BofA Following Citigroup to $5 or Lower 34 comments
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Back in mid-September, when Bank of America (BAC) bought Merrill Lynch (MER) in a $50 billion all-stock transaction, we were told that we were on the verge of witnessing the creation of an institution unrivaled in its breadth of financial services and global reach. Today, without billions more in financial aid from the government, Bank of America is unable to complete the deal.
The Wall Street Journal reported yesterday that Bank of America was unprepared for Merrill’s larger-than-expected fourth-quarter losses. But how exactly did Wall Street’s elite financial advisors, law firms and accountants condone the terms of the share exchange in the first place? On what basis did the Federal Reserve and the Treasury approve the deal? Quite clearly, valuations of Merrill as a going concern failed to address inherent balance-sheet risks and, more disturbingly, it is apparent that nobody in authority has a handle over those risks even today.
Questions surrounding the integrity of Bank of America’s disclosure are now casting a dark shadow over the banking sector. Wall Street insiders are suggesting that the bank’s management was conducting informal talks with Treasury officials to substantially increase the size of the initial $25 billion bailout during the course of December. If the Merrill transaction was in doubt, or subject to more government funds, why did Bank of America make a formal completion announcement on the first day of the New Year?
In after-hours trading, Bank of America’s shares dropped to their lowest level since 1991. But there is much more downside left. What Bank of America’s management has obviously managed is the valuation of an investment banking, wealth management and international loan syndication franchise (Merrill Lynch) within the context of early-2008 data on the domestic and global economy. Contextualized in today’s environment, that valuation cannot withstand scrutiny; that is perhaps one reason why it has not reached the public domain. When the Merrill overvaluation is combined with Bank of America’s own loan-delinquency provision issues, it is not too difficult to make the case that the bank’s shares will follow the Citigroup (C) route, to $5 and below in the days ahead.
Short sellers may wonder if the train has left the station many weeks ago, that the time to short Bank of America was in early November ($24 per share). But trading positions must be predicated on the facts as they are available at a given point in time, not on wisdom in hindsight.
The banking sector can only be viewed from the prism of nationalization; a scenario in which no bank will fail, but few banks will be able to provide heavily diluted shareholders with reliable earnings growth in the foreseeable future. As business-model adjustments remain a work-in-progress, shares of Bank of America and Citigroup are destined to flounder in the low single digits well into 2010. Forthcoming financial results in the banking sector will certainly not capture the prospects of a deepening and extended recession, particularly when fair value measurements (SFAS 157) of Level 2 and Level 3 assets continue to be hopelessly out of tune with reality.
Noticeably, Bank of America’s additional bailout demands are coming at a time when the Congress is under pressure to release the second half of the $700 billion so-called Troubled Asset Relief Program, or TARP. Fed and FDIC officials, testifying before the House Financial Services Committee this week, relentlessly repeated Ben Bernanke’s theme: the money is urgently required to plug holes in the country’s financial system. That theme may or may not have any foundation in hard statistics. But, in the absence of a thorough, publicly-disclosed valuation umbrella, warnings pertaining to systemic risks lack any credibility whatsoever. Perhaps somebody responsible for disbursing taxpayer dollars should start by defining the concept of systemic risk before writing the next check!
Disclosure: Author holds a short position in BAC and is exiting Citigroup, looking to short again on rallies above $6.50.
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This article has 34 comments:
Anyway, on the serious note, all the banks trying to get or remain too big to fail at any cost to please the Fed and Treasury is a bit pathetic. Bernake and Paulson's careers will end short because they have 0% public trust and for good reason.
The banks that don't ask for Federal funds and don't kiss the Treasury and Fed's royal arse are the only bank gems. Please remember BoA asked for government funds before to stay out of bankruptcy and their CEO said they would never ask for government funds again. Gee, asking a company to keep a promise is like asking a compulsive liar not to say an untruth.
They don't even notice they are doing it.
like C before it, ken lewis salivated at the thought BAC could dominate the banking industry, minimizing the risks and maximizing perceived benefits. like sandy weil at C before him, the financial media hailed him as a visionary. merill lynch and countrywide were mortally wounded at the time ken lewis jumped in with both feet, with little due diligence, overpaying because he was afraid of someone beating him to the punch. it was one of the most ill timed and ill advised acquisition binges ever. now his once great bank is a basket case too.
imagine it. in december, before the close of the merrill lynch deal, ken lewis tells the treasury that they can't close it without government help. if he's a visionary i'm a prophet.
my comments are not johnny come lately. i made a similar post earlier this year when BAC stock was still worth more than a fast food lunch.
