Bank of America Continues to Stand Strong 90 comments
an article to
-
Font Size:
-
Print
- TweetThis
BAC hit its annual lows below $3 on Friday as talks about nationalizing Bank of America and Citigroup (C) became stronger. Recently this has become a tradition for BAC specifically. Every time the stock slides downwards, nationalization talks gain momentum. On Friday BAC, hit its annual low for a combination of reasons and not as an indication that nationalization is inevitable.
Friday morning, Bank of America chairman Ken Lewis was served with a subpoena by New York Attorney General Andrew Cuomo over the Merrill Lynch bonus affair. On this news the stock prices sharply slid downwards. However, this news stands no ground. Lewis received a subpoena, he has not testified yet! Just because the man is served with a subpoena does not mean he did something wrong. Perhaps when he testifies he will have an opportunity to set it clear for the last time that he was not involved with the Merrill pay out. Merrill Lynch was an independent company at that time, led by John Thain. If anyone should be held responsible, it is completely Thain’s responsibility because he allowed it, paid it, and received it! Lewis has consistently stood up against high executive pays and set a $500,000 cap on Bank of America’s executive salaries. Additionally, Lewis and his direct reports did not receive a bonus for 2008. Why would Lewis allow Thain’s team to be paid out and not his own, especially when he will be the one paying for it? Talk can be cheap, but his disapproval of Thain’s decisions were proved when Thain was forced to leave Bank of America under pressure.
The second reason why BAC hit its annual low was because the entire market was down. BAC may be increasingly volatile, but it moves with the market and Wall Street ended another depressing week on Friday, leaving major indexes down more than 6 percent. Stocks tumbled as investors worried about the term of the recession and showed mixed confidence in Obama’s new stimulus.
Moreover, Bank of America received a series of negative publicity on Friday, beginning with the subpoena order, which caused stock prices to drop in an already falling market. Then assumptions of nationalization surfaced and led to further drops in stock prices hitting its annual lows below $3. However, it's important to notice the bounce back in this volatile stock as it still managed to close at $3.79 with only 3.56% negative change even after surviving all the negative publicity.
The rule of thumb is buy low and sell high. Eventually stocks will rise after hitting rock bottom. However, investor confidence right now depends on whether Bank of America will be nationalized.
Here are all the reasons why Bank of America will NOT be nationalized.
First, and the most important reason, is that Bank of America is still profitable, has strong capital, is solvent, and is actively lending. Mid-quarter, it's hard to specify numbers, but there have been indications that business has improved over the fourth quarter after absorbing Merrill’s loss. There seems to be no reason why a company that is profitable and has strong capital and liquidity levels would be considered for nationalization. “Speculation about nationalization is based on a lack of understanding of our bank's financial position as well as a lack of appreciation for the adverse ramifications for our customers and the economy,” said Lewis.
Next, Lewis has confidently announced that he does not need any more government assistance. Once again he proved this by action, when Bank of America made its first TARP payment of $402 million to the government earlier this week.
Additionally, federal support for Bank of America has been indicated. Bank of America was a team player when it purchased Merrill Lynch after having second thoughts. Bank of America was rushed into the deal by the government when it was suggested that Merrill would pose a systematic risk on the economy if Bank of America did not go through with the deal. The Feds also indicated that they would back up the deal and provide protection against losses in troubled assets. A deal that caused Bank of America to see its worst days was rushed into for the good of not posing further risks on the economy and backed by the federal government. It is unlikely that the federal government will let Mr. Lewis fail.
Finally late Friday, the White House indicated that they are not trying to take over the banks. When asked about nationalization, press secretary Robert Gibbs said, "This administration continues to strongly believe that a privately held banking system is the correct way to go, ensuring that they are regulated sufficiently by this government."
Disclosure: Long BAC. Although I work for BAC I do not get compensated for this. All opinions are personal and I write because I have invested in BAC and I tirelessly research the company.
Related Articles
|
-
The Seeking Alpha 100
See allThe top 100 stock
market authors
selected for publication
Seeking Alpha 100 » -
Fastest Climbers
Authors with the largestSee all
increase in followers
in the last 7 days
Fastest Climbers » -
Top Commenters
Top commenters,See all
as ranked by their peers
Top Commenters » -
Top Instabloggers
The 100 most active
Instabloggers.-
1
David Fry
-
2
TraderMark
-
3
Don Dion
-
4
Cliff Wachtel
-
5
Joseph L. Sha...
