Bank of America shares hit their lows of the day shortly after influential financial analyst Mike Mayo downgraded the stock, citing the need for the firm to raise capital to cover mortgage-related settlements.
“On July 20th, we lowered our rating on Bank of America a notch and said that we prefer Wells Fargo and we reiterate this view with another downgrade of (BAC) to (underperform) from (outperform) given less confidence that (BAC) will not have to raise capital,” said Mayo of CLSA in a note. “The market could force this outcome if CDS spreads continue to widen.”
Bank of America was already lower after AIG officially filed a mortgage suit against BofA, seeking $10 billion in damages against the bank.
“The proposed settlement related to sales of private-label RMBS investors has hit more road bumps than expected, including today’s news related to AIG,” wrote Mayo, who was named by Fortune as one of the few analysts who saw the 2008 credit crisis coming. “The resolution of mortgage issues (putbacks, RMBS sales, and servicing) will take much longer and may indeed be much higher than management’s estimates, raising questions on the company’s ability to meet regulatory capital requirements in a timely manner.”
Many of the suits and potential suits are related to Bank of America's takeover of Countrywide Financial and that firm's mortgage servicing practices during the housing bubble. They are also focused on the creation of mortgage securities from Bank of America's other major purchase during the credit crisis, Merrill Lynch.
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