Bank of America: A Risky Bet That May Be Worth It - Barron's 46 comments
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Bank of America (BAC) is trading near $3, down from $37 a year ago, and the bank is taking a beating over Merrill Lynch's larger-than-expected losses. But Bank of America could be a home run, writes Barron's Jacqueline Doherty, if it can avoid Citigroup's (C) fate.
Critics say BoA, like Citi, will have to boost its capital base by converting preferred shares to common, diluting common stock shareholders. The government's 'stress tests' can't bring much good news for the bank either. But BoA can still turn itself around.
BoA's tangible equity ratio is 2.68%. CEO Ken Lewis says regulators would like to see that number at 3%, a goal he feels the bank can reach by the end of the year. Assuming total assets remain unchanged, BoA would have to raise its equity base by $8B; BoA plans to get there through a combination of retained earnings, asset sales and shrinking its balance sheet. "It's our earnings power that people are missing," says Lewis. "We can absorb a lot of [hits] and still be profitable."
The bank could generate over $100B in revenue this year after mark-to-market write-downs. Despite problems at its credit card unit, Merrill and elsewhere, Lewis claims BoA will be profitable this quarter and for all of 2009 unless things get significantly worse. (Analysts expect BoA to lose $0.01 per share in Q1, and earn $0.57 this year.)
BoA's Tier 1 capital ratio is 10.6%, well above the 6% regulators usually deem adequate. And when the economic crisis passes, BoA shareholders could benefit from something the crisis forced: a massive buildup in BoA's loss reserves. As of the end of 2008, those reserves stood at $23.5B, almost double the level from the year before.
Barron's warns that "anyone buying BoA shares is making a home run-or-strikeout bet, not an investment." Even so, "the bank's chance of passing regulatory muster may be better than the bears say." While some of the forecasting might be iffy, BoA makes a decent speculation at less than $3.25.
:::::::::::
- Along with JPMorgan (JPM) and Wells Fargo (WFC), BoA faces a potential credit-rating downgrade. Moody's plans to review its long-term debt rating for BoA.
- In March, S&P cut its credit rating for BoA to A from A+, citing the weak economy and the toll BoA's Merrill Lynch and Countrywide Financial units will likely take on the bank's earnings. S&P warned more downgrades could follow.
- Merrill Lynch reported a Q4 loss of $15.84B, around $533M more than estimated by BoA. Merrill also revealed material weaknesses in its controls over financial reporting as of the end of its fiscal year in December 2008.
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This article has 46 comments:
To call it a bet is accurate in the sense that buying a B of A share is like buying a call option that doesn't expire. You can lose your entire "bet" but the downside risk is minimal compared to the upside potential.
To NOT call it an investment is wrong, IMHO. The reason I think it is an investment is that an investment in B of A is an investment in the future of this country. If B of A fails I would argue that our country would fall deep into a depression as the local and international effects of such a failure would be troubling.
Also, B of A has been unfairly lumped into the same boat as Citi. I believe this has happened because they both took the exact same amount of TARP funds ($45b total each). The reasons for taking the funds were quite different. Also, B of A's international exposure is not nearly as great as Citi's. B of A also has an enormous LOCAL deposit base of $1 trillion.
Yes, it's a bet, but it's also a damn good investment. March 12 we will know more about decisions regarding M2M. A temporary freeze to M2M accounting will double B of A stock in a day.
Ken Lewis seems to be too much horsepower for this market; he goes into things with little foresight.
Don't take bets or place bets when it requires both an unfavorable policy regarding the truth of asset values, and/or management that plays over its head - consistently. That is my rule and I think it would have served we shareholders well had Lewis been more reluctant to take risk.
On Mar 07 02:44 PM ebschor wrote:
> The comment by Barron's that warns that "anyone buying BoA shares
> is making a home run-or-strikeout bet, not an investment" is accurate,
> but not the whole story.
>
> To call it a bet is accurate in the sense that buying a B of A share
> is like buying a call option that doesn't expire. You can lose your
> entire "bet" but the downside risk is minimal compared to the upside
> potential.
>
> To NOT call it an investment is wrong, IMHO. The reason I think it
> is an investment is that an investment in B of A is an investment
> in the future of this country. If B of A fails I would argue that
> our country would fall deep into a depression as the local and international
> effects of such a failure would be troubling.
>
> Also, B of A has been unfairly lumped into the same boat as Citi.
> I believe this has happened because they both took the exact same
> amount of TARP funds ($45b total each). The reasons for taking the
> funds were quite different. Also, B of A's international exposure
> is not nearly as great as Citi's. B of A also has an enormous LOCAL
> deposit base of $1 trillion.