Top Instabloggers » -
1
-
Top StockTalkers
TopSee all
StockTalkers.
Top StockTalkers »
Without discussing the merits of bank nationalization (we have already made our views quite clear), we would like to focus on the increasingly ideological nature of the public debate. The modern political reality in the United States, especially with regard to the debate of recent economic developments, is the formation of two diametrically opposite schools of thought. This sort of behavior was quite evident during recent "bailouts" of the financial and auto industries, as well as the crafting of numerous "economic stimulus" measures. The two sides, of course, are those who would prefer to strictly adhere to a market based capitalism to solve our problems, and those who believe that firm Government intervention is the only way to escape financial ruin. Pragmatism, it seems, is often ommitted from the discussion.
Insofar as the debate over bank nationalization has proceeded, we would submit that a classic "false choice" argument is being furthered by both sides. The free market folks prefer to conjure imagery of a nationalized bank being run by inept politicians and red-tape bureaucrats running wild. Conversely, the proponents of Government intervention have adeptly tapped into a vein of populist rage, arguing that these insitutions must be fully nationalized in order to get credit "flowing"again.
We would like to make the point that a pragmatic and effective strategy of nationalization has occurred before-in Sweden. As any student of politics is aware, ideologies are not true, and are simply a tool in the political bag. Although we prefer optimism, we are at heart realists who doubt that this debate will be settled in pragmatic fashion.
The question you should all be asking is what is the likelihood that 1) real losses on their respective credit card portfolios, 2) real losses on residential mortgages and 3) real & mark to market losses in their commercial real estate portfolios swamp and overshadow the reserves, (which are based upon historical norms) and the book equity? You can apply this test to other asset pools on a given balance sheet but these are clearly the 3 areas of current concern.
The current market cap is not relevant to this accounting exercise. It is however, relevant to a given balance sheets ability to raise new capital.
Presumably, this is the type of “stress testing” Washington is referring to. If unemployment continues to rise, real credit card & residential mortgage defaults will increase - and discretionary spending will continue to decrease. The number of dark stores in your local strip mall / shopping center will shoot up and their owners will no longer be able to pay the mortgage. Thus real losses in the commercial mortgage market are realized, forcing mark to market losses in everyone’s commercial mortgage & CMBS portfolios… a disaster scenario or death spiral.
How far is Washington willing to ‘stress’ a given portfolio? Given that we have already surpassed historical norms – What will Washington deem prudent & acceptable for a stress test? This is very subjective and a big part of the reason the Street reacted so negatively to this concept the other day. What are acceptable levels of loss, that the policy makers are asking the American public to pay for and endure? If Washington believes their projected losses to be acceptable – and blows through the existing balance sheet, then nationalization could be a politically acceptable solution. If the balance sheet doesn’t get blown through, then more preferred stock / increasing ownership is the politically preferable solution. It is important to recognize that a de-facto nationalization of AIG, FNM and FRE has already occurred.
BAC’s YE 2008 press release shows loans, leases and securities at $1.209 trillion, reserves of $23 bn, or 1.9%. Reported book equity, including preferred stock was $177 bn. It doesn’t take a lot of math to see a potential problem.
Again, you had some nice points but you downgrade yourself by not being able to take criticism.
Simple as that, Just take it and move on......
Jay
On Feb 22 09:00 PM Farah Lalani wrote:
> Thanks for the comment wholesalecd. But i am not denying that my
> article is not biased as it is obviously pro-BAC as you can tell
> from the title. However, my comment actually says that I am not biased
> "because i work for the company," but my thoughts are rather influenced
> by investing in BAC.
Obama's left with cleaning up the mess from the war to our drenching economy, he has his plate full
Jay
1) The market is running wild - Market is reacting on media hype and fear...when you drive into the meat of the situation Bank of America by itself was profitable in 2008, it was Merrill lynch with the major problems and by taking on Merrill Lynch through goverment persuasion I cant imagine that Bank of America will be left holding the bag by the government.
2) Obama understands that the markets will determine his success with correcting the economy. He wants stocks to rally, bank stocks have the largest potential to do that since they have been beaten down to historical low levels.
3) Tim Geithner does not believe in nationalizing the banks either. Mr Geithner last week said: “Governments are terrible managers of bad assets.” He went on to outline a plan that will seek help from the private sector, will maintain a market for these toxic assets, and will increase transparency. Nationalization accomplishes none of these three.
