Bank of America Splits Assets: Is It Really Over?

Mar. 8.11 | About: Bank of (BAC)

Should I get the "told ya so" sign out yet?

Bank of America Corp. (NYSE:BAC), the biggest U.S. lender by assets, is segregating almost half its 13.9 million mortgages into a “bad” bank comprised of its riskiest and worst-performing “legacy” loans, said Terry Laughlin, who is running the new unit.

So half of what they have is trash? Looks that way.

Oh, and it's about a trillion in assets too.

The obvious question is "how much are they worth?" Looks like roughly $300 billion of it is on the bank's balance sheet, and the rest serviced for someone else. These are loans that are either delinquent or likely to become delinquent.

What's recovery on that portfolio? We have no idea, really. But it's important, because while the bank has $148 billion in market capitalization it is (like most banks) negative on cash-to-debt, which means the hit on that passel of "assets" is rather critical to forward valuations.

The stock is up big today, almost 4.5%. On this announcement? Well, not entirely. The CEO thinks they'll have a "normalized" earnings rate that is in the nosebleed territory, but of course "normalized" earnings may be more of a dream than a reality. First, you have to get rid of all those bad loans, and someone has to eat that loss.

For the securitized stuff that they service, they're not likely to lose much - the servicing contracts pretty much guarantee it. But when it comes to the loans on their actual balance sheet the questions are far more complex. There, it all comes down to recovery value, and if that $300 billion is only worth half that, well......

(Incidentally, didn't we hear that there were no material impairments remaining on these things to be reserved against, and haven't all these banks taken down reserves of late as a consequence? I seem to remember that....... but I might be mistaken....)