>
> Yes, it's a bet, but it's also a damn good investment. March 12 we
> will know more about decisions regarding M2M. A temporary freeze
> to M2M accounting will double B of A stock in a day.
The is man took a bank that was large and solid and in a couple of moves put the bank at hazard of bankruptcy or more likely zombie status. Management matters, and at banks conservative management does not need M2M relief since they manage their risks by tracking that number daily. So if M2M is needed to continue it is just a conspiracy to defraud customers and shareholders by not revealing the quality of assets.
Now is not the time to engage in fun and games in the same of screening an investment. By the way, I hold a lot of BAC and I am very unhappy with management and I want a recovery, but not at the expense of the truth.
As long as banks keep doing stupid things there will be no point in making a long term investment into them.
As you mentioned, there is massive dilution coming, so buying common shares before that dilution is over with is very risky even in the short term.
One might be able to purchase some shares on speculation and sell them to the greater fool later. This is not much different from putting some money on red except it may make you feel as if you did "something intelligent".
Bryon Fessler , Irving TX
On Mar 07 02:44 PM ebschor wrote:
> The comment by Barron's that warns that "anyone buying BoA shares
> is making a home run-or-strikeout bet, not an investment" is accurate,
> but not the whole story.
>
> To call it a bet is accurate in the sense that buying a B of A share
> is like buying a call option that doesn't expire. You can lose your
> entire "bet" but the downside risk is minimal compared to the upside
> potential.
>
> To NOT call it an investment is wrong, IMHO. The reason I think it
> is an investment is that an investment in B of A is an investment
> in the future of this country. If B of A fails I would argue that
> our country would fall deep into a depression as the local and international
> effects of such a failure would be troubling.
>
> Also, B of A has been unfairly lumped into the same boat as Citi.
> I believe this has happened because they both took the exact same
> amount of TARP funds ($45b total each). The reasons for taking the
> funds were quite different. Also, B of A's international exposure
> is not nearly as great as Citi's. B of A also has an enormous LOCAL
> deposit base of $1 trillion.
>
> Yes, it's a bet, but it's also a damn good investment. March 12 we
> will know more about decisions regarding M2M. A temporary freeze
> to M2M accounting will double B of A stock in a day.
BOA has its strengths and its problems (just much smaller that Citi's). Some of them serious, it has $500 billion in Consumer Loans, a large chunk of it in California. But this is not a critique whether or not to buy BOA stock for potential future gain. Its only to point out that the author of the Barron's article doesn't know or understand what she is analyzing.
I have two mortgages with B of A and because I put 20% down on 15 year mortgages 5 years ago, I will not default and because I don't believe they are evaluating each and every mortgage out there, the value of my mortgages is now being driven down when it is worth every penny of it's original value as are at least 80% of all mortgages but the hit to the balance sheets has been far more than 15 to 20%.
I say again dump M2M and bring back uptick.
Nonsense. It is worth what a willing buyer will pay for it, no more, no less.
Citi dug their own grave. But lets not be in such a hurry to toss BAC in there with it. Ken Lewis wanted the Merrill Lynch retail brokerage wealth management business. The rest of ML was accepted into BAC along with the government's promise to bear the vast majority of the losses (that's they way they've handled bad banks since the 30's).
BAC's problem is not a loss of confidence in Lewis, but rather a loss of confidence in government. With so many people out there talking about nationalization as if it were a goal, it's pretty hard to be an investor, right?
On Mar 07 08:32 PM juan77 wrote:
> Oh no! Barron's endorsement is the kiss of death!
M2M is mark to market.
Bank rules on mark to market accounting are not as severe as in some other business segments so not sure what good M2M rule change will do for BOA either.
what I have done and i am an financial planner is
take this opportunity to invest in a basket of stocks
such as BAC , JPM , and WFC. I consider these investments
good risk reward ratio's and I only invest the right
amount of money (what you can afford to lose) if you
hit just one that will do it for you and finally I do
agree if you don't want to try and guess which ones to
buy then you buy XLF and UYG. I think now is the time
if you have any long term horizon to place your bets
this is how the wealthy in most cases achieved their
wealth during the trying times.
I had dinner last night with my broker; who really is my mother's broker. He was the only non-family member that my mother wanted to attend her 90th birthday. He's known me since "before I was born." He states the same thing the Pete Najarian ("Fast Money" commentator and owner of Options Monster) stated, that if M2m is loosened, then banks stocks will double on March 12th.
