Henry Blodget says Bank of America is insolvent. Warren Buffett says buy, buy, buy.
Blodget came to his conclusion after discounting the value of various parts of the business. Mortgages. Commercial real estate. Europe. And then he worried the bank's problems could take America down with it.
Buffett moved after looking at the same numbers and concluding the bank is undervalued. Getting his managers in to uncover those values is what Buffett is all about.
What bears like Blodget must understand is there are key differences between late 2011 and late 2008:
- There was no visibility on the depths of the problems then.
- The problems were systemic, not limited to one bank.
- We didn't have strong, expert hands on which to push problem portfolios.
- We didn't have a model for dealing with the problems.
I think Buffett can solve the problem by breaking up the company. He obviously sees value there. A break-up is the best way to extract that value.
The mortgages can go to a new Mortgage Bank of America. That unit can then play “good bank-bad bank” with the paper, tossing the garbage into a new unit whose task will be to either make it good or liquidate it. It's been three years. We know which loans are bad now.
Breaking up Bank of America into a commercial bank, a savings bank, and an investment bank serves as a model for other supposedly “too big to fail” institutions.
Buffett can get it all done now, taking the pieces that need to be taken bankrupt into bankruptcy and selling off those that are profitable.
In his 2010 letter to shareholders Buffett criticized bankers heavily. Now he has the chance to be the sheriff, and at a profit.
Geographic separation may be the best way to start. Keep the commercial bank in Charlotte, move management of investment banking to New York and move the mortgage business to, oh, say Omaha.
If done right this could provide a model for breaking up other “too big to fail” institutions like Citigroup (NYSE:C) and JPMorgan Chase (NYSE:JPM). But do it gradually, so as to cause minimum financial disruption. And do it under financial control, not in a panic.
The whole thing about 2008, about TARP and all the rest of it, was to create a temporary structure under which the crisis would pass, not a permanent new mega-banking sector.
Now that value has been identified, it's time to unlock that value, and a break-up may be just the way to do it.
Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.