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Bank of America Death Watch: Unloading “Non-Core” Assets Aggressively

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Bank of America’s actions continue to betray its words. CEO Brian Moynihan bravely maintained in an investor conference call last week that the beleaguered bank would be around for the next 230 years and did not need more new capital. He nixed selling equity at its current price levels, because it would be highly dilutive.

Yet we and others have raised the issue that the bank is in a corner in dealing with its not so hot balance sheet. Not only are equity sales an alternative the bank desperately wants to avoid, but the other route back to health, earning its way out, looks constrained. Bank expert Chris Whalen forecasts reduced profits for major banks. And the industry seems to see that coming too. A Financial Times story yesterday reported that top global banks were making serious headcount cuts based on their expectation of earnings pressure.

So what’s a struggling bank to do? If you are in a leaky boat, you throw anything disposable overboard and bail like crazy. But BofA is in the weird position of having potential a long term solvency problem without immediate liquidity pressures. So while selling dispensable operations is a good strategy right now, it needs to sell ones where it can show a profit over book vale or otherwise have a favorable impact on its capital levels.

And the Charlotte seems a wee bit eager to dispose of assets. It is keen to ditch its 10% holding in China Construction Bank, but there are no nibbles, since between rights issues and equity floatation, Chinese banks are selling stock at a frenzied pace to strengthen their capital level to comply with soon-to-be-implemented Basel III requirements. If BofA does not unload this stake and CCB, as expected, also launches a rights offer, BofA will have to particpate, plowing more capital into an operation it wants to unload.

It is faring better in its efforts to offload its foreign credit card operations. Per the Financial Times:

BofA, whose stock has fallen by more than 40 per cent this year, said Monday it had agreed to sell its Canadian cards business for about $8.5bn to TD Bank and pledged to sell its bigger UK and Irish cards portfolios. Its shares rose 7.8 per cent on Monday to $7.76….

The MBNA sale will be a boost to BofA’s capital ratios. Although it is not huge in the context of the $1,400bn risk-weighted assets on its balance sheet, the effect is amplified because the credit card business is counted as risky under regulatory rules and the owner therefore has to put more capital against it than other assets.

The article points out that that the UK portfolio will not be such an easy sale. While there are some logical buyers, like Barclays, it remains an open question as to whether they regard this opportunity as a real priority.

I don’t mean to leave readers with the impression that Bank of America is in imminent peril. The bank is in many ways a victim of the Geithner stress test/extend and pretend charade. BofA and Citi were on the verge of failure in early 2009, and the powers that be chose to go easy on them and rely on cheerleading, regulatory forbearance, super low interest rates to provide easy, low risk profits, and some capital raising. The problem is that everyone drank the Kool Aid and BofA didn’t take aggressive enough action, either on boosting its equity or shrinking its balance sheet, when times were better.

However, the bank faces a growing wave of mortgage litigation. Even though it gets occasional breaks, the news on that front is on the whole negative. Yes, it had a positive development today, in that several securities lawsuits were consolidated and put before a believed-to-be-friendly judge. But on the negative side, another state attorney general, Catherine Masto of Nevada, indicated she had reservations giving a broad release of liability in the so-called 50 state attorney general settlement. Note that this sort of release is what Bank of America needs to help calm investors; anything short of that is pretty useless. We’d indicated that Masto would not join, but taking a stand publicly is far more powerful than remaining silent, and it provides confirmation of our thesis that those talks are in far more trouble than the reassuring PR would lead you to believe.

Bank of America could limp along for years in a less than healthy state; it could take a long time to see how these mortgage lawsuits play out. Recent setbacks suggest that the hope of settling them on the cheap is waning fast. But bank confidence is a fragile thing. If the bank’s stock price continues to languish and CDS spreads remain elevated, it may simply take the wrong turn of events, say the expected Eurocrisis, which will lead to heightened concern about counterparty exposures, and some new bad BofA revelation, to trigger an unwind. I’d rather not be proven right on this one, but the risk is all too real.

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45 comments

  1. Linus Huber

    A Financial Times story yesterday reported that top global banks were making serious headcount cuts

    This I can confirm, the 2 large Swiss Banks (UBS, Credit Swiss) announced lately to reduce head count quite a bit, confirming this assessment.

    I see the whole situation as a slow motion deflationary implosion with some counter trend reactions inbetween.

  2. Conscience of a Conservative

    Moynihan seems intent on following a good bank /bad bank strategy, but ironically they are keeping the bad(Countrywide) assets. Reminds me how during a market decline investors on margin call sell their blue chips and hold on to the small less liquid names.

