Why is Bank of America’s Stock Cratering Yet Again? It’s the Extend and Pretend Endgame

Yesterday, the S&P 500 ended flat, yet Bank of America continued its truly impressive implosion, with its stock tanking 7.89%. It is now trading at a market cap of $65 billion, versus a book value of common equity of roughly $215 billion.

Market commentators were having so much fun discussing the meltdown that FT Alphaville even dedicated a post to the “The Bank of America Explanation Game.” This was its tally, and the post includes an explanation for each:

1. An analyst note suggesting BofA will need to raise $40bn-$50bn

2. Reports that BofA is keeping a stake in China Construction Bank

3. Yet more talk of snags in a broad mortage settlement deal

4. General market weakness and BofA’s susceptibility to HFT

5. Wikileaks has apparently destroyed some of its BofA data files

Henry Blodgett at Clusterstock endorsed the “BofA needs a lot more capital” view, and pointed out the obvious: the bank had had plenty of opportunity to sell equity when its share price was higher, and if it did need to sell stock now, it was going to be extremely painful for existing holders. Concerns about BofA’s ability to bolster its balance sheet are probably not helped by rumors that the bank is trying to unload Merrill and (not surprisingly) finding no takers.

Now narrowly, the trigger yesterday likely was the Jefferies view re Bank of America possibly needing to raise $40 to $50 billion. But that isn’t the most helpful way to frame the issue.

Think about it. BofA has $215 billion in book value of common equity. $40 to $50 billion is a huge number relative to that. For investors to react suddenly to one firm’s view (what, you own the stock and this is news to you?) points to something much more fundamental.

We are now seeing the downside to extend and pretend. Years of regulatory forbearance mean that investors know the marks on the balance sheet of a beast like Bank of America (and frankly all the other big banks) have a ton of air in them. And now that the economy is looking seriously wobbly and the odds of son of Credit Anstalt are well above zero, it means big banks are at real risk of getting seriously whacked in a major stress event. Worse, with Dodd Frank (supposedly) barring bailouts and Tea Partiers on an anti-bank, anti-Fed, anti-spending warpath, it might not be so easy for the authorities to rescue a big bank if a run started (not that I’m advocating a rescue, mind you, I’m looking at this from the vantage of a bank shareholder).

Steve Waldman set forth the basic issue in a very important post last year:

Bank capital cannot be measured. Think about that until you really get it. “Large complex financial institutions” report leverage ratios and “tier one” capital and all kinds of aromatic stuff. But those numbers are meaningless. For any large complex financial institution levered at the House-proposed limit of 15×, a reasonable confidence interval surrounding its estimate of bank capital would be greater than 100% of the reported value. In English, we cannot distinguish “well capitalized” from insolvent banks, even in good times, and regardless of their formal statements.

Now normally, investors accept the unknowability of bank equity because they have some faith in the system. Does anyone have any confidence in the system now? Financial regulators have shown themselves to be incompetent and/or badly captured by banks. Earth to base: letting off bank management easy is bad for investors in the long run. Being an investor in an overly risky bank looks swell until it suddenly isn’t.

Look at how the officialdom blew the bank stress tests. The sole purpose of that exercise was to goose bank stock prices so they could afford to raise new capital and rebuild their balance sheets affordably. What happened instead? Treasury let the banks sell pretty small amounts of stock and allowed them to “pay off the TARP.” Huh? The economic motivation for that was solely to escape pretty minimal restrictions on executive pay. And to compound the error, banks (BofA being one of the few exceptions) were allowed to resume paying dividends.

It is pretty easy to construct a list things to doubt on Bank of America’s balance sheet. Here are a few:

Second liens. Net of reserves, they are about $80 billion. That should probably be written down by 60%. That gets you to $48 billion, conveniently in range with the capital raise number bandied about today.

Commercial real estate loans. $182 billion, per the bank’s latest Y9. Probably at least some modest impairment there.

Goodwill. $78 billion. Countrywide has been written off, but Ken Lewis loved overpaying. The bank made a botch of its acquisition of US Trust, and given that it is rumored to be unable to ditch Merrill, query whether any goodwill booked in connection with Merrill is worth anything now. Some it not a fair bit of this number is probably vapor-y.

European exposures. Ooh, this is fun. No number here per se. Moynihan was asked in the seriously misbilled “we’ll take tough questions” conference call. He said BofA had $17 billion of European sovereign exposures and claimed it was hedged.

First, hedges of sovereign risk are wrong way hedges. The AIG credit default swaps against CDOs were classic wrong way hedges. An event that will lead you to put in an insurance claim is very likely to kill the insurer, which means your hedge is no good.

Second, sovereign exposures aren’ t likely to be the biggest risk BofA faces in Europe. What about its European bank exposures?

Notice how this list looks pretty bad and we haven’t even gotten to mortgage litigation losses. Not to worry, those are years away.

More immediate is what might happen to other exposures, particularly derivatives positions, in a market stress event. The poster child was Lehman. Pre-crisis, analysts focused on the asset side of its balance sheet. But the black hole in Lehman’s balance sheet has proven to be way beyond anything that could be attributed to either the asset side items that everyone had been watching or the “disorderly collapse”. While the derivatives counterparties grabbed collateral (as they are permitted to do), the bankruptcy judge can and has been contesting cases where the other side looked like it took more than it was entitled to. The open question is whether this sort of blowout was specific to Lehman (and the terrible mess in its derivatives books) or whether this is a more generalized phenomenon when a big trading firm crosses over the finance equivalent of an event horizon.

The point is that there is objectively a lot not to like about Bank of America. And now that investors have decided to start thinking critically, as opposed to blindly accepting bank equity as the faith-based paper that it is, one shouldn’t be surprised that they are getting cold feet. And the fact that the authorities have undermined the limited value of bank balance sheets via allowing all sorts of rosy accounting treatments is a self inflicted wound.

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  1. CB


    is keeping a stake in China Construction Bank or can’t get out of it? I read somewhere that BofA is captive there. Don’t remember the reason.