What will be the future of the US of A without the banking and finance sectors?
- - - Agriculture? = definitely not. Whatever agricultural technology America has, the developing coutries have already learned them all with cheap abundant labor to boot.
- - - Industrialization/Manu... = nope! America will have to either reduce minimum salary by 90% which nobody can possibly live with or slap 90% tariff on imported items coming from China. The glory days of American industrial might is already done for the USA and gone to the developing countries.
- - - Technology? = perhaps. But with the American baby boomers who used to be so excited with technology during the last few decades approaching old age, it is only natural that they will lose their interest in technology. Steven Jobs might just be the last of them and he is not going to last for long. The X-generation who suffered too much from parental divorces during their childhood would want no part of what their parents love to do which is tinkering with tech toys. The Y-generation which is going to be the future of America are much too green minded and are too pampered with promises of $150,000 annual salaries of banking and finance employees they decided to take take vocation and shuned engineering at all costs. Meanwhile, China and India made technology and engineering as the main course for the future of their hundreds of millions of young students.
- - - Alternative Energy? = perhaps. AE is not a proprietary technology the US posseses. China also has massive investments in AE since energy cost in that country is exorbitantly expensive as compared to the US with their meager income paying the same price for the same barrel of oil. They are much much more desperate to invent and produce viable alternative energy sources than the Americans. And with their hundreds of millions of new engineers, they are more likely to be able to develop AE much faster than the US. Sooner of later, the US will have to import AE technology from China rather than the other way around.
- - - Health Care? = Definitely. But it is more for the future rather than the present. American baby boomers are still in their 50's and 60's and are still healthy. 10, 20 and 30 years from now, health care will become the major source of internal income for the USA. And once the 2.8 billion young baby boomers of the BRIC which are now in their 20's, 30's and 40's approaches old age; then the US can start exporting more and more health care technology to those countries. But that will be at least 20 years from now.
- - - Military hardware and software? = definitely. The United States of America is the numero uno in military. Every developing country with diplomatic ties with the US will be buying more and more from the US for their defence needs. Flip side is that the US still spends more money into national defence than the whole world combined. Likewise, being the premier merchant of death is not really worth mentioning too often to the whole world at large. This is not something you can rally the whole population of the country towards more productivity and income generation in order to be able to meet the increasing demands of an aging population for more health care.
- - - Retail and consumer goods? = McDo, Coke, etc. Sure, they will dominate the whole world in retail in the foreseable future. But not enough. Retail is a dog eats dog industry. China is already starting to dominate global exports for consumer goods including foodstuffs.
USA is in a bind. It has been tinkering with new ways and means of how to generate more income from banking and finance for the last 2 decades while neglecting manufacturing and technology.
And the result? Record profits were achieved by the the banks and financial institutions from 2001 to 2006. The downside was that their newly invented MBSs and ABSs toxic bombs exploded right into their faces and damaging not only the US but the whole world at large.
All is not lost. Most experimentation don't result with eureka the first time.
There is alway a second time around.
Hope they do it right the next time otherwise the US will become an undeveloped or even a third world country within the next few decades.
On Jan 15 10:24 AM User 337875 wrote:
> Short sellers are great at disseminating prophecies of doom. Fortunately
> the writer disclosed his position - so you can take what he writes
> with a grain of salt. He's short; so if he can convince you that
> you should sell the stocks NOW NOW NOW then he makes more money.
The Great GSE Meltdown: Market Adding Fuel to Fire?
"This will totally impair the ability for Citigroup (C), Merrill Lynch (MER), and Lehman Brothers (LEH) to raise capital." These 3 companies were clearly insolvent 6 months ago IMO as a result of the gathering of the perfect financial storm which has cut off any possible escape route. The only drama playing out now is how long they can artfully hide their insolvency. Everyone is in over their heads and Bernanke and Paulson can do little more than put bandaids on to try to protect the interests of their constituents. (end of excerpt)
So here we are 6 months later and what happened? Rocket science? Nope just some common practical sense. And yes even after billions of rescue dollars those banks are STILL insolvent, the ones left anyway. One final clue that I have made before- What makes you think that a monetary system contrived nearly 100 years ago can just continue to work off into the unlimited future? The answer is that it CANNOT work indefinitely. Who will start thinking outside the box?