In the rather latest but apropo cliche, "Buy the rumor, sell the news," I will continue on with my Friday's purchasings of bank stocks with my high risk e-trade account, moving into banks stocks Monday morning, more aggressively after I talk to my broker tomorrow, and keep adding if I see the financials gaining as the rumor persists.
(My broker, thank heavens, is my conservative side. He shakes his head at how aggressive I am with my e-trade account. But heck, it's up 42.6% since I started trading last July 2nd.)
Hope this semi-inside scoop helps all who keep up on this sort of news. Prepare yourself for a potential big pop in the financial sector this week. Then check me out over in the gold section of SA later on. I will be there!
Good luck!
Because of that, they are affecting the smaller regional banks in a big way too.
Smaller regional banks usually serve the communities very well. Their share values shouldn't be this low now.
I would rather buy regional banks than these Big Guys because I know the regional banks better and how they operate.
EWBC & CATY are excellent banks, and they are much better deal than BAC. These 2 have been in good shapes for almost Half Century serving the Asian communities so well. Both now have offices in Hong Kong and China,
Should do well in the future.
Mark to Market is fine for meat that is goes rotten after 1 weeks time.
Mark to Market on 30 year morgates during a deleaveraging process is like putting a dog with a hangnail to sleep.
I think all politicians these days are useless, but why are Republicans intent on ruining the country. As another commentor said earlier, a bet on Bank of America or Citi for that matter is a bet on the US. If you see Nationalization actually announced get ready for the media and blogosphere to ignite an electronic run on banks and at that point you can call it a day.
If that occurs it will be so interesting in the last weeks of the internet still being up to see the same bloggers and media types who pushed Nationalization blame the runs on the Banks and Politicians.
On Mar 08 10:40 AM Glen L. wrote:
> " the value of my mortgages is now being driven down when it is worth
> every penny of it's original value"
>
> Nonsense. It is worth what a willing buyer will pay for it, no more,
> no less.
Yes, this is exactly what I felt when we recently had another article about BAC. If I was a gambler (with spare cash), I'd buy a few shares and hope for the best, since they teeter on the razors edge. But I'm not a gambler, and I don't have spare cash either!
As far as betting on BAC, I don't think this is the time. We have another year of uncertainty in financials, and once we are done with this year there is still the unwinding of TARP money which will drag down capital generation for more years. And of course be ready for lots of new regulations on the financial industry which will decrease return on capital.
All in all I think it will be 5 years +/- before BAC or this industry overall offers good returns for investors. There MIGHT be some picks out there that can be made, but I would disqualify from buying anything that hasn't paid back all of its TARP money or anything that isn't 100% pristine.
A few months ago I did some bottom fishing and got pulled off the boat by XLF. I can see maybe doing some very short term trading because of the volatility, but that is IT. I am done doing any investing in this sector for at least a year.
His TV appearances do more harm to the bank and public confidence then his ego can imagine. His lack (and or denial)of complete and required knowledge of the Merrill deal borders embarrassment to even the least educated investor, media personnel, and government officials.
Why anyone thinks getting rid of the US's big banks is a good idea is assanine. Its like people don't see the bigger harm by letting these banks go under. You can fix these problems with time. Mark 2 Market has identified the issues. We can see them. How much more transparency do you need?
If you were testing if a town of wood homes could burn down and you started the fire. After the first few houses burned down and it was obvious the whole town would in fact burn down...you are insisting that instead of putting the fire out we should hurry up and burn the whole town down. Too bad the people who are for this idea have no fortitude to rebuild the town. They'll just burn it down and rot in the ashes.
Sounds like a GREAT plan.
Are you crazy? Your examples of "investments" aren't even investments, they are speculative plays for day traders.
M2M accounting is the only thing giving REAL investors any confidence - suspend that and confidence goes even further.
Just because you think you can sweep your $hit under the rug doesn't mean it goes away.
Mark these words BoA is a TERRIBLE play folks, zero transparency and all lies. Why else would the taxpayer be propping them up.
Anyone going long on BoA for long term will be utterly slaughtered.
On Mar 08 08:09 AM Ranchr wrote:
> Bring back the uptick and end M2M. The shorts relentlessly pound
> B of A and other stocks into oblivion and M2M creates a false picture
> of a banks balance sheet.
>
> I have two mortgages with B of A and because I put 20% down on 15
> year mortgages 5 years ago, I will not default and because I don't
> believe they are evaluating each and every mortgage out there, the
> value of my mortgages is now being driven down when it is worth every
> penny of it's original value as are at least 80% of all mortgages
> but the hit to the balance sheets has been far more than 15 to 20%.
