Another day, another glowing financial headline. Here is the ridiculous headline of the day: Bank of America posts first-quarter profit, surpasses view.

Bank of America Corp. posted strong first quarter results today, as higher revenue from the purchase of Merrill Lynch & Co. help offset a surge in credit costs.

The results surpassed analysts’ expectations, and provide further evidence the banking sector might be improving.

But the bank also took a hefty $13.4 billion provision for credit losses and its shares fell 80 cents, or 7.5 percent, to $9.80 in premarket trading.

The Charlotte, N.C.-based company earned $2.81 billion after paying preferred dividends, or 44 cents per share, compared with a profit of $1.02 billion, 23 cents per share, in the year ago period. Analysts surveyed by Thomson Reuters expected profit of 4 cents per share.

The higher-than-expected earnings could take some heat off Chief Executive Ken Lewis who has faced calls from shareholders to either give up his job as chairman or be ousted.

The first quarter results include revenue from the company’s acquisitions of Merrill and Countrywide Financial Corp., which Bank of America did not own last year.

During the quarter, revenue more than doubled to $35.76 billion, mainly from the addition of Merrill. Analysts expected revenue of $27.13 billion.

However, Bank of America recorded a $13.4 billion provision for credit losses in the first quarter, showing that it is not immune from deteriorating credit quality and growing unemployment. The bank set aside $6.4 billion as additional reserves to cover future losses.

One Time Gains

Accounting gains shenanigans magically turned another Citigroup loss into a $1.6 billion gain and Wells Fargo’s earnings report was so full of holes the CEO ought to be under investigation for signing it. Please see Stress Over Stress Test for details.

And the real news from Bank of America is not the miraculous beat the street headline but the $13.4 billion provision for credit losses and deteriorating credit quality. Growing unemployment is going to add to those woes more than has been factored in.

$400 Billion More in Losses Coming Right Up

JPMorgan says: Banks Face $400 Billion More in Losses.

Banks are likely to realize about $400 billion more in losses on soured assets, requiring further injections of government capital, JPMorgan Chase & Co. said.

Banks will need to set aside about $215 billion more in reserves against their holdings of $2.1 trillion of U.S. home loans that haven’t been packaged into securities, mortgage-bond analysts led by Matthew Jozoff in New York wrote in a report dated April 17.

As of the fourth quarter, banks had set aside $85 billion in reserves for residential loans on their books under accounting rules that require allowances only for losses expected to be “realized in the next year or so,” according to the report. Losses from securities portfolios will slow because “they have already gone through large writedowns,” the analysts wrote.

Losses worldwide at banks and others from toxic U.S. assets may reach $2.2 trillion, the International Monetary Fund said in a report Jan. 28, more than the $1.4 trillion it predicted in October. World growth will be 0.5 percent this year, the weakest postwar pace, the IMF said in a separate report that day.

White House chief of staff Rahm Emanuel said in an interview on ABC’s “This Week” program that while he hadn’t seen results of so-called stress tests on the 19 biggest banks, he believed “we won’t” have to get more money.

Lawrence Summers, the National Economic Council director, said on NBC’S “Meet the Press” that “the first resort for more capital is going to the private markets,” by issuing new equity or swapping some liabilities into stock that dilutes other stakeholders.

Shareholder Dilution Coming Up?

If JPMorgan is correct, banks need $215 billion more in reserves. Where is that money going to come from?

Rahm Emanuel and Lawrence Summers say banks will raise that capital privately instead of at taxpayer expense.

However, it is debatable if we can believe either Emanuel or Summers because of the fraudulent Public Private Investment Plan (PPIP) of Treasury Secretary Geithner. Please see Geithner’s Plan Can Succeed as well as More Ugly Details Emerge On “Geithner’s Heist America Plan” for details.

However, if banks are going to raise that capital privately, there is no better time than now given the massive runup in bank shares since early March.

Mike “Mish” Shedlock
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