This is socio-economic analysis and errors seem to have come into your writing.
(A) Agriculture: Per-hectare yield in China and India and other East/South/West/South East Asian/African/South/Ce... American countries. These are the demographically increasing areas but their agricultural output is barely enough to meet internal demand.
(B) Manufacturing: Mechanical and electro-mechanical and automotive technologies as well as chemical industries have started big time in the above areas in the last 30-40 years but is there next-generation research in these areas in those countries? The answer is NO. USA still produces a lot of R&D in those areas and it is not easy to match the US output. So technologies have to come out of US and be exported to the above areas.
(C) High Technology: Steve Jobs is not the last of the baby-boomer tech heroes. Just look at Google and Facebook and the telecom startups in Silicon Valley.
(D) Energy Technology: This will come out sooner out of US R&D than China R&D.
(E) Healthcare: Automated and efficient healthcare is a possibility sooner in US than in other countries even with the higher costs.
(F) Military exports: Nothing need to be written here since DOD funds forever all new military technologies.
Which sector would you think will get more innovation inorder to support all of the above technologies? That would be financial sector aka financial engineering. Cannot live without it, can we?
If legal immigration continues into US the way it had, then US will lead in R&D, money making and technology exports.
The banking sector death will lead to an innovative revival. The banking official may be corrupt but the level of corruption does not match that of Asia or Africa or South America. It is far far lesser.
BK
On Jan 15 01:19 PM aarc wrote:
> Keep bashing the banks.
>
> What will be the future of the US of A without the banking and finance
> sectors?
>
> -
-
> - Agriculture? = definitely not. Whatever agricultural technology
America
> has, the developing coutries have already learned them all with
cheap
> abundant labor to boot.
>
> - - - Industrialization/Manu... =
nope!
> America will have to either reduce minimum salary by 90% which
nobody
> can possibly live with or slap 90% tariff on imported items
coming
> from China. The glory days of American industrial might is
already
> done for the USA and gone to the developing countries.
>
> -
-
> - Technology? = perhaps. But with the American baby boomers who used
to
> be so excited with technology during the last few decades
approaching
> old age, it is only natural that they will lose their
interest
> in technology. Steven Jobs might just be the last of them and
he
> is not going to last for long. The X-generation who suffered too
much
> from parental divorces during their childhood would want no part
of
> what their parents love to do which is tinkering with tech toys.
> The
Y-generation
> which is going to be the future of America are much too
green
> minded and are too pampered with promises of $150,000 annual
salaries
> of banking and finance employees they decided to take take
vocation
> and shuned engineering at all costs. Meanwhile, China and
India
> made technology and engineering as the main course for the future
of
> their hundreds of millions of young students.
>
> - - -
Alternative
> Energy? = perhaps. AE is not a proprietary technology the
US
> posseses. China also has massive investments in AE since energy cost
in
> that country is exorbitantly expensive as compared to the US with
their
> meager income paying the same price for the same barrel of oil.
They
> are much much more desperate to invent and produce viable
alternative
> energy sources than the Americans. And with their hundreds
of
> millions of new engineers, they are more likely to be able to
develop
> AE much faster than the US. Sooner of later, the US will have
to
> import AE technology from China rather than the other way around.
>
>
> -
-
> - Health Care? = Definitely. But it is more for the future rather
than
> the present. American baby boomers are still in their 50's and
60's
> and are still healthy. 10, 20 and 30 years from now, health care
will
> become the major source of internal income for the USA. And once
the
> 2.8 billion young baby boomers of the BRIC which are now in their
20's,
> 30's and 40's approaches old age; then the US can start exporting
more
> and more health care technology to those countries. But that will
be
> at least 20 years from now.
>
> - - - Military hardware and
software?