>
>
> I say again dump M2M and bring back uptick.
On Mar 08 03:56 PM Mayascribe wrote:
> Right now, as I write this 3:54PM, my Wells Fargo broker is in Washington,
> D.C., meeting with a House Finance Committee congressman from Scranton,
> PA, with four "chosen" brokers from other big houses. The discussions
> today are about the "loosening" of M2M. Last week, there were preliminary
> hearings about M2M, and they continue today, and will until the Scranton
> congressman meets with Barney Frank on Wednesday.
>
> I had dinner last night with my broker; who really is my mother's
> broker. He was the only non-family member that my mother wanted to
> attend her 90th birthday. He's known me since "before I was born."
> He states the same thing the Pete Najarian ("Fast Money" commentator
> and owner of Options Monster) stated, that if M2m is loosened, then
> banks stocks will double on March 12th.
>
> In the rather latest but apropo cliche, "Buy the rumor, sell the
> news," I will continue on with my Friday's purchasings of bank stocks
> with my high risk e-trade account, moving into banks stocks Monday
> morning, more aggressively after I talk to my broker tomorrow, and
> keep adding if I see the financials gaining as the rumor persists.
>
>
> (My broker, thank heavens, is my conservative side. He shakes his
> head at how aggressive I am with my e-trade account. But heck, it's
> up 42.6% since I started trading last July 2nd.)
>
> Hope this semi-inside scoop helps all who keep up on this sort of
> news. Prepare yourself for a potential big pop in the financial sector
> this week. Then check me out over in the gold section of SA later
> on. I will be there!
>
> Good luck!
Haircut risk is greatest with non-cumulative preferred issues, then junior subordinate deferrable debt and finally subordinate debt that can be exchange traded.
+ non-cumulative preferred issues such as BAC.J yielding ~30% (considered equity)
+ Debt Securities:
- Trust Security backed by a junior subordinate deferrable (up to 5 years) interest note. e.g., BAC.W,
yielding about 20%.
- InterNotes are direct unsecured subordinated (non-deferrable) obligations. e.g., symbol IKL, yielding about 15%
On Mar 08 12:00 PM formerhawk wrote:
> Beik
>
> M2M is mark to market.
>
> Bank rules on mark to market accounting are not as severe as in some
> other business segments so not sure what good M2M rule change will
> do for BOA either.
seekingalpha.com/artic...
Mark to Market is illogical for real estate …. Example, I have fully leased rentals that I could not sell right now for 50% of their value, cause no one can get a loan.
In one year I'll get 100% cause loans will be back.
Meanwhile, can I ‘Mark to Market” my rentals for property tax purpose [Fat Chance] !
Mark to Market is illogical for real estate …. Example, I have fully leased rentals that I could not sell right now for 50% of their value, cause no one can get a loan. In one year I'll get 100% cause loans will be back
Maenwhile, can I ‘Mark to Market” my rentals for property tax purpose [Fat Chance].
On Mar 08 09:48 PM Beik wrote:
> Thank you. let us hope for the best.
Amadeo Giannini and Bion Barnett are both rolling over in their graves.
''It has never failed at any time to take care of the legitimate requirements of its customers, nor at any time failed to pay cash on demand to any and every depositor,'' said Bion Barnett in 1927, celebrating the bank's 50th anniversary.
He was 70 years old by then but still had another 31 years to go. In his 80s he shot his age in a round of golf, which to golfers is a major achievement.
At 90, he said: ''I have decided to establish a rule of the bank to the effect that no officer or employee who reaches the age of 89 need return to work after the noon lunch hour.''
He showed up for work until he was 93. He died in 1958 at the age of 101.
As one of the biggest and strongest banks in Florida in the 1930s, Bion Barnett's bank helped keep the state's banking system operating after other banks started failing during the Depression. Communities suddenly without banks came to Barnett asking for help.
----------------------...
Barker-Benfield, Simon
The Florida Times-Union
October 8, 1998
On Mar 09 12:17 AM Don-n-ABQ wrote:
> You think Jacqueline Doherty or Ken Lewis will loan me $350.00 so
> I can buy 100 shares?
>
> Amadeo Giannini and Bion Barnett are both rolling over in their graves.
But when the market is in a downturn. Who would you think would be committing the abuses. Short sellers using CDS to foment fear. The banks themselves are too busy to do anything other than trying to shore up their finances to prevent bankcrupcy. Government must relax regulations and try not to manhandle the banks as they are doing now. Their micro-managing the banks will only prove disastrous as the govt knows next to nothing about managing banks.
