Yet another sign of deplorable practice in action. Regulators are urging all banks to increase their capital bases. Bank of America bought Countrywide, which lost $2.33 billion last quarter, but management maintains will be profitable by year end (perhaps if they engage in the tactic forewarned by Institutional Risk Analytics, of putting Countrywide in Chapter 11 to stiff Countrywide bondholders. IRA has said that move would have a serious adverse impact on bond issuance by banks). It has also been reported that tax losses from Coutnrywide make the deal cost-free. But you have to have taxable profits to use tax losses (although BofA could carry the losses back as well as forward).
Meredith Whitney of Oppenheimer, who so far has called the performance of banks correctly in this credit crunch. said in her July 15 research report that bank valuaatons (meaning earnings multiples) were headed lower until they “got real”. The overview comment:
For the financial markets to stabilize, we believe banks need to swiftly address true asset values and adjust their books accordingly. As assets have repeatedly been marked down over the past year in what seems like a constant game of “catch up,” investors have grown understandably wary of valuations and accordingly have revalued bank stocks with significantly lower valuations.
The report then explains at some length why the real estate assumptions at the major banks are still too optimistic, even those of Bank of America, which assumes a 25-30% peak trough price decline. She classifies the stock as “perform”.
The comment on the buyback at Bloomberg is skeletal:
Bank of America Corp., the biggest U.S. consumer bank, approved the purchase of up to 75 million shares of common stock.
Bank of America’s board authorized management to spend up to $3.75 billion on the share repurchase, according to a PR Newswire release today from the Charlotte, North Carolina-based company.
It is all part of the PR campaign to talk up the financials’ stocks so that they can go out and get capital at less dilutive prices. I frankly doubt it will work but it is a well orchestrated operation.
If you haven’t seen it yet, you might want to check out Holman Jenkins article in the opinion section of the WSJ today.
Totally agreew this is part of an orchestrated PR campaign beginning with the div raise at WFC, who might be well managed is in the unenviable position of being homesteaded in the most overvalued RE market. Then again NY/CT is still unde the radoar and that dirty little secret will eventually find its way into MSM. Would go so far as to think that Buffet had a hand in inching up that dividend as one in a serioes of confidence building measures for the banking system. Bill Gross had the analogy right on the agency debt, hiding under the unbrella, and that analogy holds for the protected banks. The probelm is that there is no real bid for these compnies. The short cover rally will end and then they will go to raise capital and suffer the HBOS fate. Think about that LEh deal whicyh was placed with strategic long term investors who agreed not to short it. perhaps JPM and BAC can raise money because they are simply not going away, but anyone buying the issues will lose money. Govt also trying to get spreads down for banks so as not to retard the pillaging being done via NIM expansion. This is desperation pure and simple.
who will buy this garbage is the equit susbidy team via the long only 401K folks, i.e. you, who have already lost their shirt buying this garbage during one of those other once in a lifetime opportunities.
Financed in part by a GBP1.25 Billion UK note sale.
I guess a bunch of management stock options must be vesting soon. Hopefully they’ll remember to reset the strike price as well.
Agree in general however this was apparently not a NEW purchase, but a diminished continuation of a prior program.
As such, it was market manipulation and a bit of financial sector ‘welfare queen’ egregiousness.
Reminds me of Home Depot taking out loans to buy back their own stock.