    1. Yves Smith Post author

      They were trying to get out of their stake but there is a ton of Chinese bank equity sales and rights offerings in the pipeline, and BofA does not want to get out at a loss.

      But the problem is if it stays in, the Chinese bank will probably make a rights offering of its own, and BofA would have to kick MORE dough in.

      Saying that it wanted to sell its stake and then not selling it has highlighted this little problem. If they hadn’t tried unloading it, the overwhelming majority of investors would not have had a clue re the high odds that BofA might have to sink more money into the operation.

      1. Brett

        I’m kind of surprised they aren’t trying to sell the whole thing. Most reports out of China suggest that China is dealing with a housing/credit bubble, and the fallout could be ruinous. Holding the stock of a huge bank in China doesn’t seem like the wisest idea — especially when BAC has paper profits of around $10 on its holdings. Bloomberg’s story suggested that they will keep at least half their stake — so maybe they get $10 billion in capital off a sale. But to who?

        1. Brett

          Ooops — that’s paper profits of $10B, not $10. They bought the 10% stake for $9.2 billion, it’s worth about $19-$20B right now. How they unload it and avoid driving the price down is another question.

    2. fajensen

      If their stake happens to be located inside China, then there are currency controls applied: They have to have government permission to export their own money!

      … This they might not get very soon unless they can bribe someone sufficiently high up – but probably not even that will work since China is really ticked off by the US policy at the moment and China may want some leverage on The One.

      It is surprising how many bright, seemingly professional, people invest in China without even bothering to discover the rulez first! It would not surprise me if BAC went into the currency exchange trap.

      1. Bhikshni Lozang Trinlae

        Not to mention that corrupt government regulators may be taken into the public stadium and shot in the back of the head

    3. 10-q???



  2. downtown josh brown

    selling or spinning Merrill, if that is truly what they are trying to do in private counter to all public protestations, would essentially signal a code red and serious internal panic…the bank has gone to great lengths to “integrate” and make the case that MER brokers selling bank products is the future of the franchise

    there is also no public company buyer for MER, the foreign banks/brokers wouldn’t tough it and the Morgan Stanley Smith Barney behemoth is already its own shipwreck.

    A Merrill carve out probably would involve private equity taking a stake followed by an IPO spin-off, this would take too long to help BAC though its current crisis

    1. Yves Smith Post author

      This is apparently a market rumor, as I indicated, I have no idea re the validity.

      I had said in earlier posts (before I had heard said rumor) that Merrill would be pretty impossible to sell now. So maybe they put out a feeler and got the expected rebuff.

      I know they’ve talked re integration, but I don’t know how deep it has actually gone.

      1. dearieme

        “Merrill would be pretty impossible to sell now”: just a guess, but surely there will be some combination of terms and price that would allow a sale? I’m further guessing that the necessary terms would involve more transparency than would suit BoA.

        1. Maximilien

          Yeah, now that bailout money is no longer a certainty, that pesky ol’ “transparency” is sticking its nose into potential mergers and acquisitions.

          Of course it was nowhere to be seen back in ’08, when taxpayer cash was there for the asking and opacity was convenient. Ken Lewis, maybe a fool but certainly a crook, didn’t even bother to “nail down the cash” (Rule #1 of any takeover) when he bought Merrill, knowing full well that any “surprises” would be taken care of by the gov.

          The result? $3.6 billion in back-dated bonuses to Merrill staff, paid compliments of the taxpayer.

    2. PQuincy

      The idea that bank-owned brokerages will have privileged access to moderate net-worth bank clients, sucking up their investment business, seems to be a recurring fantasy of bank managers, but is there any life in it? I remember all the “financial supermarket” talk back in the 80s and 90s, and it didn’t make much sense then. Why should it work now?

      Yes, the persistent (and increasingly annoying) clumsy salesmanship by tellers and retail banking reps every time I make a deposit continues, and this may suck in few hundred thousand dollars of grandma’s savings here and there. But I (no expert investor) know far better than to go into Merrill ( if I had any money at BoA) because they’re an awful retail firm, and always were. I got burned by their fees, lackadaisical service, and poor performance when I was just starting to save, and learned my lesson, after all.

      Merrill as an investment bank may be of value in the BoA system, but the idea that ‘retail integration’ will suddenly unleash a flood of cash from mid-tier bank customers strikes me as absurd.

      Then again, I’ve never understood why ANY small investor would use a high-service brokerage, given their long long record of selling inferior branded products with high costs and poor performance.

      1. Bill

        The first ever stock market investment
        I ever made was with Merrill, in the

        The “broker” (salesperson) steered me
        into one of their own IPOs, named
        Cincinnati Microwave, selling for $12.

        Within weeks, it had fallen to $8, where
        I sold it a couple years later. It later
        went BK.

        I learned a lesson about Merrill and IPOs
        from that experience. I’ve never dealth
        with them again.

      2. Maximilien

        Not to mention their unloading of junk on unsuspecting clients. A broker tried to sell me some crap many years ago. Luckily I’d read a few books on investing and remembered the maxim: “Never buy anything a broker offers unless you are a favored client.”

        Obviously I was not a favored client and I knew what my broker was up to, so I declined the sale and immediately closed my account. Turned out the investment (some sort of segregated fund) had a 5% sales commission. The fund was closed 5 or 6 years later and investors lost 50% of their money. I’m sure the brokers did well on it, though.

      3. Nathanael

        Merrill Lynch has been a criminal operation as long as I can remember.

        We got stuck with a Merrill account after it bought out another brokerage and we didn’t act fast enough. Then they charged us a fee to close our account — which is illegal, as it’s in violation of the terms we opened our account under — but they made the fee just small enough that it’s not worth suing over.

        Which is obviously their entire business plan.

  3. Daniel de Paris

    Wonderful Post,

    I am not alone unable to set any value on a bank… Not only a question of education and IQ…

    Agreed 100% on the practical impossibility to set a value on a bank in difficult times. May I add this become especially when the monetary environment becomes so volatile.

