Is Bank of America Actually Behind Citigroup on the Problem Bank List?

In the NY Times on Sunday, the saga of Bank of America (BAC) CEO Ken Lewis is documented. All we can say about BAC and Ken Lewis is that this bank has gone from arguably the most stable large money center to one of the most unstable, just behind Citigroup (C). We attribute this remarkable transformation to the ill-advised Countrywide and Merrill Lynch transactions, both of which were done without a receivership to restructure the target companies.

As one banker told The IRA Friday: "We can still save Bank of America if we just put Merrill into bankruptcy. But the Fed does not want to see the last significant primary dealer fail. For many people, Merrill really is the only dealer left. Morgan Stanley (MS) does not seem committed to the markets and Goldman Sachs (GS) does not seem to care either."

Note: Our friend David Kotok said similar regarding the Washington obsession with saving the NY Sell Side banks as a driver for the Merrill transaction in a roundtable with Josh Rosner last week (“'The Big Banks vs. America: A Roundtable with David Kotok and Josh Rosner', January 26, 2009”).

Shame nobody at the Fed or Treasury thought to ask BAC shareholders if they wanted to sacrifice the most thoroughly domestic of the large banks. And the sad thing is that almost immediately after the close of the Merrill deal, BAC has to start selling assets.

Forgive our broken record, but just compare the Countrywide and Merrill transactions to the way in which Jamie Dimon, CEO of JPMorganChase (JPM) bought WaMu, cleansed through an FDIC receivership. As we describe in further detail for our advisory clients this week, we don't think JPM will outrun the economic tsunami, but hats off to Dimon and his operating team for buying his organization valuable time to restructure and change their risk profile. That may be the difference in terms of outcome for creditors of JPM and BAC.

Frankly, the more we look at the mess at BAC, the more we wonder if BAC should not be ahead of Robert Rubin and the directors of C on the bank director incompetence index. We'll be coming back to our view of the failure of Lewis and the BAC board to exercise sufficient oversight of the bank's M&A activity in a future comment focusing on the duties and responsibilities of the directors of bank holding companies.

Stock position: None.

Comments

[ironpants:]

Mark-to-Market claptrap has basically ruined the valuations of many otherwise well-run firms with BAC being one of them.
The eggheaded insistence that fair value be assigned present market value has been corrosive to capitalism in general.
Let's let companies mark to model based on some explicable, realistic assumptions regarding future value of their investments.
We have to let firms exercise some foresight and judgment as they invest or they will have no incentive to do so.
Enough talk about the so-called 'insolvency' of BAC. That's a smokescreen for shorts who want such entities to collapse for short-term gain.

Feb 10 06:50 AM

[Roscat:]

Companies HAVE to mark-to-market sooner or later. And BAC was greedy and impulsive to make such acquisitions.
If you have an investment that you cannot sell and have to wait years for it to barely gain some value, it is useless. If you keep it off the balance sheet, then, make some money with the other investments. The problem is, no company can do that. It's like in 2001 when investors where caught with shares of Internet companies that were not making any money. Whoever was able to keep the shares, barely made any money on them even 8 years later. Whoever was able to sell at market prices, moved on to better investments (derivatives, for example - to be sarcastic). Just mark-to-market as much as possible and move on. You have to pay for risk in investment.
BAC has been jealous on C for decades and wanted to become domestically what C was internationally. As a reflection of Ken's personality, BAC spent as much as possible for acquisitions that made sense theoretically. The problem that BAC has is exactly what RBS has. The ideas were right, but KL was unable to time the deal and calculate the consequences, thus destroying even what he had valuable. Let Ken, his board, and 2 down go, and have them sell some of the assets they have to make up for the bad deals they made. And after that pray that a union between North and South will actually work, even after more than 100 years.

Regards.

Feb 10 07:17 AM

[Christopher...:]

Agree on FVA. After got of BB TV yesterday, David Reilly (formerly WSJ editorial page) came down and declared my road to Jerusalem coversion after I conceeded that FAV helped deflate the bubble more quickly. Oh boy. The impact on valuation of financials due to FVA is clearly negative now, but the lunacy will work for the longs when credit conditions start to bounce. The thing which bothers me is how affected assets or income due to FVA helps the investor. I don't believe that it does.

Feb 10 08:38 AM

[Gtarras:]

Agree 100%.

Example. In my line of work I calculate MTM on super senior corporate tranches (with subordination of 10%). they will experience 0 loss ultimately. Yet, on a billion dollar portfolio, we might have $100MM-$200MM paper loss. Scares the hell out of people. Makes it easier for shorts to push, and maybe even to have a run on the bank.

At some point, these paper losses will become paper gains. That will be fun to watch.

On Feb 10 06:50 AM ironpants wrote:

> Mark-to-Market claptrap has basically ruined the valuations of many
> otherwise well-run firms with BAC being one of them.
> The eggheaded insistence that fair value be assigned present market
> value has been corrosive to capitalism in general.
> Let's let companies mark to model based on some explicable, realistic
> assumptions regarding future value of their investments.
> We have to let firms exercise some foresight and judgment as they
> invest or they will have no incentive to do so.
> Enough talk about the so-called 'insolvency' of BAC. That's a smokescreen
> for shorts who want such entities to collapse for short-term gain.

Feb 10 11:26 AM

[monday1929:]

..........He mused as he waited in the bread line.


On Feb 10 06:50 AM ironpants wrote:

> Mark-to-Market claptrap has basically ruined the valuations of many
> otherwise well-run firms with BAC being one of them.
> The eggheaded insistence that fair value be assigned present market
> value has been corrosive to capitalism in general.
> Let's let companies mark to model based on some explicable, realistic
> assumptions regarding future value of their investments.
> We have to let firms exercise some foresight and judgment as they
> invest or they will have no incentive to do so.
> Enough talk about the so-called 'insolvency' of BAC. That's a smokescreen
> for shorts who want such entities to collapse for short-term gain.

Feb 11 08:17 AM

[monday1929:]

It is time to listen to those who saw this coming. Listen and you may learn.


On Feb 10 11:26 AM Gtarras wrote:

> Agree 100%.
>
> Example. In my line of work I calculate MTM on super senior corporate
> tranches (with subordination of 10%). they will experience 0 loss
> ultimately. Yet, on a billion dollar portfolio, we might have $100MM-$200MM
> paper loss. Scares the hell out of people. Makes it easier for shorts
> to push, and maybe even to have a run on the bank.
>
> At some point, these paper losses will become paper gains. That will
> be fun to watch.
>
> On Feb 10 06:50 AM ironpants wrote:

Feb 11 08:20 AM