Bank of America (BAC)

The housing market remains very weak. Bank of America relies very heavily on a strong housing recovery in order for it to be able to return to its pre-crisis levels. However, analysts have become increasingly pessimistic over the likelihood of a strong housing recovery. This means the Bank of America's balance sheet will remain burdened by undervalued houses that are incredibly hard to sell off and liquidate. This lack of liquidity will prevent Bank of America from taking advantage of other potential investments throughout the market.

Bank of America (BAC) which is the largest US bank by deposits just had an enormous bull run. Stock has been up by 76% year to date and 22% in just this week. We reiterate our Sell on BAC as nothing really has changed with the core issues of Bank of America. Stock is more expensive now as compared to earning potential. Bull run is a result of hype created by media about the stress tests which means nothing and the improved capital ratios. Stress tests are very lenient in measuring capital ratios and little mention is made of future earnings. If you look at the last quarterly report, you would find it packed with a number of one-time gains and losses. There was a $2.9 billion gain from BofA’s sale of its investment in China Construction Bank, a $1.2 billion gain from its swap of some preferred stock, a $600 million goodwill impairment, a $1.5 billion expense tied to BofA’s endless mortgage lawsuits. In short, it's messy.

The extent of the problem can just be seen with the recent mortgage settlement which would cost banks collectively 25b$. Bank of America's share is close to 12b$. Settlement also doesn't stop federal and state authorities to pursue other charges against banks. This is just one settlement. BOA has plenty to of other problems to fix. There legal bill per quarter is alone 2b$. For BAC to be valued at 10 times future earnings just like peers (JPM, WFC), it has to generate 11b$ of net income. Even if BAC is successful with there project to cut down costs, it won't be producing a 11b$ income in 2012 without one time sales and BAC is already exhausted with selling the non-core assets. In case of an emergency they would need to sell core assets like Texas branches as listed in the plan to the government.

If someone holds BAC stock, this might be a good price for exit.

This is a company that predominately plays a shell game with bonds and makes its money via political wealth. It has no idea the difference between an asset and liability. Consider this idea that changes what one thinks about bonds: What happens if one buys debt but doesn't intend to collect interest nor redeem it? The value goes to the management who pocket one million dollars not to cash in one billion dollars and expose the truth behind the collateral.

BAC is engaged in the progressive strategy of holding European debt, at the cost of its shareholders. It counts debt as assets while in reality they extend the banks liabilities because they cannot be exposed to a legitimate marketplace. With a little help from the ratings agencies that debt looks good when in actuality a Z-Euro, zeuro, (1 euro = 0$) is just around the corner.

This scheme all works if there are a lot of progressive banks working this scam. Consider this: What happens if there is a sudden need or urge for BAC to redeem debt European Union debt, such as the 20.5 billion in French holdings (if you believe this number). As a result, a global "orderly retreat" is happening right now with buyers beings bilked by progressive sellers. BAC is being propped to assure that progressives disinvest on more favorable terms (they have lost a lot of wealth and could lose more) by delaying the sale of European debt in a real market.

This systematic selling, day by day, is very disconcerting. An epic stock market crash is just around the corner -folks.

If the consumer and commercial real estate loans in BAC's portfolio perform worse than expected by the bank and the stress tests imposed by Uncle Sam, due to worse than expected macro economic conditions such as unemployment (therefore default rates), there will be erosion on profits.

Should the bank need more bail out from the US government for any reason, such help will likely not be free to common shareholders and may cause common share dilution.

Wikileaks leader Julian Assange announced that he had documents on a large US bank that he would be releasing sometime in 2011. There is a lot of speculation that this bank is actually Bank of America. Based on the reactions from previous documents released by Wikileaks, a leak about Bank of America could result in widespread negative publicity or even litigation.^[1]

Congress passed an amendment which places a restriction on the interchange fees of debit card purchases. The interchange fees are the amount that the seller is charged when a customer uses their debit card. Much of these fees end of going the initial issuing bank. Bank of America relies on this fee revenue from the debit cards it has issued. While companies like Visa and Mastercard are often perceived to be the ones who will bear the brunt of the losses, the true recipients of these fees are banks like BAC.^[1]

Mr Obama announced in late January that he has proposed regulation which will prevent commercial, deposit banks from undertaking proprietary trades. This type of regulation will place greater strain on Bank of America as it already has difficulty making a profit in its current state. Bank of America will no longer be able to make proprietary trades to make up for losses from defaults or other shortfalls.^[1]

First-quarter profit for Bank of America Corp. (BAC) more than doubled, but a surge in troubled loans threw a wet blanket on the bank’s earnings report. So far, Bank of America has received $45 billion in government loans, and Chief Executive Kenneth Lewis said on a conference call that “we absolutely don’t think we need additional capital," Reuters reported

Bank of America bought Countrywide Financial (CFC) earlier this year and therefore has to deal with problems in the housing and credit markets. They spent $2 Billion on buying preferred shares of CFC. On the positive side, the deal came with preferred shares and a 7.25% coupon- nice work if you can get it. And, as preferred shareholders, BAC gets to belly up to the bar first if CFC goes BK, in which case it's widely presumed they'd grab off the lucrative CFC servicing arm.

Well, already those preferred shares have lost nearly half their original value, and most traders expect CFC to get a lot worse before it goes bankrupt. And the servicing arm? It's robust, but now threatened by the latest Treasury mortgage rescue initiative, the so-called "teaser freezer" that would (if CFC voluntarily agrees to it) freeze mortgage rate resets for a few years, a move that would put a substantial dent in the CFC servicing arm's profitability.

