Bank Of America's Solution Isn't Buffett, It's Dismemberment

John Tobey, CFA profile picture
John Tobey, CFA
Bank of America’s (NYSE:BAC) situation is taking on the aspects of a Greek tragedy – or a farce. Despite Warren Buffett’s official statement that Bank of America is a well-run company, his way-too-small $5 billion in preferred stock with juicy terms is unfavorable to the bank. (A good explanation is in the Seeking Alpha article, “Buffett's Deal With Bank Of America Is Absolutely Terrible ... For Bank of America, That Is.”)
On Wednesday, Henry Blodget said Bank of America is $200 billion short in capital. (Remember Blodget? He was the analyst at Merrill Lynch – now Bank of America Merrill Lynch – who was kicked out of the industry and had to pay millions in fines and disgorgements for allegedly having two opinions: One for the public and one issued privately.)
BofA’s response to the $200 billion amount by wunderkind CEO Brian Moynihan was “Unh, unh! No way! We’re fine!” (His audience was the understandably nervous employees.) In this day of instant electronic video and audio, Brian sent a memo to his 280,000 “teammates.”
But we shouldn’t express amazement at his reaction. Moynihan was a favorite of weak former-CEO Ken Lewis, who claims he bought Merrill Lynch because government leaders “convinced” him it was important to do so.
After taking over, Moynihan has one-upped Lewis, taking actions that exhibit hubris, not skill.
  • Paid back the entire $45 billion in TARP funds, saying the bank could go it alone. Meanwhile, uncharacteristically realistic Citigroup (C) repaid $20 billion, converting the other $25 billion into common stock – i.e., critically needed capital.
  • Took a China trip with fanfare about expanding the bank’s presence there, even as the bank struggled with deteriorating fundamentals in a highly uncertain U.S. environment.
  • When asked about divestiture to raise needed capital, said there were no meaningful components to

This article was written by

John Tobey, CFA profile picture
I am the founder and editor of Investment Directions. My career has been managing and consulting to multi-billion dollar funds. Using the widely accepted “multi-manager” approach, I have worked with top investment managers throughout the country, gaining a high level of expertise. My career has spanned many market environments, and I have hands-on experience searching out opportunities and avoiding risks in all of them. I now devote my time to Investment Directions, with the goal of helping investors further their understanding and improve their investing skills. I am currently serving on: The AAUW Investment Advisers Committee and The City of Vista Investment Advisory Committee.

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