4) Earlier this week, Bank of America actually paid back $402 million in a TARP dividend payment to the U.S. government.
5) The Fed will be purchasing $500 billion of mortgage backed securities over the next six months
BAC is stronger, well-integrated, and despite the current troubles, was a viable and tough competitor in the commercial lending sphere.
That's more than Citi—Sandy Weill's Frankenstein that grafted business after business onto itself without regard to compatibility—could ever say.
However, I do think that you'd be plugging your ears if you didn't realize that Bank of America isn't in a fair amount of trouble. Just the fact that you have to resort to the "government won't let it fall" argument is telling.
The problem is confidence is lost in overall financial system and it takes time to gain that back.
Pros and Cons of Government Intervention
1) If no government intervention, then market faith will decide the faith of all the mazor banks. JPM and BAC have largest derivatives exposure.
and if economy detoriates more than these exposure will lead to huge loss. This will result into more layoff's and further detoriation.
2) Even if government decides to Intervene, then as far as now only two options are known
a) Capital Injection
b) Nationlization of selected banks
I find both of the above solution will not stablize the economy.
Something innovative and out of box thinking is required.
Overall, it will be U shaped or L shaped recovery and there is no way we can have V shaped recovery.
Excuse the laughter but the title of this article sounds a bit like the guy, with flood waters up to his neck who says to the passing boat driver of the last rescue opportunity, “No thinks. I’m pretty sure I’m standing on a firm rock. So I’m, ‘Standing strong’ and don’t need a ride.”
Farah, this would be an acceptable college Finance 101 piece for different (and more usual) times. But unless you are ready to define and quantify (e.g.) the risk on BOA’s 9/30/08 $38.6 TRILLION in notional derivative contracts (against only $1.3 Trillion in TOTAL assets), then forgive me if I go ahead and hop in the passing boat.
“The rule of thumb is buy low and sell high.”
There are no rules of thumb anymore, Farah.
BOA may, indeed, be standing on its toes atop a solid foundation during this flood. But (respectfully) your article lacks going forward analysis and ignores still rising flood waters.
Say hello to Ken for us.
Anyone who wants boa to nationalize is a short seller! Short sellers are the ones at risk now.
AND no one seems to answer - Who in the government is qualified enough to run a financial institution?
It's not as easy as the advocates of nationalization believe it is.
So please, Farah, don't fall victim to a bunch of SA geeks drooling over your post. Do yourself and the SA readers a favor: either post something not entirely subjective, or move along.
second, analysis has been replaced by panic, opinion and hysteria. everywhere all of a sudden people are demanding this and that who certainly never looked in detail at ANY corporate balance sheet - not to speak of a banks' balance sheet. overleveraged, losses, subprime, bad loans, foreclosures are the words used frequently - but hardly are there real numbers provided. If any estimates are given, like by Roubini, they are on an aggregate basis - but these telle you NOTHING about any particular bank.
Chances are, that politicians, who usually do not at all understand banking and economics, will simply overshoot and kill the patient while claiming to rescue him (or the taxpayer or the economy or the world).
The political decisions that will be taken are the big wildcard here and contrary to what many seem to think, they are the primary reason that the markets are now in freefall. The right political decisons can lead to a recovery of the financial system and the economy, albeit at a slow pace. The wrong decisions can kill both of them. That#s why the markets are freaking out here. it#s become a digital world, sort of: either most stuff will fall by another 70-100% or it will recover anywhere between 50 and 500%. Depending upon what probabilities you attach to either outcome, you get a wild, wild swing in the current 'fair value'. So a swing in these probability perceptions by, say, 10-20% could easily move stocks of banks, in particular, by 50 or 100% within days. On top of all that are again redemptions and liquidations by funds and hedgefunds.
I think, both from a political viewpoint as well as a market-technical viewpoint the markets will see THE lows within the next 4-5 weeks.
Thereafter, individual stocks will decouplöe from each other and move on their own fundamentals - not in tandem as they do now.
On Feb 22 10:56 AM freechoice wrote:
> look... BAC, C, And ALL THE OTHER banks are in this mess because
> of over leveraging and partying with inflated capital markets...now
> the house of cards has fallen... ITS time to NATIONALIZE the failed
> banks...
