Silicon Valley Bank Was the Warm-Up, Bank of America Might Be the Main Event

March 10th, 2023 will mark two years since Silicon Valley Bank became a cautionary tale for anyone who thought bond losses were a "just a paper problem." If you don’t know by now… they’re not. Rising interest rates back in 2021 lit the $212 billion bank’s balance sheet on fire. The Biden administration swooped in to save the day, but not before every other bank CEO started applying for new jobs on Indeed. Fast forward to today, and the banking sector may be facing a deja vu moment… this time, with Bank of America in the crosshairs.

Bank of America’s unrealized bond losses have ballooned to $111 billion, according to recent estimates. To put that into perspective, JPMorgan Chase, the poster child for playing it safe, is sitting on just $20 billion in similar losses. That means Bank of America’s bond problem is more than five times larger. (JPMorgan’s Jamie Dimon must be smirking like he just shorted meme stocks in 2021.)

So who (or what) is the primary culprit? You guessed it… Rising interest rates. The yield on the 10-year Treasury note jumped by 0.75% in Q4 2023, ending the year at 4.57%, while mortgage security yields surged as well. Since bond prices move inversely to yields, the value of Bank of America’s $568 billion "held-to-maturity" portfolio has plummeted. Sure, these losses don’t count toward reported capital thanks to accounting rules, but economically, they’re as real as your rent check… you’ll have to pay.

Bank of America’s bond portfolio reads like a time capsule from the early pandemic… heavily loaded with securities purchased when rates were at historic lows. The average yield on these bonds? Just 2%. Compare that to today’s yields, ranging from 4.5% to 6%, and it’s easy to see why this portfolio is a profit sinkhole. On the other hand, JPMorgan took a more cautious approach, with Dimon famously pumping the brakes on bond purchases in 2020, citing poor risk/reward. Fast forward to today, and JPMorgan’s $20 billion in losses is the financial equivalent of comparing a pothole to the Grand Canyon.

Bank of America’s leadership insists they’re gradually letting these bonds mature. But here’s the catch: only 6-7% of the portfolio rolls off annually. At this rate, it could take until 2040 for the bank to fully dig itself out. (By then, we might be buying houses on Mars.) This glacial pace isn’t sitting well with investors, who are understandably questioning the strategy. Bank of America isn’t the only one in hot water. Industrywide, unrealized bond losses could surpass $500 billion, up from $364 billion in Q3 2023. While Bank of America’s stock has climbed 37% in the past year, it still lags behind JPMorgan’s 42% gain. And over the past three years, the difference is even more obvious: Bank of America’s annualized return is a barely positive 0.6%, compared to JPMorgan’s 16.5%.

As the two-year anniversary of Silicon Valley Bank’s collapse comes up, it’s clear we’re in a financial Groundhog Day. Back then, rising rates exposed vulnerabilities in bond-heavy portfolios. Today, the story’s the same… just with bigger numbers and even more dramatic headlines. Bank of America’s losses are so colossal they’re practically begging for their own Netflix documentary.

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