  3. TC

    That risk of an unwind already “is all too real” offers enough evidence to suppose BAC presently is as good as insolvent. Then, to consider what little in Congress is being done to alleviate risk of chaotic collapse of U.S. mega banks, you begin to fathom what intrigues are developing in the shark pool of American wildcat finance. With the corruption likely immense, one can forget about confidence returning anytime soon. Enter the image of Nero (Obama) fiddling while Rome burns, on the road campaigning seeking another four years when in truth he should be thrown out of office — impeached — as soon as possible. Intrigues meet political controller, and a naive one at that, whose breach of duty appears near to crashing down on his thick head, making all effort venturing reelection appear a vile exercise in vanity.

    1. Maximilien

      Nicely said, TC. Your comment should be made available in Braille, for all those blind and deaf people (surprisingly many) who still adore Obama.

    2. Jen

      TC, you needn’t worry about Congress doing anything that would help the economy directly or indirectly. They haven’t so far (since 2010) and won’t. They are following a scorched earth policy to defeat the FIRE-friendly incumbent.

    3. Justme

      Don’t forget who signed TARP to bail out these banks and without a single regulation or any oversight as to how they used the money..dear ol’ George Bush! Obama isn’t shoveling money to the greedy bastards – he is trying to find ways to get them to do what they should have done in the first place – make good on their fraudulent loans that are contributing to the devistation felt throughout the US.

      1. tg

        You need to read the actual federal budgets that have been signed by Obama before you just point fingers. I would also recommend that you go to recovery.gov to see how much money as passed from the government and corporations. Then, spend some time researching who gives money to the Democrats (and Republicans). This is not just a Republican problem. If you honestly believe that a politician is “for the people” just because their party mascot is a donkey instead of a elephant then you probably should just stay at home on election night.

  4. Tony

    Are banks still getting money from the Federal Reserve at near-zero rates and then turning around and leveraging that at 10+-to-1 in Treasuries? My sense is that this feral looting of the taxpayers to benefit the bankster class has now ended or is at least being curtailed somewhat and that’s why banks are now struggling.

    When Government Sachs reported 15 days of trading losses in a recent report my immediate thought was that there must have been 15 days during the reporting period wherein the government didn’t provide guaranteed profits via the Federal Reserve.

    How many days did GS go without a trading loss? Was it like a whole year? You’ll never hear about this type of looting in the MSM.

    1. Nathanael

      They’re still getting that bailout, yes. Trouble is that practically *all* their other operations are going belly up simultaneously.

      And T-bills have such low yields now that they’re not actually making that much money off fleecing the taxpayer.

      So the income from the Fed loans isn’t enough to avoid insolvency — they’re still using fraudulent accounting to pretend that they’re not insolvent.

      The Fed loans avoid *illiquidity* but do nothing for insolvency. And furthermore there are some Fed rules about lending infinite amounts of money to insolvent operations; though they’re not really being enforced right now, eventually the charade is going to be hard to keep up.

  5. Jim A

    But BofA is in the weird position of having potential a long term solvency problem without immediate liquidity pressures. I don’t think that this is all that uncommon. I would argue that most companies pass through this stage on their way to bankruptcy.* If others weren’t still willing to lend them money, they wouldn’t end with a negative worth in bankruptcy. They can keep digging themselves deeper before people stop lending them shovels. In fact, I would argue that this is why we THEORETICALLY regulate banks more tightly than other entities. After all with the FDIC providing insurance, there’s a vested public interest in ensuring that they are forced out of business before their negative worth becomes too bad.

    *which is NOT to say that in every case companies with a negative net worth are not able to pull themselves together and return to profitability.

    1. Jim Haygood

      BofA is in the weird position of having potential a long term solvency problem without immediate liquidity pressures.

      Hell, Jim, we could say the same about dear old Usgov. It’s got a negative worth in the tens of trillions. But punters are so desperate to fund it that occasionally Usgov can charge them for the privilege of holding its T-bills.

      Peoples’ economist Mao Tse-tung explained the paradox decades ago: “Political[-economic] power grows out of the barrel of a gun.”

      1. grandiosity

        Please. The US Gov can print its own currency. It is not going bankrupt. The only trouble is whether foreign purchasers of US debt don’t want to hold US dollars or the interest burden crowds out the ability of US taxpayers to pay for government services.

        When that day comes (it will – even Rome wasn’t immune to decline – perhaps this bumpy peak-oil ride is a signal) then investors will look for other paper to hold.

        But if you believe in a “bullets and gold”, then the US is issuing the dollars you want to be holding right now.

