Thinking the Impossible: Could Bank of America Go to Zero? 55 comments
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Just about all of us recognize Bank of America's (BAC) familiar red and blue flag logo. Millions of Americans have accounts there. Bank of America, along with Citigroup (C) and JP Morgan Chase (JPM), are arguably three largest banks in the US. All have serious problems.
The thought of Bank of America's common stock becoming worthless was unthinkable just a few weeks ago. Now, however, the mega-banks are again in big trouble. Most US and European banks have dropped to new lows within the last week or two. Back in September, the month of the Merrill deal, Bank of America common was between 30 and 35. On January 23 of this year it touched 5.2. How could "America's Bank" get in such dire straits?
Under normal conditions, the index committee removes from the index a DJIA component which drops below $10. These aren't normal conditions. So, Bank of America and Citigroup remain on the DJIA. Removing two of the top banks (not to mention General Motors (GM)) from the DJIA is politically undesirable at this time. Maybe a reverse split?
Acquisitions of Countrywide Financial and Merrill Lynch were, at the time, thought to be advantageous to Bank of America. Toxic assets held by these two companies, as the recession has deepened, are now found to be significantly larger than originally thought. This week we have John Thain, ousted Merrill chief, and Ken Lewis, Bank of America's CEO, trading blame over the possible $50 billion mistake.
Nouriel Roubini (as re-published through John Mauldin) says the US banking system needs $1.4 trillion to recapitalize and in its current state is insolvent:
The US banking system is borderline insolvent in the aggregate and it will take a huge amount of public financial resources and complex and time-consuming work-out of insolvent institutions to restore its financial health and allow it to lend again in ways that support sustained economic growth.
The US Dept. of Treasuries OCC's Quarterly Report (see page 23) shows just how deeply the mega-banks are into derivatives. Bank of America has assets of $1.836 trillion and derivatives of $39.979 trillion, (mostly swaps). With the demise of the Shadow Banking System (non bank financial institutions), trading derivatives is much more difficult. If marked to market, one wonders just how much of a loss would be realized in this $39.979 trillion portfolio. Nobody, who will talk about it anyway, seems to know. It wouldn't take much to wipe out $1.8 trillion in assets. Not surprisingly, there is a major confidence problem. With a continually slumping housing market, commercial real estate problems accelerating, increasing credit card debt defaults and a deep recession that's driving foreclosures to record levels, you can only guess. Investors don't like guessing.
There are more reasons why Bank of America could go to zero. If the bank is insolvent, the US government will have to use not only TARP2, but also a TARP3 and a TARP4. Imagine the bickering in Congress. Someone, somewhere, somehow, sometime, has to own up to the toxic assets. Only the US government (taxpayers) can do this (lucky us). With government funding, dilution can wipe out the common stock holders. With politicians calling the shots, you can forget dividends and other "extravagances" such as bonuses, private jets, etc.
The establishment of a "bad bank" to hold toxic assets is now being talked about, and Wall Street hails it as a possible solution. But how do you determine the price to pay for the toxic assets? Face value is a bad deal for tax payers, while mark to market is a bad deal for the banks. Either way, today's common shares may not be worth much, if anything.
Eventually, the US government may "nationalize" the mega-banks along with some of the regionals. The Obama administration will have to keep the depositors happy and calm at all costs. They have to do this to avoid major social unrest; everything else is secondary. The toxic assets end up in a bad bank worth who knows what. Then the mega-banks emerge somewhere down the line as recapitalized private entities. The FDIC will keep depositors and some bond holders happy (we hope). Everyone else: good luck and fasten your seat belts.
Disclosures: No positions.
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> When 90% of the bloggers here are so sure the world is ending, I
> just buy more and stop watching the tape. As Warren said, it is never
> been a good thing to bet against America. This too shall pass. Buy
> BAC and put it away for seven years for a 10X.
If you use SeekingAlpha as a sample, of course the sentiment will be bearish. But are SA users a good sample to base your unscientific survey on? Hell no. They're far more skeptical and contrarian than your average person.
