Good morning Bank of America

(Fall, then…) rise and shine:

BofA’s stock was still down around 2 per cent at pixel time, following an 8 per cent decline on Monday. There’s a worrying relationship between its stock and credit at the moment, too. Its CDS reached 435 bps on Tuesday morning, surpassing the previous record set on March 31, 2009. (It had pared back a bit at pixel time.) Chart using Markit data and FT Alphaville’s GCSE Excel skills:

BofA’s price to book ratio was at 0.32 as of close Monday, which as Bespoke Investment explains, is its lowest level save for a three-month period from January to April 2009. Therefore if you believe the book value, the stock is cheap as chips.

The problem is that many people do not. Business Insider’s Henry Blodget wrote a short post on Tuesday morning summarising why the bank’s stock is tanking. He cites other bloggers, namely Zero Hedge and Yves Smith, so make of that what you will.

Short version:

Why is Bank of America’s stock tanking?

Because the market thinks Bank of America is worth much less than Bank of America’s management says it is.

Longer version:

Here are some of the things that the Bank of America observers think should or will be subtracted from the bank’s $222 billion of book value:

$15-$20 billion in Increased mortgage-litigation reserves. Zero Hedge thinks BOFA is understating the liability for mortgage litigation costs by this amount.

Some percentage of $80 billion of “second mortgages.” Yves Smith thinks these should probably be written down by 60%, or $48 billion. You can pick your own number.

Some percentage of $182 billion in commercial real estate loans. The “extend and pretend” game in commercial real-estate is even more pronounced than in residential real estate. So as Yves Smith observes, there’s almost no chance those loans are actually worth $182 billion.

A healthy percentage of $78 billion of “goodwill.” Bank of America built itself by acquisition. “Goodwill” is what’s left over when management overpays for something. As Yves Smith observes, Bank of America’s former CEO Ken Lewis loved overpaying for things. He overpaid for Countrywide, for example, which has since been written off to zero, and Merrill Lynch, which he could have had for free by waiting a couple more days.

Untold amounts of exposure to collapsing European banks and sovereign debt. Yves Smith says Bank of America says its sovereign exposure is $17 billion. Really? Has the firm not written any credit default swaps protecting customers in the event that European banks or countries go belly up? Might the firm have to post some cash “collateral” to satisfy these contracts? That’s what Lehman had to do, after all. And that’s what made Lehman go from “having plenty of capital” to being broke overnight.

The explanation game continues, then. We’ve been trying to get the Jefferies “note” that allegedly said BofA required a $40bn – $50bn capital raise but no joy yet — if we get something we’ll report back.

Meanwhile, BofA bulls are taking comfort in a Bernstein note released Tuesday, which purportedly says everything is okay with the bank’s balance sheet. Reading the note, it’s not quite that rosy. It does argue its stake in the China Construction Bank is neither here nor there for its capital ratios. But it’s also sceptical of the wider picture:

We don’t see a quick fix to the market’s lack of confidence in BAC’s capital ratios. As we wrote last week in our call entitled No Quick Fix for Confidence Conundrum; Reviewing Mortgage Putback Scenarios we don’t believe that BAC can put to rest concerns about its capital levels by announcing a share issuance. The market’s concerns stem from the inability of the company (or anyone at this point) to credibly ring-fence BofA’s mortgage putback exposure, and while we believe the balance sheet can digest significantly higher levels of putbacks than are currently forecasted, the market is not likely to rest assured about BofA’s capital ratio trajectory until the company can provide some visibility on the upper end of its potential liability, something that is likely to take several quarters to play out as legal settlements and court cases are gradually addressed.


Related link:
The Bank of America explanation game – FT Alphaville
Here’s Why Bank Of America’s Stock Is Collapsing Again – Business Insider

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