    Should the dollar go down the tube and Q3 arises, Bofa looks like a bargain to me! As a conclusion, I understand that the market is pricing an enduring deflation. At least until it can ransom the authorities into Q3 and more…

  4. attempter

    In English, we cannot distinguish “well capitalized” from insolvent banks, even in good times, and regardless of their formal statements.

    In other words, like the people always suspected, the finance sector is not a “capitalist” or real economic phenomenon, but a purely political artifice.

    And the Bailout is actually just a quantitative leap of this political policy, not a qualitative one.

    Finance is nothing but a camouflaged political party. Economically, it does far less actual work and produces far less than, for example, the mafia.

    So just like we’ve always said, none of this is anything but a purely artificial political choice which can be supplanted by a different political choice at any time. There would be no necessary real economic effect of such a change at all, other than to liberate the real economy from the finance tyranny.

  5. Yearning To Learn

    excellent post.
    It does seem we are in quite the quandry these days.
    BofA is clearly TBTF, but it’s also TBT exist and likely TBT save. and yet it’s losing its zombie power by the day. The only surprising thing is that it’s BofA before Citi.

    The political calculus you elucidated is likely accurate, however I’m not sure that a torpedo to the financial system won’t change the math allowing for a BofA bailout of some sort. Tea Party will oppose, but Big Repubs and all Dems will vote for don’t you think?

    The Tea Party appeared to have the upper hand during the Kabuki theater, but in that instance the TP was in (secret) alignment with Repubs and Dems–all parties wanted cuts to SS and Medicare… The TP gave the Repbus/Dems cover to do what they wanted to do while blaming a “bad guy”.

    but if BofA goes down then you have a lot of financial interests frightened. This will align Dems and Repubs against the TP. it will of course be structured as a non-bailout bailout.

    I just don’t see the possibility of BofA going down. yet.

    1. knighttwice

      The only politics that count in this matter is BO’s. There is NO way he will get reelected if he bails out BAC. After all, it was his team that came up with the Dodd-Frank statutes. How ironical that it could be a failure of “the Bank of America”. BAC’s error was not realizing how fragile the world remained when the stock had climbed to $14. They should have issued massive equity then, but were addled by the regulators constant marination. History will show that the BO administration’s decision to permit the banks to exit TARP was one of the worst decisions in the past 100 years…

      1. Yearning to Learn

        BAC’s error was not realizing how fragile the world remained when the stock had climbed to $14.

        But of course the execs realized this.
        the only failure is the failure for many to understand that the Executives running BAC don’t care about BAC’s future. Instead, they care/cared about maximum upfront compensation as soon as possible before BAC sinks.

        Thus: get bailout money. Extract as much as possible in terms of salary and bonuses, and then walk away when it all implodes.

        sure they lose their job. and have to suffer on hundreds of millions of dollars extracted while in power. also will likely get picked up as “talent” at some other TBTF entity.

        for some time Executive incentives have been aligned AGAINST shareholder incentives. with predictable outcome.

  6. Arnold

    The most valuable asset that Bank of America has to its name right now is its One Bryant Park building in Times Square. My prediction is that Donald Trump will buy the building at fire sale prices and turn it into the first green casino in Manhattan.

  7. vlade

    Yves – re collateral. Collateral disputes are common, daily occurence. Even as simple things like vanilla IR swaps, which in theory should be trivial to value, can get hairy, as it depends on what curve are you using and how are you interpolating. Do you take collateral and funding costs into account? Do you take the correct basis into account? What discounting curve do you use (i.e. are you predominantly funding at 3M or something else?, does it have term structure?)? How do you interpolate? How do you deal with futures convexity if you use them to bootstrap? Put all this together and you can be quite a few points apart even for an IR swap. Make it xcurrency swap, bermudan, inflation swap, or who knows what and you can be miles apart. Even such things as one would expect by default – agreed market quotes are uncommon, as everyone runs their own end-of-day (or three) and takes market data snapshot whenever they want.
    Untangling the collateral and arguing what is due what is a nontrivial exercise.

  8. drfrank

    Time to bring back the idea of disclosing, I mean highlighting, the ratio of money-good assets to FDIC liabilities. Thus, unquestionably money good assets should cover taxpayers’ contingent exposure by at least 1.5 to 1, or more. The rest on the liability side of the balance sheet is capital at risk–investor be wary.

    I suppose it is too much to ask that Government guaranties for banks be limited to insurance for consumer deposits, and crazy to suggest that nobody really needs more than $10,000 in an insured deposit account. Imagine if banks had to compete for deposits based on their strength, their disclosed capital reserves. Does anybody (besides old man Volker) remember the time when banks had names like “Citizens Fidelity,” or “bank and trust?” Or the reason why they had such names?

    One curious thing about regulation has been that the ostensible purpose of regulation has been lost in the conversation. Another is that “market forces” have not been allowed to impose a form of regulatory discipline.

    As for Obama, he has shown no interest in these matters, and his willingness to rely on received wisdom has been our common disaster.

  9. mememe

    on the plus side–should BofA become nationalized (more likely than not) liberals and conservatives get what they both want, a one-term Obama.

  10. CL

    The comment about the goodwill writedown is irrelevant to any bank’s capital standing. Bank capital levels are based on tangible equity, which means when calculating capital ratios, one would have already deducted any goodwill on the balance sheet. A goodwill writedown thus has no impact on tangible equity. So your estimate is high by at least $78bn.

    1. Yves Smith Post author

      First, the focus on tangible common equity is a post crisis development and it was pushed by the US. Your statement is far more sweeping than that.

      Second, I was not speaking about regulatory capital in this post. I’m looking at this from an investor perspective. And BTW, investors seem to think the bank is much worse off than regulators do, given the market cap v. reg capital levels.