> = definitely. The United States of America is the numero uno
in
> military. Every developing country with diplomatic ties with the
> US
will
> be buying more and more from the US for their defence needs. Flip
side
> is that the US still spends more money into national defence than
the
> whole world combined. Likewise, being the premier merchant of death
is
> not really worth mentioning too often to the whole world at large.
This
> is not something you can rally the whole population of the country
towards
> more productivity and income generation in order to be able to
meet
> the increasing demands of an aging population for more health care.
>
>
> -
-
> - Retail and consumer goods? = McDo, Coke, etc. Sure, they will
dominate
> the whole world in retail in the foreseable future. But not
enough.
> Retail is a dog eats dog industry. China is already starting to
dominate
> global exports for consumer goods including foodstuffs.
>
> USA
is
> in a bind. It has been tinkering with new ways and means of how to
generate
> more income from banking and finance for the last 2 decades
while
> neglecting manufacturing and technology.
>
> And the result?
Record
> profits were achieved by the the banks and financial
institutions
> from 2001 to 2006. The downside was that their newly
invented
> MBSs and ABSs toxic bombs exploded right into their faces and
damaging
> not only the US but the whole world at large.
>
> All is not lost. Most experimentation don't result with eureka the
> first time.
>
> There is alway a second time around.
>
> Hope
they
> do it right the next time otherwise the US will become an
undeveloped
> or even a third world country within the next few decades.
My assessment in early 2007 was that BAC was disciplined and reasonably well managed. When they jumped on Countrywide as we were falling into a recession and financial crisis I think they made a grave error. From the moment it happened, it seemed like a huge risk and has gotten worse every month since.
I was surprised when they bought Merrill. In the back of my mind I had to question whether BAC was trying to become to big to fail. Buying CFC and MER seemed like a lot of risk and a lot to digest. On the other hand I thought perhaps the Fed wanted to reduce the number of bailouts.
Someday we will know what happened. Until then I think I will believe my original theory that buying CFC was like getting sucked down a mineshaft.
Someday banks can provide better transparency when they have less to hide.
What a pathetic bunch... Begging money from the American taxpayers.
Everyone is starting to catch on to the fact that the banking system is insolvent and has been for some time. Paulson and Bernanke's hope (bet) was that they could cover this over for a couple of bad quarters and that the typical hype from CNBC, CNN-Money, Bloomberg, etc would restore psudo-confidence and then they will have pulled off one of the greatest scams in modern history. It just didn't turn out that way... People are a lot smarter than Paulson and Bernanke took them for.
You should hear Bernanke now... He says that he expects things to start to turn around in the second half of this year, but if you listen to him on YouTube, etc, it almost sounds like a prayer.
I guess Bernanke could ask Congress for $350 billion every quarter to keep up the charade. When it comes to spending taxpayer money Pelosi, Frank and Dodd, no is not a word in their vocabulary.
On Jan 15 05:12 PM Mbuna wrote:
> Most people on Wall St. need their head examined, period. It is a
> fantasy life and most of the columnists here on Seeking make their
> living off of that fantasy. Reality is right in front of you and
> doesn't even take any research. Here is part of a comment I posted
> in July (yes you can look it up to verify) 2008 to-
> The Great GSE Meltdown: Market Adding Fuel to Fire?
> "This will totally impair the ability for Citigroup (seekingalpha.com/symbo...),
> Merrill Lynch (seekingalpha.com/symbo...), and Lehman Brothers
> (seekingalpha.com/symbo...) to raise capital." These 3 companies
> were clearly insolvent 6 months ago IMO as a result of the gathering
> of the perfect financial storm which has cut off any possible escape
> route. The only drama playing out now is how long they can artfully
> hide their insolvency. Everyone is in over their heads and Bernanke
> and Paulson can do little more than put bandaids on to try to protect
> the interests of their constituents. (end of excerpt)
>
> So here we are 6 months later and what happened? Rocket science?
> Nope just some common practical sense. And yes even after billions
> of rescue dollars those banks are STILL insolvent, the ones left
> anyway. One final clue that I have made before- What makes you think
> that a monetary system contrived nearly 100 years ago can just continue
> to work off into the unlimited future? The answer is that it CANNOT
> work indefinitely. Who will start thinking outside the box?
Military ? - sure - who will pay for it ?
Who will pay for anything of substance ?
