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Net Net: Promoting innovation and managing change

Bank of America Goes on Attack

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I’m completely floored by Bank of America’s decision to attack Henry Blodget’s piece laying out the bear case against the bank.

Blodget piece at Business Insider explained some of the concerns that have been raised by well-known financial bloggers. This is an important thing to explain because the stocks shares have been falling much faster than other financial stocks, despite no news coming out.

Naturally this has people wondering what the heck is going on.

Understanding what the critics of Bank of America think is important to figuring out what’s behind the decline.

Bank of America erupted with nasty rage in response to Blodget’s post.

"Blodget is making exaggerated and unwarranted claims which is what the Securities and Exchange Commission stated publicly when he was permanently banned from the securities industry in 2003,” the bank said.

That's not exactly the usual tone we expect banks to take when responding to analysis they regard as off-base.

As you may already know, Blodget is that Henry Blodget. The guy who was targeted by then Attorney General Eliot Spitzer and the Securities and Exchange Commission in their crackdown on Wall Street analysts. He agreed to a permanent ban from the securities industry after being charged with civil fraud by the SEC in connection with his reports on technology companies during the 1990s internet bubble. He was working for Merrill at the time, the company that is now owned by Bank of America.

Here’s the rest of Bank of America’s response:

The sovereign exposure is off by a factor of 10. The commercial real estate figures are off by a factor of four. The mortgage analysis was provided by a hedge fund that has acknowledged it will benefit if our stock price declines. The recommendations on goodwill accounting would be prohibited by generally acceptable accounting practices.

Traditional bank valuation relies upon tangible book value per share, which excludes by definition 100 percent of goodwill and other intangibles. As of June 30, our tangible book value per share was $12.65.

But this is part of the problem. If Bank of America’s tangible book value per share is twice that of its share price, something has gone badly wrong. Either the market is amazingly undervaluing Bank of America, or Bank of America’s assessments of its liabilities and assets is wrong.

Blodget has written a good response. Among other things he points out that he is a Bank of America shareholder. I’m guessing that he still had Merrill shares when Bank of America took over.

From Blodget:

Now, anytime a bank stock tanks, a whole host of excuses are usually trotted out. Generally, the blame is placed on “shortsellers.” This is the first time in 20 years around the markets that I’ve seen the blame placed on a blog post (or, for that matter, me).

For what it’s worth, I am not a “shortseller” of Bank of America stock.

In fact, thanks to the fact that Bank of America bought a company I used to work for, Merrill Lynch, I am actually a Bank of America shareholder. (Not a huge one, thank goodness, but a big enough one that I would prefer Bank of America’s stock to be going up).

As a Bank of America shareholder, I am furious that Bank of America once again appears to be headed down the tubes, especially because the bank had several years before the financial crisis and two years after the financial crisis to raise tons of capital and write its assets down to levels that could never be questioned by the market.

Disclosure: Henry Blodget runs BusinessInsider, which employed me for around 18 months between September 2008 and March 2010. I do not own and I am not short any shares of Bank of America.

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