      1. CL

        This article is about BofA’s need to raise $200bn in capital, and one of the supporting arguments is that a goodwill writedown may be imminent. My point is that a goodwill writedown does not create a capital need. Furthermore, I don’t think the investor community would view such a writedown as an erosion of shareholder value. Tangible book value is not a post-crisis measurement – it has long been a yardstick of both value and capitalization for banks.

        1. Yves Smith Post author

          I’ve been running both merger analyses and financial analyses of banks since 1980, which I strongly suspect is a lot longer than you have.

          You are simply wrong re the use of tangible common equity. Goodwill results from a merger. The assumption is that when a buyer pays a premium, it is because the franchise has value in excess of book value. While tangible common equity is a metric, it has never been a primary metric in the investment context. And from a regulatory standpoint, it is not a primary metric of the adequacy of capitalization either.

          1. crankyinnyc

            you are flat out wrong. Goodwill write downs have zero impact on regulatory capital and zero impact on knowledgeable bank investors.

            I have been professorially involved in analyzing, investing, advising, acquiring/disposing and managing banks both here in the US and Globally for more than 20 years

        2. CL


          You certainly have been running “merger analyses” much longer than I have, during which time you obviously have not gained a clear understanding of regulatory capital.

          Banks need capital to support potential losses in real, hard assets and to protect depositors. If BAC writes down its goodwill, the values of its hard assets are not affected and depositors are not endangered. For that reason, a goodwill writedown does not necessitate a capital raise – it has nothing to do with your explanation of merger accounting.

          Maybe tangible equity does not affect the way you invest, but I assure you it does for the broader community, and I will prove to you that regulators most certainly rely on it.

          Below is a link to the 6-30 BAC Y-9C. Go to Schedule “HC-R-Regulatory Capital” and read the components of Tier 1 Capital (a primary regulatory capital measurement) – you will find a deduction of goodwill and intangibles, which implies they examine tangible equity and do not ascribe value to goodwill.


          1. Nathanael

            Granted, but I ask you to think about the fact that so-called “tangible” common equity is not, in fact, tangible. I’ve looked at banks’ financial statements and it’s quite obvious that even that is cooked — it’s another example of valuation fraud by means of related-entity transactions in *intangible* paper.

            It’s much more work to commit valuation fraud in actual tangible assets, bricks-and-mortar… but “tangible” as used on balance sheets doesn’t just include bricks-and-mortar.

  11. ArkansasAngie

    Why do we refer to the “people” who own stocks investors.

    They aren’t investors they are speculators

    I also seriously doubt that they are people
    Enough is enough. End the charade.

  12. Brett

    What ever happened to the old fashioned explanation that the market is just mispricing this stock because of a climate of fear and a (seemingly) never ending streak of bad news? I think high frequency trading has a lot to do with it — the further BAC falls the more stories that are written about it, the more the Goldman Sachs super computer algorithms pick up the tid-bits and trade on the news.

    This seems like the black swan that everyone things is going to happen but probably won’t happen. I recall 2009 when I was sure that BAC would be put in receivership by the U.S. government. The stock was sitting at $3 and I thought everyone who bought it was a fool. But turns out the bank had friends in high places (specifically Geithner) who figured out a way to save them. Last I checked, Geithner is still Treasury Secretary and he still is subservient to the banks.

    My main point here is it is impossible to know what’s going to happen. BAC seems to have a lot of assets that it could sell to get to that $50 billion number. They just sold their Canadian credit card business for $8.8 billion. For whatever reason, they aren’t selling out of the China Construction Bank (but this seems like a conscious decision on BAC’s part, not something that was forced). They are trying to sell other credit card companies in Europe (which may be harder to sell than the Canadian one). And they are trying to sell Merrill Lynch (which may be difficult). And if worst comes to worst (for the mortgage related difficulties), they likely have the option of putting Countrywide in bankruptcy and splitting it from the main bank.

    Likely there are even more opportunities that haven’t made headlines yet. The news that they need $50 billion is old for anyone who has been paying attention to this stock. So these giant moves based on the smallest bits of news really make no sense. But we live in a world not where actual people buy and sell a stock, but where giant computers buy and sell millions of shares in fractions of seconds trying to profit on momentum trading and the direction of the news flow. And given that BAC’s problems look to be long lasting (years), the myopia with investors (who want rewards today) likely means they are cashing out rather than wait for any reward.

    But how all this means that BAC will be bankrupt — I don’t see it. In 2008, when we were looking at a massive hit to the economy, and a huge deflation of the housing bubble, it was obvious (in hindsight, though many called it at the time) that BAC (and every other bank) was in serious trouble. Today, the fears of double-dip recessions are overblown. The problem is slow growth, but the bubble has mostly deflated and billions of dollars of bad loans have been written down. BAC could surely write down even more, but extend and pretend is sometimes a viable strategy, given Bernanke has said that rates will stay at 0% through 2013 (a subsidy to banks).

    1. Yearning to Learn

      But how all this means that BAC will be bankrupt — I don’t see it.

      this is precisely the problem. none of us can see anything due to opaque accounting gimmicks. That’s the point of this article.

      These rumors sway speculators and Algos regarding BAC because the accounting is clearly dodgy at best.

      but the bubble has mostly deflated
      hmm… I’m not sure I agree here, but am prepared to be shown a case that the bubble has largely deflated.

      1. Brett

        Economists who know what they are talking about (Dean Baker, for example), say house prices will likely fall another 10% to get back to normal the normal trend line. Sounds like a lot, but compared to where we were in 2006-2007 (looking at a 50% decline in housing), the economy is much closer to the bottom and thus the losses are not as significant.

        I’ll admit that I don’t know what it means for BAC that 1/4 of homeowners are underwater. So far, it seems to me that people are staying in their homes and continuing to pay despite being underwater (though some have turned in the keys). Will those trends continue? Hard to say, but as of now it seems like the increasing rate of people falling behind on payments has slowed down considerably. The economy is no longer losing 700,000 jobs per month, and even given the U.S. accepting austerity, it’s unlikely we’ll see job losses like we were seeing in late 2008/early 2009.