The only way out is to tariff the crap out of everything coming into this country so it makes a person at least LOOK at american-made goods.
And to tax the crap out of american companies that offshore work to places outside the USA.
On Jan 15 01:19 PM aarc wrote:
> Keep bashing the banks.
>
> What will be the future of the US of A without the banking and finance
> sectors?
>
> - - - Agriculture? = definitely not. Whatever agricultural technology
> America has, the developing coutries have already learned them all
> with cheap abundant labor to boot.
>
> - - - Industrialization/Manu... = nope! America will have to either
> reduce minimum salary by 90% which nobody can possibly live with
> or slap 90% tariff on imported items coming from China. The glory
> days of American industrial might is already done for the USA and
> gone to the developing countries.
>
> - - - Technology? = perhaps. But with the American baby boomers who
> used to be so excited with technology during the last few decades
> approaching old age, it is only natural that they will lose their
> interest in technology. Steven Jobs might just be the last of them
> and he is not going to last for long. The X-generation who suffered
> too much from parental divorces during their childhood would want
> no part of what their parents love to do which is tinkering with
> tech toys. The Y-generation which is going to be the future of America
> are much too green minded and are too pampered with promises of $150,000
> annual salaries of banking and finance employees they decided to
> take take vocation and shuned engineering at all costs. Meanwhile,
> China and India made technology and engineering as the main course
> for the future of their hundreds of millions of young students.<br/>
>
> - - - Alternative Energy? = perhaps. AE is not a proprietary technology
> the US posseses. China also has massive investments in AE since energy
> cost in that country is exorbitantly expensive as compared to the
> US with their meager income paying the same price for the same barrel
> of oil. They are much much more desperate to invent and produce viable
> alternative energy sources than the Americans. And with their hundreds
> of millions of new engineers, they are more likely to be able to
> develop AE much faster than the US. Sooner of later, the US will
> have to import AE technology from China rather than the other way
> around.
>
> - - - Health Care? = Definitely. But it is more for the future rather
> than the present. American baby boomers are still in their 50's and
> 60's and are still healthy. 10, 20 and 30 years from now, health
> care will become the major source of internal income for the USA.
> And once the 2.8 billion young baby boomers of the BRIC which are
> now in their 20's, 30's and 40's approaches old age; then the US
> can start exporting more and more health care technology to those
> countries. But that will be at least 20 years from now.
>
> - - - Military hardware and software? = definitely. The United States
> of America is the numero uno in military. Every developing country
> with diplomatic ties with the US will be buying more and more from
> the US for their defence needs. Flip side is that the US still spends
> more money into national defence than the whole world combined. Likewise,
> being the premier merchant of death is not really worth mentioning
> too often to the whole world at large. This is not something you
> can rally the whole population of the country towards more productivity
> and income generation in order to be able to meet the increasing
> demands of an aging population for more health care.
>
> - - - Retail and consumer goods? = McDo, Coke, etc. Sure, they will
> dominate the whole world in retail in the foreseable future. But
> not enough. Retail is a dog eats dog industry. China is already starting
> to dominate global exports for consumer goods including foodstuffs.
>
>
> USA is in a bind. It has been tinkering with new ways and means of
> how to generate more income from banking and finance for the last
> 2 decades while neglecting manufacturing and technology.
>
> And the result? Record profits were achieved by the the banks and
> financial institutions from 2001 to 2006. The downside was that their
> newly invented MBSs and ABSs toxic bombs exploded right into their
> faces and damaging not only the US but the whole world at large.
>
>
> All is not lost. Most experimentation don't result with eureka the
> first time.
>
> There is alway a second time around.
>
> Hope they do it right the next time otherwise the US will become
> an undeveloped or even a third world country within the next few
> decades.
On Jan 15 02:11 PM PROXIMO wrote:
> Funny how shorts regularly get slammed for disclosing their positions.
> But when a "long" touts the glowing prospects for his favorite stock,
> seldom are ulterior motives inferred. You do not hear a peep of critcism.
> There is utter silence. Critics are as quiet as a mouse in church.
> A cigar store Indian. A small town church cemetary on a rainy Sunday
> afternoon.
1) Healthcare: Tele-nursing and remote surgeries are already happening. How long before we have dirt cheap Indian nurses and doctors working in American hospitals from their remote sites in Delhi?