        1. grandiosity

          @Jim — urk, sorry. My knee is jerking badly these days.

          Yes the punters want US$$ for precisely the reasons you point out. Don’t see this trend ending soon, unless the Chinese figure out how to unite Iran and Pakistan and keep India on the sidelines.

  6. Danb

    Re: “the beleaguered bank would be around for the next 230 years and did not need more new capital.” A few weeks before the Berlin Wall fell Erich Honecker, head man in East Germany, said that the Wall would still be standing in one hundred years.

    1. Maximilien

      It’s called “incantation”.

      “For effective incantation, knowledge is neither necessary nor presumed.”
      —–J. K. Galbraith

  7. Kindle South Africa

    Big Banks along with politicians are notorious saying one thing while doing the exact opposite. It almost makes you want to assume that when they talk they speak in a code that requires you to translate each of their words into the antonym of whatever they utter and then you discover the truth.

  8. Manhattan Bank Hag Who Loves Banks

    “HSBC have provided funding to the makers of cluster bombs, even as international opinion turns against a weapons system that is inherently indiscriminate and routinely maims or kills civilians.” – Jerome Taylor
    Go get ‘em Capital One! Bankity-Bank-Bank-Cluster-Boomlets!

    1. Goldman Oil Funnel

      “On August 5, 2011, NATO air missiles targeted a children’s hospital in Zlitan, Libya, killing 50 children. This event clearly reveals NATO war crimes and shows that civilians are being targeted during the bombing campaigns. “

    1. hello

      “richard says:
      August 16, 2011 at 10:17 am
      should i take my savings out of BofA?”

      No.

      But if your deposits exceed FDIC limits ($250k per account per spouse/guardian), you may consider spreading your deposits over multiple FDIC-insured accounts at multiple banks in the intermediate term—though in a worst case scenario it’s a 99% likelihood that BAC will depositors will be made whole but you can never be too careful over that rogue 1%.

      1. Running da' Money

        Horrible advice. Pull everything out of BOA and burn your credit cards safely. Even though the tyrannical intestinal tract of the kleptocrat’s command and control infrastructure connects all da’ Credit Unions and local Bankin’, go ahead put your scrip in one of them instead. It’s the thought that counts.

        1. BondsOfSteel

          Your deposits are safe at BAC.

          But ‘Running’ is right…. why bank there? You’re probably getting jammed on fees as the bank tries to earn it’s way out of the hole it made. Those earning come from it’s customers.

          You should look at local credit unions / community banks. It shouldn’t be hard to find a better deal.

          1. 5:00 PM

            I have a checking account at BofA for one reason only: they have the best online banking I’ve seen and they have never charged me one penny in fees to use it. However, I never have more on deposit at BofA than is need to pay current bills. I found a strong independent bank a long time ago and any real money goes there. It’s great to be recognized when I walk in the door, too.

    2. Susan the other

      Anybody see Charlie Rose last night interviewing Warren Buffet? Buffet is pathetically too-little-too-late. He even brought his tax returns to prove how wasteful the US entitlements are: See, they sent me 30K in Social Security benefits last year, hahahaha. But Buffet assured Charlie Rose that the banks are in “great” condition. Don’t you worry about the banks Charlie.

    3. Claire Solt PhD

      Absolutely! Close your accounts and change to a local bank with a good rating. I finally did after BOA pulled some unbelievable stunts on a credit card account. Closed both checking and savings. My own balance sheet went up 25%. They were stealing me blind with their keep the change plan.

  9. Fraaaaack

    So what happens to my mortgage from BofA if they go under? Would it get purchased up by some other company?

    1. serg tat

      You should walk away from your mortgage long time ago. And let CC have it too. The Ponzy which is the USSA economy will collapse sooner or later.

    2. Jim Haygood

      Same thing that happened when WaMu went under — a new mortgagee takes it over.

      After all, performing assets (such as mortgages) are what the FDIC sells to minimize its net loss.

      A bank failure is not likely to cancel anyone’s debts, though it may haircut large deposits.

  10. Shankara

    Fraaaaack, yes, a freshly created note will insure that one financial institution or another will eventually succeed in scoring your home. Don’t put off the inevitable or attempt to resist, it’s futile, for with or without the necessary paperwork one or more bank will lay claim to your domicile eventually. It’s not if, but when. Just go with the flow.

    The game is called Wak-A-Serf, and it’s all part of the 21st century land grab where those with solid credit connections plant stakes around those who no longer have any. The ensuing havoc is guaranteed fun for the entire elitist family. Rated C for collapse.