        BAC’s great worry is litigation arising from mortgage fraud/securitizing mendacity from Countrywide. But those the major costs are years away, and they will likely be tied up for years more in court if any judgments go against BAC and cost them considerably more than they are willing to pay. BAC will try to take a get of jail free card if it’s offered them, but if that becomes unlikely they’ll just resort to the old fashioned high-priced lawyers tangling up cases for years in court. In the meantime, they are trying to earn their way out of the mess. But by all means, it’s a long term problem and it takes patience on the part of the shareholder.

        1. ReaderOfTeaLeaves

          But the larger problem remains in the sense that banks create credit and they pumped up billions in garbage while Bush was in office. No economy can bear the weight of mortgage fraud, rampant speculation, and money printing indefinitely.

          There is far too much unproductive, accounting-fraud based nonsense related to TBTF and related financial incompetence.

          All the energy and time spent arranging deck chairs in the BoA Titanic is sucking energy away from deeper, systemic solutions for the larger economy.

    2. Typing Monkey

      “the further BAC falls the more stories that are written about it, the more the Goldman Sachs super computer algorithms pick up the tid-bits and trade on the news.”

      I know very little about HFT, so this statement confuses me. How do the algorithms pickup or trade based on information in news stories? I thought algo trading relied on fundamental data (numbers, not stories)?

      And if the information has to be interpreted by a human, then what advantage is there in algo trading (since the interpretation is teh slowest part of teh process)?

      1. Brett

        That comes from this Alphaville story about how Berkshire Hathaway tended to jump up whenever Anne Hathaway was in the news a lot.


        The theory is that the HFT momentum trade machines, which scour popular news sites searching by keywords, were confusing Anne Hathaway for Berkshire Hathaway. Seems plausible to me – it is a bunch of machines constantly looking to arbitrage the tiniest discrepancies in bid/ask prices. Some of the algorithms are specifically designed to trade on momentum. That is, if a negative news story hits the internet, the machines will instantly try to short the stock (or otherwise sell) to front-run the general tide of the market. It’s a wild casino that you are competing against any time you buy or sell a stock as an individual.

        1. Alex

          The only stocks that are remotely safe right now are blue chips which pay a dividend, if you’re in it for the long haul and (possibly) have a dividend reinvestment plan.

  13. Jackrabbit

    IMO QE3 was meant to pump up bank earnings to prepare for equity offerings. That’s why Banks were allowed to pay dividends (Jan 2010) shortly after QE3 started (Nov 2010). I think the Robo-signing mess (Sep 2010), Fukushima (March 2011), European Crisis, S&P downgrade, etc. put a damper on their efforts.

    Bank stocks fell after QE1 (April-May 2010). This would have been most troubling (and enlightening) if banks had been laying plans for equity offerings.

    No one knows how risky the banks are, so earnings momentum (EM) is an important metric. While unreliable, EM appeals to speculators and less sophisticated investors.

  14. Typing Monkey

    Second, sovereign exposures aren’ t likely to be the biggest risk BofA faces in Europe. What about its European bank exposures?

    Very good question, especially since an even casual glance at some of those banks makes it very difficult to sleep at night.

    Have you considered writing up a death watch for some of them?

    Look at how the officialdom blew the bank stress tests.

    No, they blew the bankers. They then declared that it was a worthwhile exercise that was much better than expected.

    And now that investors have decided to start thinking critically, as opposed to blindly accepting bank equity as the faith-based paper that it is, one shouldn’t be surprised that they are getting cold feet.

    With all due respecr, the problem wasn’t that people were stupid enough to blindly accept the banks’ word. What happened is that those who were short got killed due to the highly questionable shenanigens pulled. Now that Europe is on the brink, though, there’s just not enough money anywhere to keep this crap going on much longer. (nor is there the will power–even the unelected Fed has to be somewhat concerned about its complete lack of credibility and the level of public hatred directed towards it)

    Might this somehow get delayed a little longer? Sure, I guess. How much longer? Maybe a year or so, at the very maximum. But the increased probability of a major near-term default (look at the European funding mismatches!!!) is going to keep people jittery for a long time, I think.


  15. LeeAnne

    add to “The Bank of America Explanation Game,” the windows of their 97th/Broadway Manhattan branch haven’t been cleaned in years giving them a goin’ outa business look -their signage likewise neglected and dated looking.

    Wish I could say the same about Chase as in JP Morgan Chase where their branches are all shiny, new and ubiquitous.

    They’re getting ready for something big with branches blanketing the main streets of Manhattan crowding out most all local privately owned businesses replaced with investment banking financed franchisees.

    What can it be? The branch spaces are huge and empty, obviously preparing to service a huge influx of locals. It must be the coming change in currency and/or maybe preparation for John Kerry’s passion for Infrastructure Banks.

    Would he be so passionately behind them if it weren’t a foregone conclusion? Watch for Obie’s vacation celebration talk on jobs -US jobs.

    Looks like John’s taking a page out of Pete Peterson’s book: How to Make a Billion Bucks in the revolving door of public servicing yourself to serve-yourself-investment banking.

    May they both rest in peace.

    John Kerry’s enthusiasm

  16. tyaresun


    There is a rumor circulated on Wall St. that JP Morgan (NYSE: JPM) will take over Bank of America (NYSE: BAC) within the week. The government will support the deal with a $100 billion investment in preferred shares issued by the combined entity. Alternatively, the government may guarantee the value of a large pool of Bank of America assets. The word is that Treasury Secretary Geithner has discussed the transaction with JP Morgan CEO Jamie Dimon.The “merger” would completely destroy the value of BAC’s common shares.

    The government feels that the deal may be necessary as Bank of America struggles unsuccessfully to close several transactions to bolster its balance sheet. The Wall Street Journal reported that the financial firm will need to raise $200 billion which would be another possible event that would wipe out common shareholders.

    1. Yearning to Learn

      JPM taking over BofA seems like Too Big To Imagine.