Good luck investing with Warren. Hopefully you get 10% eternal dividends and warrants with your shares too. Buffet hasn't owned stocks personally in years, he's just dipping his toe in now. Also consider that his perspective may be a little different than yours.
On Jan 29 04:46 PM monday1929 wrote:
> JPM has 75 Trillion in hidden off=book near worthless derivatives.
> They are broke.
>
>
> On Jan 28 10:52 PM BankBull wrote:
I would comment that it is precisely mark to market accounting in the real estate sector, coupled with Fed interest rate policy, that fueled the hyperinfaltion in RE prices and the resultant mortgages that were securitized by them. People profited by cashing out on inflated RE, as did the mortgage originators and banks. And everybody was very happy with mark to market as long as prices kept going up. But that bubble has now burst, and both RE and business equity values are falling to a more realistic valuation. But you can't have mark to market accounting only on the way up when prices are appreciating--when you want it. You have to deal with it on the way down too. The pain from the excessess of both private individuals, corporations, banks, and government will be severe. But we will not move forward out of this crisis until the market sorts out the winners and losers. And no amount of government intervention will do anything other than delay and/or soften the landing.
And then when this is all over, we can look forward to the legacy of additional massive public debt that will have been created, add it to that little SS debt we've been ignoring, and either raise taxes through the roof or print money hand over fist to pay it off with worthless dollars. It just ain't gonna be pretty anyway you look at it.
boombustblog.com/Reggi...
On Jan 29 11:30 PM Adam Sharp wrote:
> "JPM has 75 Trillion in hidden off=book near worthless derivatives.
> They are broke."
>
> Can someone point me to a source for this, if there is one? I've
> been searching for details about off-book stuff, and more details
> about their Tier 1 Capital situation (details, not PR fluff). I haven't
> dived into the SEC filings yet, was hoping someone had already done
> the homework...
On Jan 29 11:30 PM Adam Sharp wrote:
> "JPM has 75 Trillion in hidden off=book near worthless derivatives.
> They are broke."
>
> Can someone point me to a source for this, if there is one? I've
> been searching for details about off-book stuff, and more details
> about their Tier 1 Capital situation (details, not PR fluff). I haven't
> dived into the SEC filings yet, was hoping someone had already done
> the homework...
In honor of my 45th birthday let me bring you some tasty morsels to down with you corn flakes and coffee while you wait on the GDP number to come out.
Banks are bellyaching about the unemployment rate. Why? Because they have models that suggest they will be in even DEEPER DOO-DOO if unemployment nationwide reaches 8.7%-10% depending on the bank.
WELLLLLLL......mozy on over to ShadowStats.com to look at the unemployment numbers compile there or click this link......
www.shadowstats.com/al...
All compiled from BLS data. It shows the "official" (ROTFLMAO) number as 7.2%. But the broader U-6 number is around 13.8%. But if we counted unemployment as we did during the Great Depression we would be at nearly 18% now.
BTW....that 7.2% number is of course an old figure. We are definitely above 8.7% now.
So as unemployment explodes, defaults on credit cards, auto loans, etc. also explode.
I kind of feel bad for the Banksters. I mean after all....they're having such a hard time continuing to hide all the toxic derivatives from the light of day, and keeping most of their foreclosed properties off the market in a desperate bid to keep the home market from cratering further.
And picking out new drapes and area rugs and a new jet.....JEEZ can't a Bankster catch a break?
BUT WAIT THERE'S MORE!!!!!
Steve Schwarzman of Blackstone stated in Davos that 40% of the world's wealth has dissappeared.
www.telegraph.co.uk/fi...
Who contained most of that wealth? RIIGGGHTTTT.....THE BANKS!
Cheers!
> Bank of America is insolvent, and it has a 118 Billion loan guarantee
> to prove it. According to Warren Buffet, Bear Stearns had 14.5 Trillion
> in derivatives on it's book when it went down in flames. JPMorgan
> who took on that risk was said to have had 44 Trillion at that point
> in time. Do not look at derivatives as assets, look at them as liabilities,
> and the true picture of our banking system becomes more clear.
My opinion is that JPM bought bear stearns to reduce some of its counterparty risk, which is one of the biggest risks with these 'derivatives'.
related article at: aprioritrader.blogspot...
