assumed structure
      • c.  Whether the assumed structure results in the highest economic value to the seller for the reporting unit, including consideration of related tax implications.
      • a.  Whether the reporting unit could be sold in a nontaxable transaction
      • b.  Whether there are any income tax laws and regulations or other corporate governance requirements that could limit an entity's ability to treat a sale of the unit as a nontaxable transaction.
      • a.  The assets and liabilities that make up the reporting unit have not changed significantly since the most recent fair value determination. (A recent significant acquisition or a reorganization of an entity’s segment reporting structure is an example of an event that might significantly change the composition of a reporting unit.)
      • b.  The most recent fair value determination resulted in an amount that exceeded the carrying amount of the reporting unit by a substantial margin.
      • c.  Based on an analysis of events that have occurred and circumstances that have changed since the most recent fair value determination, the likelihood that a current fair value determination would be less than the current carrying amount of the reporting unit is remote.
      • a.  A significant adverse change in legal factors or in the business climate
      • b.  An adverse action or assessment by a regulator
      • c.  Unanticipated competition
      • d.  A loss of key personnel
      • e.  A more-likely-than-not expectation that a reporting unit or a significant portion of a reporting unit will be sold or otherwise disposed of
      • f.  The testing for recoverability under the Impairment or Disposal of Long-Lived Assets Subsections of Subtopic 360-10 of a significant asset group within a reporting unit
      • g.  Recognition of a goodwill impairment loss in the financial statements of a subsidiary that is a component of a reporting unit.

      Essentially, impairment of goodwill is usually associated with a change in that asset group's ability to generate income and/or cash-flow.

      Obama - Change I still believe in

      by dvogel001 on Sat Nov 06, 2010 at 09:01:40 PM PDT

      [ Parent ]

  •  What's Ur take on Wilminton Trust? (1+ / 0-)
    Recommended by:
    phonegery

    Dvogel, good diary.

    In my opinion, BofA is not in any immediate danger.

    Still, the Q/Q writedown of assets at Wilmington give me pause regarding the asset quality at many banks...

    http://www.nytimes.com/...

    But the general impression was that while loan losses would hurt the bank for some time, Wilmington had taken its lumps at the end of the second quarter. No wonder, then, that its decision on Monday to sell to M&T for $351 million was shocking. The price, a 45 percent discount to Friday’s close, makes it one of the biggest so-called "take-unders" in recent Wall Street memory.

    In reality, the valuation is not that bad given the bank’s dismal third-quarter results. At around tangible book value, it is not that out of line with where healthier banks have been trading. But until the deal was announced, investors thought Wilmington’s tangible book was worth twice as much.

    What changed that was losses taken after the bank — under mounting pressure from regulators — reassessed its assumptions about its mortgage and construction loan book. Worryingly, these were mostly loans made in Wilmington’s own backyard, where M&T guesses it could lose another $1 billion.

    Learn about Centrist Economics, learn about Robert Rubin's Hamilton Project. http://www1.hamiltonproject.org/es/hamilton/hamilton_hp.htm

    by PatriciaVa on Sat Nov 06, 2010 at 08:53:03 PM PDT

  •  just to complete the late night nerd circle (4+ / 0-)

    BoA is selling at a discount of $100 billion to their book value.

    As I understand it this is because of their HELOC liabilities - not for putbacks on MBS.

    "The way to see by faith is to shut the eye of reason." - Thomas Paine

    by shrike on Sat Nov 06, 2010 at 08:56:18 PM PDT

  •  Your details are important, but the big picture (0+ / 0-)

    is that there are many, many billions of US$ of mortgages that are many billions of US$ underwater and are now, or will soon be, non-performing and/or foreclosed on. Every financial institution that has an appreciable percentage of their loans in mortgages is now, or will soon be, bankrupt by any reality-based accounting method. Add in the title problems and hopeless employment situation and this is a nightmare.

    I voted with my feet. Good Bye and Good Luck America!!

    by shann on Sat Nov 06, 2010 at 10:15:06 PM PDT

    •  The affects of these issues have already been (0+ / 0-)

      (reserved for/written off) billions of dollars of mortgages over the past 2 years by the banks before they have actually gone bad...so none of what you say about that will have a negative impact...

      As for the title problems that has been blown out of proportion too, yes there were some paperwork gaffes and they will be corrected and the titles will be squared and the transactions will be completed...

      That is what many people don't understand about GAAP accounting...these have already been reflected in the financials of the banks several quarters ago...

      Obama - Change I still believe in

      by dvogel001 on Sun Nov 07, 2010 at 12:16:06 AM PDT

      [ Parent ]

      •  GAAP assumes that there is a functioning market. (0+ / 0-)

        This is not the case. The banks are all zombies as they will never have their principal repaid. They owe more money to their creditors/depositors than the mortgage holders can/will pay plus what they can sell the repossessed houses and office buildings for. This is the definition of bankrupt. There is no reason for optimism here, the growing unemployment will only make matters worse and no one has any idea how bad the lawsuit settlements will be for the mortgage problems until the juries have awarded their many billions of US$ in damages to the the suing parties.