      How on Earth could the Government try to facilitate such a massive entity?
      That seems politically impossible in the current climate, IMO.

      1. fajensen

        They are doing precisely that here in Denmark – http://epn.dk/brancher/finans/article2522044.ece – “healthy” banks can get virtually unrestricted and secret funding from the central bank to take over “troubled” banks “assets”. They are hastily ramming this legislation through parliament cloaked in the noise from the upcoming general election but I bet that “the opposition” votes for this deal too. They always make up a “broad coalition” before ripping off the people to block any rage being expressed by voting.

        The politics simply does not matter – if it actually did matter, voting would be described as the tool of extremists and banned immediately.

        Google Translate:

      2. Sy Krass

        The combined entity will be called JPMorgan Chase Chemical Bank One First Chicago First USA Washington Mutual Bear Stearns Bank of America Countrywide Merrill Lynch. I must be missing a few, any help. The name will be changed to The Inbred Bank


    2. LeeAnne

      and that scenario fits in perfectly with the consolidation of everything -all monopoly, all the time.

      just press a button, and BINGO -the talking point for the day, or the end of a social program, or, heaven forfend, another few $Trillions for the banks, a rise in transportation fees -easy for them to keep track of, and sorry – no permits today for peaceful protests.

  17. kravitz

    okay yves. you got me curious. had to see what was up. just after noon. bac’s at $6.3. wouldn’t quite call it a crater. but the headline next to the quote was not helping…

    BofA Has ‘No Reason’ to Raise Capital: Bove

    “Bank of America has so much cash on its balance sheet that it could pay back all of its short-term debt and a big chunk of its long-term debt,” said Richard Bove, an analyst at Rochdale Securities.”

    but the day is still young…

    1. Nathanael

      Cash? Ha.

      The so-called “cash” on bank balance sheets is mostly money market paper. Most of that is backed by securitized mortgages…. and you start to get the picture.

      How much *actual* cash does BoA have? Meaning, Federal Reserve Notes, coins, etc. ? Answer: not enough to repay even 10% of its depositors.

  18. Eureka Springs

    Rumors abound.


    JP Morgan May Take Over Bank Of America

    The government will support the deal with a $100 billion investment in preferred shares issued by the combined entity. Alternatively, the government may guarantee the value of a large pool of Bank of America assets. The word is that Treasury Secretary Geithner has discussed the transaction with JP Morgan CEO Jamie Dimon.The “merger” would completely destroy the value of BAC’s common shares.

    The government feels that the deal may be necessary as Bank of America struggles unsuccessfully to close several transactions to bolster its balance sheet. The Wall Street Journal reported that the financial firm will need to raise $200 billion which would be another possible event that would wipe out common shareholders.

    1. Just Tired

      Looks like the evolution of banking is leading us to one central bank (the Fed) and one de-central bank (JPM).

  19. Steve Roberts

    The Canadian credit card business was sold for $8.8 billion (not closed yet).
    Merrill is worth probably $30 billion when things settle down.
    China Construction Bank is worth $18 billion
    That’s $66.8 billion and the market cap is $65 billion.

    BAC is a buyout candidate for $90 billion.

    1. Yves Smith Post author

      So go buy the stock and tell me in a year how it works out for you. AIG supposedly was worth a ton more than the $85 billion line of credit from the Fed too.

      The fact that they can’t sell the Chinese bank stake says it ain’t worth $19 billion. There are a ton of Chinese banks raising equity now in various forms AND this one likely will hit all investors for more capital in a rights offering. Not exactly an attractive investment proposition.

      And you seem to forget the liability side of the balance sheet.

      1. bjk

        “So go buy the stock and tell me in a year how it works out for you.”

        Go short the stock at 50% of tangible book, see how that works out for you.

        “AIG supposedly was worth a ton more than the $85 billion line of credit from the Fed.”

        AIG’s problem is the more than 1 billion shares in the hands of a forced seller. The business is healthy.

        “And you seem to forget the liability side of the balance sheet.”

        You mean the $1 trillion in deposits? That’s what will save BAC.

        1. Yves Smith Post author

          You are the one who chose to challenge me, and asserted BofA is worth approximately 50% more than its market cap, so the onus is on you to put your money where your mouth is.

          I dumped BAC at $36 and was pissed at being sufficiently distracted so as to be late to do so (I hate trading).

          As of BofA’s latest Y9, it has less than $900 million in core deposits on a $2.0 trillion balance sheet. It has over $900 billion in non-core funding and trading liabilities. Your argument that that deposits will “save” BofA shows you know perilous little about banking and leverage.

          And banks that were even more heavily deposit funded have had terminal runs, look at WaMu for starters.

          1. bjk

            You’re predicting a run? So after this whole crisis in which none of these banks had runs – Countrywide was hardly a bank and WaMu was an S&L – now you’re predicting a run? On what is essentially the Bank of the USA? By the way, your sniffy remark that deposits don’t matter – then how come all the brokers without deposit bases either disappeared or turned into banks? By “liabilities” I assume you’re not referring to the deposits but the putbacks – they’ve got years to pay that back, if they ever have to. The putbacks are to BofA like an oil spill to Exxon, expensive but ultimately a minor nuisance that can be delayed indefinitely.

          2. bjk

            OK, I see that YS clarified the reference to liabilities – always good to actually read the comment you’re replying to. As of the latest earnings report, BAC had $400 billion in cash. I don’t think there is any dispute about the value of cash, and for the rest, as I said, they’ve got years and trillions to extend and pretend.

    2. DavidE

      I have to question your valuation of Merrill. What is the great attraction about Merrill that someone is going to pay $30 billion for it? Nevertheless, they are probably better off divesting of a lot of their holdings.

  20. Philip Pilkington

    Question-a-reeny regarding banking lore:

    I’ve been looking into the situation in Holland/The Netherlands for some time now. I’m trying to advise someone on where to place a rather large inheritance (that they really need held together in these bad times).