(see key things close to the end of the article)
-KaranZ
You are exactly right about the counterparty risk.
Consider this: If the 14.5 Trillion Bear Stearns had was actually worth something, they would have liquidated a portion of it to shore up their balance sheet. In fact none of the big banks would have ever been in trouble if their derivative holdings had been worth anything. Derivatives are not assets, they are liabilities.
On Jan 30 11:46 AM KaranZ wrote:
> On Jan 28 06:08 PM Fitz919 wrote:
You wrote: "By the way, I have no position in BAC. I am, however, an American taxpayer."
I say you (and I) do have positions in BAC, as do all taxpayers. Our positions are counterparty to stock and bond holders and the only question remaining is which party is going to pay the other.
The Insider trades were not challenged by Cox at the SEC he knew the game was comming to and end.
Bush set the end game in motion getting Spitzer away from Wall Street and putting Cox.
Bush's legal minds even took the state of New York to court to prevent Consumer Protection laws from being used to stop Predatory Lenders.
Call it what you will.
THIS CRASH IS A PLANNED EVENT !
Like many other banks, BofA's stock is an option that the government will shift the losses to the taxpayers and leave the equity holders with something economically relevant. Under the previous crony Hank Paulson regime, that was possible -- albeit unlikely since Uncle Sam could not afford to take on the debts of FNMA and FHLMC. Even with a tax cheat in the Treasury, the odds are now even lower.
BofA (and JPM and Citi) are too big to save
But if this bank and most of these banks were left to themselves and had to bring in ALL of their assets and put them on the balance sheets, we would learn why there's negative numbers that go so high.
They're busto!! End of story. What should happen is, these "stodgy, old, conservative banks" that make up perhaps 10-20 percent of the banking market should now realise their reward for being prudent. They should be picking up all these assets for pennies on the dollar. They could put together consortiums of investors with money under the mattress to liquidate these assets and get money flowing again. This would be short term traumatic, but long term would lead to a much more healthier banking sector. Throw in tighter reserve requirements, sound money creation, less government spending and regulating and you could have a very powerful economic LONG TERM financial recovery.
As long as there is no market forces involved in valuing these banks that are being shored up by the government, there can be no security in investing in any of these banks.
Right now on the current course the government is going to nationalize all these banks and wipe out the shareholders and burden the tax payers.
On Jan 31 05:09 PM James Wilson wrote:
> Insiders of banks that have failed cashed out berween May and June
> of last year.
> The Insider trades were not challenged by Cox at the SEC he knew
> the game was comming to and end.
>
> Bush set the end game in motion getting Spitzer away from Wall Street
> and putting Cox.
> Bush's legal minds even took the state of New York to court to prevent
> Consumer Protection laws from being used to stop Predatory Lenders.
>
>
> Call it what you will.
>
> THIS CRASH IS A PLANNED EVENT !
A quick lesson on derivatives: Let's say you have a home with an appraised value of $500,000.00. In the derivative world you can by an insurance policy on this home which is designed to pay you $5,000,000.00. The person who wrote that policy then finds someone else who will pay him $50,000,000.00. It is a house of cards that is totally out of whack and out of control, and must be kept secret, and off the balance sheets of anyone who participates.
In a true functioning marketplace, an asset like a home has a cash value. An insurance policy only has a cash value when certain conditions have been met, the rest of the time it's a liability, just like lots of derivatives out there, and it can be cancelled at any time.
Dimon knows his own house of cards, he's just not going to tell us about it. I'm sure that 50 Billion dollar ponzi scheme guy (Madoff?) used to be thought of as a nice guy too.
On Jan 31 08:44 PM paulvard wrote:
> My question is : Are derivatives definitely a liability? If so, shouldn't
> JPM have known this about Bear Stern before they take it over. Dimon
> says that they have studied Bear Stern and really wanted to take
> them over and not on the prodding of the government. JPM is I believe
> second to Citi in the amount of derivatives in their books. BAC is
> fourth. Dimon insists that they don't need anymore money from Uncle
> Sam. Dimon is supposed to be the most honest and straightforward
> banker in the US.