M2M in a dysfunctional OTC market is an aberation since it is no longer providing anybody the true value of their assets under normal conditions. But rather it is causing bankcrupcies left and right and supposedly healthy banks can become insolvent overnight.
Accounting rules should be relaxed during market downturns in order for the banks to be able to survive then re-inforce those rules when the economy goes back to normal and possibly add more regulations when the banking sector starts to bubble again.
On Mar 09 11:57 AM Poor Man's Loans wrote:
> You may as well buy some FNM, if you like to gamble. The payoff could
> be huge, or you could loose it all.
You snotty nose wet behind the ears young whippersnapper's have no idea what the few fat farmers back in 1776 had on their mind when with the penmanship of poets wrote the American dream.
From 1776 to 1910 the National Debt went from $00.00 to $2.6 billion and tat wus without a dang income tax and from 1910 to 2008 it went from tat p^ss poor tiny amount of $2.6 billion to over $10.6 TRILLION and tat wus with every kind of tax the turnips in D. C. could shove up the Americans taxpayers @ss.
The turnips on tat big hill has a $100 TRILLION shortfall in YOUR Social Security and Medicare and all your doing is sittin' on a dang blog writin' bout a dang BANK....tat jus tells me....you couldn't pour p^ss out of a boot with the instructions on the heel...or change a flat on your foreign automobile.
Now! you can take all tis with a grain of salt with cracklin' cornbread on the side or jus delete the whole dang post but until you get off your lazy @ss and take back your country....a Jack@ss nor a dang Elephant ain't gonna get America out of tis.
The company with tat star (Wal*Mart) moved their Global Procurement Offices to Hong Kong and than to China....you
can be assured it wusn't to buy American made. Please feel free to read "The Flow of Trade in a Global Economy" by Lance Winslow. There is one quote from his article tat comes in mind. "Now let us look at Wal-Mart again; you buy a product there, 6% goes to the employees, 10-18% is profit to the company, 25% goes to other costs and 50% goes to re-stock or the cost of goods sold. Of the 50% about 20-25% goes to China, a guess, but you get the point. Now then, how long will it take at 433 Billion dollars at year for China to have all of our money, leaving no money flow for us to circulate? At a 17 Trillion dollar economy less than 40-years minus the 1/6 they buy from us. Some say that if we keep putting money into our economy, it would take forever, but if we do not then eventually all the money flow will go. If China buys our debt then eventually they own us, no need to worry about a war, they are buying America, due in part to our own mismanaged trade, so whose fault is that? Not necessarily China, as they are doing what's in the best interests, and we should make sure that trade is not only free, but fair too."
Also, think for a moment about George Washington....yes the man tat is on the US dollar bill.... "Washington had been reelected unanimously in 1792. His decision not to seek a third term established a tradition that is now embedded in the 22d Amendment of the Constitution. In his Farewell Address of Sept. 17, 1796, he drew on the results of his varied experience, offering a guide for both present and future. He urged his compatriots to
cherish the Union, support the public credit, be alert to the “insidious wiles of foreign influence,” respect the Constitution and the nation’s laws, abide by the results of elections, and eschew political parties of a sectional cast. Asserting that the United States and Europe had different interests, he declared that it “is our true policy to steer clear of permanent alliances with any portion of the foreign world,” trusting to temporary alliances for emergencies. He also warned against indulging in either habitual favoritism or habitual hostility toward particular nations, lest such attitudes should provoke or involve the country in needless wars."
Take the time to read his farewell address after only eight years of serving his country and than ask yourself tis....How do you think George feels being sent overseas in return for all tat foreign so-call cheap items and being left in a foreign bank because the American worker doesn't make anythig for the foreigners to buy. Cheap
items didn't make tis great union of 57...oops! 50 states the greatest place on the face of tis Earth.....the American worker (union and non-union) did. You can't have a strong country without having a strong currency and you can't have a strong currency unless you keep it floating around within your 50 states. Tis is why the store with the star in the name puts 95% China made items in their stores in China....to keep their "yuan" in their country helping the nice people there. And with only 5% left for all the other 182 country's tat make stuff including the United States of America....tat doesn't produce very many jobs outside of China. Being an old person myself and knowing how it wus back in the 40's, 50's and 60's in tis union of 50 states....I look at George each
time I pull him out of my billfold and make a promise to send him out for items made in America so after floating around helping each hand he touches jus maybe one day he will shake mine again.
Gudday and God Bless!
ps: read what Thomas D. Schauf wrote back in 1992 and you will see why your Bank at $3 a share wus the best investment for any person to make.