    So, they’re thinking RaboBank — you know, from the land of the tulips. So, I start looking at their exposure. EuroSovereignLoans don’t look too bad. But then I notice a whopper: nearly 50% of their loans are Dutch mortgages. So, I dig a little deeper and lo and behold there seems to be a pretty serious housing bubble in TulipLand:


    So, I’m thinking, “Eeeeksers!” But then I see all this stuff about some of the mortgages being backed by the state and all that and I start getting confused. I’ve never been good at this bank stuff anyway.

    So, anyone with a Bank-Brain want to give me some advice. Or better yet are their any cynical Hollanders out there that might give me an informed opinion on the exposures of their banking system. It would be muchos-appreciated.

    1. Chilingo

      The traditional role of banks in any country is to provide housing credit. Having 50% of your balance sheet in mortgages isn’t really too extreme depending loan to value ratios and whether their are explicit government guarantees on the mortgages themselves.

      Unfortunately, virtually every bank in the world is highly leveraged and if home prices decline meaningfully they will require government support. I expect Rabo is no different. In a totally “free” market, banks could probably not exist as they do today. But banks do have implicit and explicit guarantees of governments so your equation shifts to looking at the ability of the government in the Netherlands to support its banking sector against 1-25, 1-50, 1-100 year events.

      Regarding Dutch home prices in general, I have heard second hand from some people that the Euro conversion with the Gilder was a bit mis-priced and this created a step-change in housing prices. Whether that narrative is correct or not I believe is fairly immaterial: the fact is home prices are 3-4x what they were some years ago and lot it probably has to do with land prices. Anything that goes up that much in such a short period of time has risk associated with it. I believe keeping track of the underlying strength of the Dutch economy especially international competitiveness — is your best bet in predicting land prices.

      1. Philip Pilkington

        Land is a problem. But so was it in Japan. I don’t trust that as a yardstick.

        What really stood out to me was this (from the MacroBusiness article above):

        “As suggested by the above chart, the level of mortgage indebtedness in the Netherlands is exceptional by world standards. For example, according to RICS, 62% of new mortgages were classified as “very large mortgages” in 2005, with average loan-to-value ratios (LVRs) of over 100%, whilst the average LVR of first time buyers in 2007 was a spectacular 114%!”

        On top of this I know that a third of the mortgages are backed by the government. HOWEVER, only 13% of Rabo’s mortgages have direct government backing.

        And yes, of course, you’re right. It all depends on the Dutch sovereign’s ability to pay should the banks go onto the public balance sheet, but to be honest, I’ve had enough of that (I’m Irish). If I’m going to tell someone where to stash their cash it’s not in some F’ed up Eurozone hellhole where we have to rely on top-level faffing to ensure deposits are guaranteed. No thank you.

    2. Nathanael

      If you don’t have to access the inheritance promptly, place it in domestic government bonds.

      It is *very* rare for governments to default on their domestic bondholders, and if they do, pretty much every single bank in the country will die. So, safer than banks.

    3. Foppe

      Philip: I suspect Rabobank is the safest bank to go to still. Mortgage debt in NL can only be discharged in bankruptcy, so not too many people will go for it. And currently the housing market is fucked anyway, so the people can’t live anywhere else but in their homes, while they can afford the mortgages if they have to.

      1. Foppe

        The normal rental market is fucked because of the high land values making enormous rents seem reasonable. Social housing has been privatized in the 1990s, and all they’ve been doing since is pulling down cheap housing and putting back more expensive housing. Therefore, lots of people who might’ve otherwise rented (longer) had to become first time buyers.

  21. Chilingo

    Having a hard time cross referencing the CRE exposure, can you provide the reference number in the Y-9? I would think F160 and F161 would be the correct lines.

  22. Tax Shelter Tax Shelter KPMG KPMG

    Can it be, it appears it is, KPMG who once escaped a death sentence by the DOJ with the help of the fat pig Bob Bennett of Skadden Arps (KPMG and Skadden will do everything possible to help you DOJ indict KPMG partners), Dennis Malloy the lying thieving Mormon Bishop and Michael Hammersley of Hammersley Partners (the lying thieving client ratting killer) is back at it again, selling fraudulent corporate tax shelters (the very same type of shelters the fat pig Bob Bennett of Skadden Arps told the DOJ KPMG would stop selling if the DOJ indicted KPMG partners as opposed to indicting KPMG).

    Of course, at the time we all knew the fat pig Bob Bennett was lying on behalf of KPMG as evidenced by an email from Joseph Loonan (chief counsel of KPMG at the time) wherein Joe tells fat pig Bob we have no idea if any of the facts you are giving the DOJ are true but go ahead because “freedom is just another word to lose”. Of course in the process of their lies, Bennett, Loonan, Hammersley and Malloy are directly responsible for the death of Jane and the destruction of many lives.

    But anyways I digress, I will give you all for free one of KPMG’s latest corporate tax shelter strategies probably developed in conjunction with fat pig Bob Bennett’s firm Skadden Arps.

    If you have a foreign corporation residing in a non treaty country and you would like to repatriate earnings at the 15% qualified dividend rate as opposed to the ordinary rate of 35%, presto the liars, murders and thieves have a strategy for you.

    Form a Netherlands Cooperative and contribute your foreign company stock to the Netherlands Company. Payment of dividends according to the liars and thieves at KPMG will now qualify for the 15% rate instead of the 35% rate.
    Sheer brilliance except if any of us commoners were to do it would be off for a life of ass raping for committing tax fraud and don’t worry if you are one of KPMG’s clients they won’t rat you out unless they have to and the fat pig Bob Bennett of Skadden Arps (or his lacky Peter Morrison in the Los Angeles office) tell KPMG to be lying rats.

    Any KPMG client can be guaranteed nothing you tell KPMG is confidential and KPMG has an extensive history of being a stinking lying filthy rat.