  11. Plutonious Monk

    I had a 1st and 2nd mortgage with BoA when flood waters destroyed my home in September 2009. The bank had a big spread in the Atlanta newspapers a couple of weeks later relative to assisting it’s customers who were hit by the disaster. Each time I contacted BoA for assistance I had to enter Phone Tree Hell for 60-80 minutes before speaking with some arrogant and indifferent doofus who knew next-to-nothing about assisting distressed customers. Upon foreclosure on the property in April 2011 BoA, in it’s consummate incompetence, failed to confirm the transfer within 30 days as required by state law and thus forfeited any and all claims to $144K in settlement.

    1. grandiosity

      Sorry to hear about your loss. Did you have to declare income for the difference between the mortgage you owed and the “value” BofA claimed post-foreclosure?

      I’m asking b/c I’m in a short sale situation. BofA has the second mortgage. They are so incompetent. We just had to resubmit all the paperwork all over again.

      1. Plutonious Monk

        Thanks for the response. No,an IRS agent has told me that the bank declared a total loss and that we are absolved of any claim by that agency due to our own losses. Incidentally, I had paid about $17K in additional principal on the two loans in the 30 months preceding the flood. The bank refused to refund any of this.
        I hope you succeed with your short sale efforts. Be patient as it may take several more months. I did pursue this course before a bank loan assistant refused to even speak to my realtor about an offer.

      2. Fraud Guy

        Also, under the HAMP and other laws passed since the crisis, you are not liable on losses realized by your mortgagor on a foreclosed home if the loss is reported by them to the IRS by 2013. Now if your bank decides not to report it by then…but since they only have 5 years to report such a loss, if you lost your home to foreclosure early in the the process, you are clear.

        Also, must be primary residence, of amount under about $749K and some other requirements. I dodged a $130K “income” bullet on this when my house was foreclosed on.

  12. Shankara

    Grandiosity, that’s not incompetence you’re witnessing when having to re-send your docs, it’s a state of the art finely tuned mechanism built for one purpose and one purpose only, to rid you of your home, all the while receiving backdoor funding from we, the taxpayers through their benefactors, our government. Aren’t endless and unlimited cabal bailouts swell?

  13. 4:20 PM

    Black n’ Wray, 11/2010:

    “Bank of America’s data indicate another form of deceit that is a typical consequence of accounting control fraud. Bank of America has delayed foreclosing, sometimes for years, on large numbers of loans that have no realistic chance of being brought current, even with the
    loan modifications it offered. This behavior would be irrational for an honest lender, for it would increase ultimate losses, but is a typical strategy for a lender controlled by fraudulent senior officers because
    it greatly delays loss recognition and allows them to extend their looting of the bank for years through bonuses paid on the basis of fictional reported “profits” after the bank has (in economic substance) failed.”

    1. Nathanael

      Exactly. Thanks for the quote. This epitomizes the behavior of the megabanks. Delays in disposing of worthless mortgages allow them to push a fraudulent balance sheet and a fraudulent income sheet, so that the execs can extract more money as “bonuses” before it all falls apart.

    2. Claire Solt PhD

      The only thing wrong with this analysis is that the Fed govt claims to own 97% of all mortgages. They have effectively nationalized both banks and the housing industry. They are charging back “toxic ASSSETS” to originating ORIGINATING BANKS. With BOA, the question is, who made them buy Countrywide? Probably Wall street who wanted to freeze out the guys from South Carolina. Definately not bean bag!

  14. Some Bloke from Australia

    I worked for an Australian Insurance Company in the 1980/90′s, and our clueless bosses were seduced into writing put options on commercial business constructions. The prime put option paid our company $10M to purchase a building for $525M in 5 years time. The building, 333 Collins St was expected to fetch $800 – $1,000M. (Maybe Yves knows the building, very plush.)
    But besides that, the company wrote 5 or 6 other sizeable put options. The market heard that we’d short them and flocked to see our bosses with the next dud deal as property prices started heading south with interest rates went at 18-20%.
    At no time did the bosses consider the need for reporting this timebomb as a contingent liability. Indeed, they’d get toey when we mentioned the requirement that we just might possibly be on the hook for $525M. The building, they insisted, was worth $800M, the put would not be exercised.
    Eventually the due date rolled around, the property was auctioned, no bids whatsoever, the put option was exercised and another insurance company bites the dust.
    At the subsequent fire sale, 333 Collins St was sold for $275M at the bottom of the property market, and within a couple of years was back to $1,000M.
    I dont know much of B of A, but are you all saying that they are on the hook for potential liabilities down the track?

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