        I voted with my feet. Good Bye and Good Luck America!!

        by shann on Sun Nov 07, 2010 at 01:02:04 AM PST

        [ Parent ]

        •  Well don't let facts get in the way... (2+ / 0-)
          Recommended by:
          burrow owl, vcmvo2

          of your emotion...the facts are...

          1. These banks have reserves to cover their losses.  Many of those reserves were established to help them apply for maximum TARP funds.  In fact, there is evidence they overestimated their losses...
          1. We have a functioning market thanks to the great work by Secy Geithner and President Obama
          1. These banks have additional access to capital from the public markets that will keep them afloat for any possible issue short of another great depression which was averted thanks to the great work by Secy Geithner and President Obama
          1. Unemployment is getting better not worse and has been for the last 6 months.  In October we added over 150,000 jobs.
          1. The whole paperwork debacle has been way overblown.  With $50 million and some accountants and lawyers it will all be settled very soon and the transactions will go through.  Nobody will be awarded damages in the billions of dollars that will stand up on appeal...

          You and your Kossack doom and gloomers will have a lot of explaining to do in 12 months from now...but I suspect that you will just go onto social justice and forget your doom and gloom predictions...

          Obama - Change I still believe in

          by dvogel001 on Sun Nov 07, 2010 at 01:52:27 AM PST

          [ Parent ]

          •  Question about #5 - The whole paperwork debacle (0+ / 0-)

            I've read that there is either an IRS or contractual roadblock to removing non-conforming mortgages and substituting new ones into the MBS vehicles. If it's the IRS, I would expect a new law allowing it. Any info you have would be appreciated. There's way too much smoke being blown about this on NC, ZH, CR and even, gosh, Dkos.

            And regarding the D&Gers, some posters, ahem, will be reminding them of their past predictions.

            One night in Bangkok makes a hard man humble ... Murray Head

            by virginislandsguy on Sun Nov 07, 2010 at 02:24:40 AM PST

            [ Parent ]

            •  The IRS looks at substance over form, (2+ / 0-)
              Recommended by:
              dvogel001, vcmvo2

              while in real property law we look at form over substance.  So if there have been defects for real property law purposes, it doesn't mean that there's a problem w/ the REMIC for tax purposes.  The IRS won't look at whether i's have been dotted, they'll look at the underlying transaction: if money has been transferred as consideration and the sold mortgages listed on the sales contract, it's a sale.

              ie, there won't need to be a change to the law, and concerns over REMICs are overblown.

              •  Thanks for your reply (1+ / 0-)
                Recommended by:
                burrow owl

                The CT financial websites seem to think the paperwork debacle will be the silver bullet to kill all the "banksters". Glad we've got some cooler and better informed posters here. I think the Diarist estimate of $50 million is low, but we're still not talking financial meltdown money.

                One night in Bangkok makes a hard man humble ... Murray Head

                by virginislandsguy on Sun Nov 07, 2010 at 05:11:04 AM PST

                [ Parent ]

                •  NP. (1+ / 0-)
                  Recommended by:
                  dvogel001

                  FWIW, the above was my immediate reaction to the CT junk about how the paperwork issues will destroy the universe, and I subsequently read the same reaction in A Taxing Matter, a progressive tax blog.  The proprietress ended w/ a hint of caution - because it's a comparatively new issue, we can't really know 100% that the IRS will take the correct position that the REMICs aren't ruined by the formalities of real property devise - but had the same take on the difference in the meaning of "transfer" for tax and property purposes.

                  So while I am just an anonymous blowhard spouting on a blog (albeit a tax lawyer, although I don't know if that helps or hurts my blowhard-ness), it's been vouched elsewhere.

        •  No, FMV accounting assumes a functioning (1+ / 0-)
          Recommended by:
          dvogel001

          market.  If there's no functioning market, GAAP tells us there are other ways to value the assets. (cost, discounted cash flow, analogous assets, etc)

  •  Capitalism is funny! (1+ / 0-)
    Recommended by:
    burrow owl

    It's based on the nominally precise accounting of totally arbitrary things.  

    The most impressive thing about man [...] is the fact that he has invented the concept of that which does not exist--Glenn Gould

    by Rich in PA on Sun Nov 07, 2010 at 03:37:13 AM PST

  •  Thx for the diary, btw. (2+ / 0-)
    Recommended by:
    dvogel001, vcmvo2

    I've always been in non-prof accounting, where goodwill just doesn't come up much, so the primer was appreciated.  I also read that article when it was published and, while I noted that sentence re: goodwill (it's sorta the lynchpin of Bloomberg's argument that BOA is overvalued and/or engaging in accounting shenanigans), my skepticism flags didn't go up.  So thanks for the primer and the debunking.

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