THE BURNED OVER DISTRICT

Bank of America was going to increase its piddly little dividend to make shareholders happy and do a share buyback to enrich its officers because its financial information was so good. Then, out of the blue, all this was suspended...because the bank couldn't do its accounting correctly.

Bank of America had planned to buy back $4 billion in stock and raise its quarterly dividend to 5 cents a share from 1 cent. It said it would resubmit a capital action plan but warned that it would most likely be less than the one it was just required to suspend, suggesting that investors could expect a smaller dividend increase or stock repurchase plan.

The news represents a blow for Bank of America, which had passed the stress test easily and was given authorization to increase its dividend for the first time since the financial crisis.

Particularly concerning for regulators and shareholders, the bank had been making the accounting error for more than four years, potentially inflating its true level of capital during that period. The mistake was unearthed during a routine accounting review in recent days. Internal Bank of America staff members discovered the error, not outside auditors, according to a person briefed on the situation.

The accounting mistake is also not small. Most recently, it caused Bank of America to inflate a crucial measure of capital by $4 billion. The bank’s earnings release for the first quarter said it had $134 billion of common equity Tier 1 capital, a closely monitored measurement of capital. After discovering the error, that number fell to $130 billion.

Banks with adequate capital are usually more likely to withstand losses and turbulence in the markets. Since the financial crisis of 2008, regulators have required banks to hold more capital.

The mistake took place within an arcane area of bank accounting that deals with a type of debt that banks issued, called structured notes. When Bank of America bought Merrill Lynch in 2009, it assumed a $60 billion portfolio of these notes. When Bank of America put the notes on its own balance sheet, it did so at a discount to the notes’ original value. Bank of America has since paid off many of the notes or bought them back from investors. When these payouts were higher than the value at which Bank of America assumed the notes, the bank booked a so-called realized loss. It did that because it was paying out more money than its balance sheet said the bank owed on the notes.

Bank of America’s capital should have been reduced by these realized losses. But instead, and in error, the bank did not do that, artificially lifting its capital over several years. In the corrected numbers released on Monday, the bank’s capital is now lower because it includes the realized losses. Bank of America had about $30 billion of the structured notes on its balance sheet at the end of 2013.

Heh! One of the country's biggest banks, crawling with accountants, under the watchful eyes of many more and nobody saw this for 4 years. And they want you to trust them to handle your finances. Seen any flying pigs lately?