  23. bjk

    Extending and pretending works when you’ve got $1 trillion in deposits. That trillion dwarfs a measly $50 billion in bad loans – you can do plenty of extending and pretending with $1 trillion in free deposits and another $1.5 trillion collecting fees at Merrill. You say the commercial RE is impaired. Vornado is trading at 2.5X book and a yield of 3.5% – that’s it? That’s the best the bears have got? This isn’t 2007, history doesn’t repeat, the party is over for the bad news bloggers.

    1. tyaresun

      1T in deposits, 1.21B earnings. They don’t seem to be earning much on those deposits I guess. Question: How many years of earnings will have to be sacrificed to payoff the adverse judgements?

      1. bjk

        You mean how many months will it take to pay judgments? At a mediocre return on assets, they could pay a $20 billion judgment with 8 months of earnings. They don’t have to pay that tommorrow, they can drag this out for years. So that’s basically a tiny footnote, don’t worry about it. So what if they can’t sell some Chinese bank? Again, let me repeat: $1 trillion. That’s the deposit base. All the rest of this chicken-little stuff is bugs on the windshield and BAC is a massive 18-wheeler carrying $1 trillion in deposits and just gaining momentum.

        1. Erik

          Wachovia and WaMu had large retail deposit bases as well. Your line of reasoning was used in Sept 2008 as justification for why they could not fail.

          “It takes millions of people making that decision to drive the bank under, as opposed to three banks with exposure to Lehman that say they don’t want to renew loans” said professor Charles Haley “It’s a very different scenario.”

          And yet both Wachovia and WaMu failed via forced takeovers only a week later.

          What is different this time? In my opinioin, Europe situation will probably play itself out first, and repatriation of EU bank deposits into US banks could extend life for BAC, C, MS, etc.

          FDIC insurance has been moved up to $250K. If BAC bankruptcy fears gain momentum, anyone holding an amount over $250K may quickly move their money elsewhere, just like they did at WaMu and Wachovia (when FDIC was $100K).

          With $1 trillion in deposits, you can be sure that there are lots of accounts with more than $250K FDIC limit. Moral hazard is part of the reason BAC has such a large deposit base now. Everyone thinks they are too big to fail, so they are a safe place to keep their money. Depositors are safe (since they’ll either be bailed out or nationalized), but common stockholders could lose EVERYTHING.

          1. bjk

            Old news, four years out of date. If depositors didn’t pull their money out the first time, they’ll be even more blase now. Everybody already knows about the bad mortgages and all the rest, that is no secret (by the way, COMMERCIAL REAL ESTATE APOCALYPSE REAL SOON NOW!11!1!!) These bloggers are pounding on the side of a supertanker screaming “watch out! this is going to tip over!” This isn’t like WaMu or Wachovia, it’s like Citi in 1991.

          2. theadr

            A point of reference: Demand Deposits have Unlimited backing by FDIC until 12/31/2011, not $250,000. Look for it to be pushed forward for another 12 months. That’s why BoNY pays negative interest on some deposit accounts now; also because the banks with $50B in deposits are required to set aside significant reserves as per the FDIC. As long as the ben-bernank keeps interest rates at their all time low, this will be pushed out indefinitely. This is what is meant by ‘liquidity trap’. Benefits to borrowers, not savers; but, as we now know, borrowing is money creation.

            Beware the commercial rent rates that have been cut by 40% in the last 12 months — how do you spell, ‘race to the bottom’? QE ad infinitum won’t do sheisa (sp).

          3. Erik

            bjk, let’s agree to disagree. we’ll let the next year or two settle the dispute.

            theadr, ok until 12/31/11 it is unlimited. thanks for the update. the FDIC doesn’t have $1T to cover Bank of America though, which means we either get a bailout or nationalization if BAC continues to deteriorate.

          4. Nathanael

            I question how many of BoA’s deposits are actually deposits by entities controlled by BoA.

    2. Nathanael

      $1 Trillion in deposits lasts precisely as long as depositors trust the bank (or possibly as long as they trust the FDIC insurance).

      It can vanish completely in less than 24 hours. It’s called a “bank run”.

  24. dante

    Harry Markopolos

    The whistleblower whose book on the Bernie Madoff scheme, No One Would Listen, is the basis for the new film Chasing Madoff, discusses his 10-year journey and explains why the fraud was obvious to anybody who cared to look.

    For years, Harry Markopolos tried to tip off the U.S. Securities and Exchange Commission to what turned out to be the largest Ponzi scheme of all time. The former securities industry exec turned independent financial fraud investigator was working for a Boston investment firm, when he discovered Bernie Madoff’s house of cards and gives an account of the scandal in the new book No One Would Listen. Markopolos has a master’s degree in finance from Boston College and is past president of Boston Security Analysts Society, Inc.


  25. Jim

    Are you aware that the Jefferies article claiming a $40b – $50b capital hole was conducted as part of a “what if” analysis by an equity derivatives specialist that doesn’t actively cover BAC?

  26. Jim

    If not, there is another Jefferies email out there that you might want to try to obtain, telling institutional clients that the $40b – $50b number was taken out of context and should not be relied upon as part of any investment decision. If you look at the “analysis” Jefferies did, it basically said “if BAC needs to have a Basel 3 T1 common ratio of XX% today then BAC needs $XX amount of capital and if BAC needs to have a Basel 3 T1 common ratio of XX% + XX% today, then BAC needs $XX + $XX amount of capital.”

  27. Allen C

    Solvency is indeed somewhat impossible to determine in a 12X+ leverage environment. Can we move on now? The answer is no as the system operators continue to argue that all is well.

  28. Allen C

    And BTW, sufficient devaluation solves most asset valuation problems. The independent, central BANK is in control of the money supply.

  29. pj

    It would be a right and just thing for THE Bank OF AMERICA to go down, wouldn’t it? It would look like something of a coup, wouldn’t it?

    At least for those who want to see America and our society and perhaps even true capitalism destroyed, it would look like a victory, of sorts.

    Interesting, that.

  30. JF

    Where do the numbers (60%) for second-liens come from? I know that stuff as generally trading at 80-90% cents on the dollar right now.

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