Furthermore, the credit markets are going to continue to see problems for a variety of reasons. Consumers are highly leveraged due to all the easy money that was lent out the last time interest rates dropped to very low levels so I don’t think the current drop in interest rates is going to help out much. At the same time, the prices of commodities are being driven higher and higher by speculators, which will do a lot of damage to consumers. Rising food prices and gasoline prices are definitely going to have an impact on overleveraged consumers’ ability to pay bills.

A number of houses are for sales and with rising foreclosures, this trend is definitely is set to rise.

The New York Times weekend edition has a damming story of Countrywide's arrogance and distain. these stories are front page news and in the fronto of mind of investors. At a time of Indymac Fannie Mae melt downs investors won't committ to B of A. Despite Bank of America's attempts to change Countrywide's name and alter its past policies, it still still owns the assets from Countrywide.^[1]

Countrywide, which administers $1.48 trillion of loans across the United States, finds itself at the center of the foreclosure mess. As of the most recent quarter, 2.67 percent of the loans that Countrywide services were more than 90 days delinquent. (The Bank of America Corporation acquired Countrywide on July 1 and is now overseeing the Countrywide portfolio.)

Lenders and servicers like Countrywide are inundated with requests for help from borrowers who cannot afford their loans. Alas, these companies’ operations weren’t set up for such work; servicing units were originally intended to collect monthly checks from borrowers and then disburse the payments to mortgage holders. During the boom years, there was little need to advise borrowers or restructure loans

Bank of America, which took $45B under the Troubled Asset Relief Program (TARP), will face increased regulation from the Obama administration. These restrictions include a limit on quarterly dividends to only a penny per share and executive bonuses to $500,000. In addition, BAC will be restricted in making cash acquisitions, buying back shares, and in taking part in federal foreclosure prevention efforts. Bank of America and the other recipients are also expected to explicitly outline how they use the TARP funds.^[1]

In April 2009, the federal regulators said that Bank of America would need to raise more capital according to their analysis. Despite BofA desire not to, the bank may be forced to do so under government regulation.^[2]

The regulaters threw Wachovia under the train causing stockholders to lose big time, giving them first to Citibank, then to Wells Fargo. They have used Bank of America to solve the problems of Countrywide and Merrill Lynch,but unlike Wachovia they allowed Merrill stockh0olders to get 1.8 times their value. Anyone have a problem with this? Why should they benefit at the expense of BAC's stockholders when they should have been allowed to fail.

The next shoe to drop will involve massive defaults of unsecured personal credit debt.

Bank of America is paying an absurd fee, about 25 times after-tax earnings, to acquire U.S. Trust from Charles Schwab (SCHW), a money manager for ultrahigh-net-worth individuals that will help Bank of America expand its small Global Wealth and Investment Management segment. BAC does hold 10% of all savings in the USA; BAC is big in Texas, Florida, and California, but as economic conditions worsen- and they almost certainly will- the drawdown on those savings held by BAC will increase dramatically as necessity requires foreclosure avoidance, increased living costs due to inflation, and other needs. And where are they big again? The very states with some of the worst foreclosure problems in the nation- Florida, California, and Texas.

With nearly 10% of the nation's deposits, Bank of America has bumped up against the legislated limit, leaving little room for growth in its highest performing division: Global Consumer and Small Business Banking.

Since Ken Lewis, announced his retirement, after 40 years at BAC and 8 years as CEO, on September 30, 2009, Bank of America still has yet to find a replacement.^[1] Bank of America has asked chief of Bank of New York Robert Kelly, but Kelly has refused. The list of possible CEOs has allegedly grown to 26 candidates - but with Bank of America strapped with $45B in TARP loans, few seem excited to take Ken Lewis' spot.^[2] The lack of clear leadership prevents BofA from effectively recovering from the financial crisis and finally repaying its TARP loans. In addition, Bank of America has consistently searched for an insider - someone who is or has a history of being associated with Bank of America. This will further prevent a fresh perspectives from being applied to the struggling bank. Without a new, innovative CEO - or any CEO for that matter - Bank of America will continue to face the problems is does today.^[3]

The SEC has asked a federal judge if it can issue a new charge on Bank of America of over $50B. The fine is based on Bank of America's handling of the Merrill Lynch acquisition. The company failed to notify shareholders before the acquisition that Merrill planned to issue $5.8B in bonuses. This legal battle could be costly to Bank of America in a time where finances are still tight. Bank of America still owes the US Treasury $45B in TARP funding.^[1]

Bank of America seems to follow a similar pattern to the zombie banks of Japan during the '90s. The Banks are sustained and continue to lend out money only because of government funding. Bank of America has a market cap of only $35B, yet it has received $40B in government loans. Bank of America has fundamentally no market value but exists only because of tax payer money. Eventually, money will run dry and so will BAC.^[1]

Unfortunately, with the new administration there are quite a few strings attached and one in particular is the possible Nationalization of Banks being that the government feels that they are in the drivers seat. They will set about dictating terms on how to do business without any expertise in the area of investments, banking or mortgages. This will continue the downward trend of the market and everyone looses.

Bank of America could had waited a couple of months more and buy Merrill Lynch cheaper. Bank of America, with the encouragement of the US Government, has increasingly followed the role of "savior" of embattled banks. Bank of America CEO Kenneth Lewis had decided that purchasing Merrill was no longer a smart move after Merrill's losses began to soar past $13.3B. However, Secretary Paulson and Chairman Bernanke forcefully urged Lewis not to step out of the deal. They threatened that there was no good reason for BAC to step out of the acquisition and that closing the deal would make it harder for BAC to access bailout money in the future.^[1] Buying Merrill was a bad move and will likely cost Bank of America big time.

Richard Bernstein, Bank of America's strategist, argued that the US Treasury's bank rescue plan won't save the problem and that "Financial stocks are likely to be as toxic to portfolio performance as banks’ assets are to their balance sheets." Bernstein used to work at Merrill until the acquisition.^[2]