2) Government: They outsource a butt-load of jobs to foreign lands. Everything from call centers to document preparation.
3) Industry- Ha, Ha! Made you laugh- Didn't I
wanna-be peehead that waits months later to see how everything (like the depth of the recession) turns out?
On Jan 16 02:52 AM mwfall wrote:
> why didn't you write this article right after the transaction? why
> be a
> wanna-be peehead that waits months later to see how everything (like
> the depth of the recession) turns out?
On Jan 16 09:53 AM User 338088 wrote:
> Just think about this.....If Bank of America did not purchase Country
> wide amd Merril, how many more people would be out of jobs, families
> with no health care insurance etc etc....2 major companies in distress
> that would cause even more economy black holes if teh Bak of America
> had not stepped in to save the. BOA is now asking for some assistance
> as a result of the pitifull shape those companies really were in!
> Go Bank of America!
Are you serious?! Did even one person on the planet think these guys were honest, or had turned over a new leaf?!
Sorry Charlie, even Ray Charles could see these banks are robbing American's blind. Largest heist in history.
I think they finally opened the book of the tier III assets!
Oh, the shareholders? They are ecstatic! BAC announced Sept 15th (@26.5) the acquisition of Merrill. Closed at 7.18 today. The shareholders LOVE HIM
On Jan 16 11:58 AM icandoitdon wrote:
> yes, BAC did it for the good of the country. i'm sure it's the shareholders
> ken lewis works for are pleased.
>
>
> On Jan 16 09:53 AM User 338088 wrote:
On Jan 15 11:39 AM Ishortyou wrote:
> the financial system needs at least 2 trillion dollar capital injection
> to stabilize at the least.
NOT.
This silliness has to stop before there is nothing left of this place, and a loaf of bread cost 50 bucks.
Who in their right mind would be throwing freshly printed deficit dollars at the very crooks who raped the financial system in the first place?
IT is a double insult: Keep the crooks in business and destroy the dollar.
We screw'd up. Face the music, face the pain of poverty and give the next generation a damm break. It is the least we can do.
On Jan 17 10:40 AM G.Kelly06 wrote:
> Kinda thought that Mr. O was on the right track. "Change" and all
> of that.
>
> NOT.
>
> This silliness has to stop before there is nothing left of this place,
> and a loaf of bread cost 50 bucks.
> Who in their right mind would be throwing freshly printed deficit
> dollars at the very crooks who raped the financial system in the
> first place?
> IT is a double insult: Keep the crooks in business and destroy the
> dollar.
>
> We screw'd up. Face the music, face the pain of poverty and give
> the next generation a damm break. It is the least we can do.
>
>
>
THE ONLY WAY FOR THE USA IS TO REVIVE THE AMERICAN ECONOMY IS TO STOP THE SOO CALLED FTO FREE TRADE ORGANIZATION WHICH MEANS TO ME WEALTH TRANSFER ORGANISATION.
90% TARIFF ON ALL IMPORTS TO THE USA.
ALL COMPANIES THAT OUTSOURCE AMERICAN LABOUR BY HIRING CHEAP LABOUR OUTSIDE THE USA SHALL BE TAXED HEAVILY TO STOP THE PRATICE.
On Jan 16 08:11 AM dividendmachine wrote:
> Bank of America took on other acquisitions because the fed asked
> them to. Now they are cutting the dividend and will survive all of
> this.Citi is in much worse shape.As my friends and readers now i
> do not own banks and NEVER have because they do not control their
> own destiny
On Jan 17 02:31 PM JOSEPH FOSTER wrote:
> FROM JOSEPH FOSTER
> THE ONLY WAY FOR THE USA IS TO REVIVE THE AMERICAN ECONOMY IS TO
> STOP THE SOO CALLED FTO FREE TRADE ORGANIZATION WHICH MEANS TO ME
> WEALTH TRANSFER ORGANISATION.
> 90% TARIFF ON ALL IMPORTS TO THE USA.
> ALL COMPANIES THAT OUTSOURCE AMERICAN LABOUR BY HIRING CHEAP LABOUR
> OUTSIDE THE USA SHALL BE TAXED HEAVILY TO STOP THE PRATICE.