After falling 20% Monday, to $6.51, shareholders in Bank of America (NYSE:BAC) must be in shock. And rightfully so.
In early March, with the stock in the $14 range, the bank held an investor conference, and CEO Brian Moynihan told investors that normalized earnings were on their way and that returning capital to shareholders was the bank's number one priority. Slides showed normalized pre-tax income could reach $35-$40 billion as early as 2013 or 2014, and by that time shareholders would be benefiting from a dividend equal to 30% of earnings, some $12 billion, in addition to another $30 billion of excess earnings the bank would return to shareholders via buybacks and special dividends. The presentation seemed focused, like the leadership at B of A was getting the bank back on track after the credit crisis and its poorly timed purchase of Countrywide Financial. I believed better days were ahead for the bank and for its shareholders.
Today, I am less certain. After infamously saying Bank of America would fight mortgage claims in hand-to-hand combat, the bank reversed, reaching a $8.5 billion settlement with a group of investors in June, which was part of the reason the bank took a $20 billion charge to Q2 earnings and reported a $8.8 billion loss. All of a sudden the capital cushion at B of A was starting to look a little thin, and rumors began to swirl that the firm might need to issue shares to raise capital. But things at the bank remained quiet, and the stock slowly drifted lower. With shares at $9.50 last Thursday, the New York Attorney General urged the judge in the case to reject the deal, claiming the settlement is unfair. Monday, AIG (NYSE:AIG) sued BAC for more than $10 billion, claiming AIG had been a victim of fraud when BAC, Merrill Lynch and Countrywide sold mortgage backed securities to AIG. While Bank of America denied the allegations, the news, coupled with the macro environment, was good enough to knock shares down 20%. Shares in the bank closed above $10 on July 26, and are now at $6.50.
If Bank of America wants to see $10 again before it sees $3, I think three steps need to be taken.
1) Sell the stake in China Construction Bank. Bank of America owns 25.6 billion shares of CCB, a stake worth about $21 billion, and the market has been eyeing the stake as a way for B of A to raise capital. A liquidation of the stake, which was not possible due to a lockup period that expires in August, "would raise about $10 billion in regulatory capital" according to Jonathan Hatcher, a strategist at Jefferies. This cash would lift the fear that share dilution was imminent, and should draw investors back into the name.
2) Finish the lawsuit issues. The $4 billion purchase of Countrywide by Ken Lewis in 2008 has lead to losses and potential losses in the $10s of billions, not to mention a legal and public relations nightmare. Bank of America needs to find a way to get out of the headlines, and out of the courtroom. If that means paying a higher percentage in a settlement to make sure it goes through, so be it. I'm not saying an additional $10 or $15 billion to get it over with, but if a $9.5 billion settlement would have won the blessing of the NY AG, that's better than having him attempt to block the deal. Management changed tactics and decided that settlements were the best way to proceed, so get the settlements done and focus on profitability.
3) Replace Moynihan and the entire board of directors. Since Moynihan took over the helm of BAC on Jan. 1, 2010, the stock is down about $9. The quarterly dividend has not been restored to anything above a penny, nor has a share buyback been allowed by regulators. All Bank of America has done under this CEO and board of directors is take over the title of Most Troubled U.S. Bank from Citigroup (NYSE:C). There is no confidence left in management, and shareholders would best be served by having the current management sell the CCB stake to raise the cash the bank needs to solve its mortgage liability problems, and then finding outside hands to run the bank.
Clearly Bank of America is a broken company suffering from a lack of confidence in both the bank's balance sheet, management's ability to see the future of the bank, and management's ability to steer the bank to a profitable future. After 18 months and a 50% loss, this shareholder is ready for new management at Bank of America.
Disclosure: I am long BAC.