>
> the other choice is going deeper and deeper into depression and pumping
> more billions into a bottomless no end in sight
>
> enugh said... nationalize yes...tough medicine but it WORKS because
> the public will now have their own tax money to free up credit and
> help the unfortunate families that lost their jobs and house values...ITS
> time to let OBAMA do his job ... GIVE HIM A CHANCE he didnt cause
> the COLLAPSE... time to let the bottom up economics a try...STOP
> pumping billions to the corrupt banks...
>
> enough said...NATIONALIZE and take the lumps... lets all help the
> less fortunate that have losts savings, jobs, and their houses...
> we have to give hope the hard working people on the assembly lines
>
>
> thats not to say we become a welfare state... UNIONS and others have
> to do their share...lower wages so we can save the jobs...
>
> enough said ....nationalize the banks now , to delay is to go more
> into depression....FORGET THE idea that TOO BIG TO FAIL...thats idea
> is costing more jobs to fail...
I generally agree with the criticisms of your article, if you strip them of the subjective negativity that most of them voice.
I also agree with the reasons against the nationalization of BAC, C, etc. Communist-style nationalization of the banks would be against the core values that America has held to for the last 200 years.
That being said, we're all Keynesian these days. No one wants to see a full on repeat of the Great Depression or the depression that occured in 1837 (Americans lost faith in banks after an epidemic of real-estate speculation. Nearly half the nation's banks failed. Sound familiar? www.marketwatch.com/ne...) I think that Obama and his advisors are going to try to do the best thing for the nation as a whole. We just don't know what that is yet.
That leaves him a lot of options between leaving the market to its own devices and 100% nationalization of key banks.
I don't know which way BAC will go, but I'm going to play both sides. Why? I'm taking lots of little profits with this roller coaster. You can't go broke making a profit. I'm buying low and selling high. I'm also selling high and buying low. It's the volatility that allowing me to do this.
Pneumonoultramicroscop... - besides being the longest word in the Merriam-Webster dictionary, is "a disease of the lungs caused by the habitual inhalation of very fine silicate or quartz dust."
A lot of dust is being kicked up by the two sides of the extreme and it's choking out the pragmatic voice. God forbid we return to our senses.
Disclosure: Long and short (no margin) BAC as long as volatility is high.
Fair attempt to defend BAC but some of the criticisms are justified - virtually all of your assessment are public knowledge and nothing new or insightful to induce new thinking. For those "experts" on political economy, most countries have always been a mixture of capitalism/socialism/c... or whatever you want to label it. The fact is, the interaction among the countries are closer, thus you see U.S. becoming "more socialistic", while China recognizes "capitalism" has its values. Stop bashing any form of political economy as not one is perfect nor should it be.
The leveraging began with the investment banks introducing/bundling exotic derivative instruments that few can understand, thus creating a "market-trading" issue, and Mark-to-Market accounting got the blame. Everyone has role in being blamed, but because U.S. is so advanced in developing derivative instruments, we are got ourselves in this trouble. Greenspan, with his idealistic view of "non-regulated" free economy is also to blame and a major cause, due to "cheap" money. When the instrument became too far removed from the actual asset it originally represented, valuing the derivative or the existence of "market" becomes increasing difficult.
That said, the governement should only support, not control, private enterprise. The issue is NOT whether we should nationalize, but rather, what is the best way to minimize damage in monetary and confidence terms. Using Sweden is an idiotic example - they only took over one bank - after it collapsed - and Sweden is not U.S. - different regime, different economy.
Bashing the current administration just to vent election losses helps little but simply exposes the person's narrow-mindedness. Our problem has been rooted for years, and you should be thankful, and supportive, that at least someone will do something, whether right or wrong will be proven in time - unless you believe U.S. will collapse and disappear, then all is moot.
On Feb 22 11:07 AM Jennifer Pritchard wrote:
> I agree with you on all of the above reasons. I work for BAC too
> in the CD/IRA department Call Center here in KS. Right now is a
> great time to buy BAC stock. I am buying as much as I can while it
> is low because I know it will be well worth in within the long term.
I bought some BAC on monday and will sell half today for a sweet gain and hold the other half for future gains. BAC is a buy opportunity of a lifetime. I agree BAC stands strong.
I bought some BAC on monday and will sell half today for a sweet gain and hold the other half for future gains. BAC is a buy opportunity of a lifetime. I agree BAC stands strong.
Happy investing!