Bank of America shares are under pressure again this morning.
The stock is currently trading at a market cap of just $62 billion.
That's way below the book value of $222 billion.
So what's going on? Henry Blodget at Business Insider sums up the "bear case" against Bank of America . The short version: a lot of people don't believe that Bank of America is correctly valuing its assets and liabilities.
Here are some of the things that the Bank of America observers think should or will be subtracted from the bank's $222 billion of book value:
Some percentage of $80 billion of "second mortgages."Yves Smith thinks these should probably be written down by 60%, or $48 billion.
You can pick your own number.
Some percentage of $182 billion in commercial real estate loans. The "extend and pretend" game in commercial real-estate is even more pronounced than in residential real estate. So as Yves Smith observes, there's almost no chance those loans are actually worth $182 billion.
A healthy percentage of $78 billion of "goodwill." Bank of America built itself by acquisition. "Goodwill" is what's left over when management overpays for something. As Yves Smith observes, Bank of America's former CEO Ken Lewis loved overpaying for things. He overpaid for Countrywide, for example, which has since been written off to zero, and Merrill Lynch, which he could have had for free by waiting a couple more days.
Untold amounts of exposure to collapsing European banks and sovereign debt.Yves Smith says Bank of America says its sovereign exposure is $17 billion. Really? Has the firm not written any credit default swaps protecting customers in the event that European banks or countries go belly up? Might the firm have to post some cash "collateral" to satisfy these contracts? That's what Lehman had to do, after all. And that's what made Lehman go from "having plenty of capital" to being broke overnight.
So, taking some back of the envelope numbers, it looks as though we could easily come up with, say, $100-$200 billion in write-offs and exposures to "clean up" Bank of America's balance sheet.
A $100-$200 billion hit to Bank of America's $222 billion of equity capital, needless to say, would do some serious damage. Specifically, it would force the company to raise about the same amount to restore its capital ratios.
Wall Street analysts see a much smaller capital hole. Yesterday a Jefferies analyst said that the bank needed $40 to $50 billion in fresh capital. While Bernstein analysts seem to think there's hardly a capital problem at all.
"But doesn’t something feel strange if Wall Street analysts are so all over the map about how and whether Bank of America can meet capital rules? Does that mean the rules are so complex there’s no consensus on how to meet them? Or does it mean BofA’s balance sheet is so complex no one is quite sure how the puzzle pieces fit together?" Shira Ovide asks at Market Beat.
My answer: yes. It means all of the above. This widening gap in analysts' assessments is strange and dangerous for investors. The rules are too complex and Bank of America's balance sheet is close to incomprehensible.
The bad news is that this sort of uncertainty is feeding a reflexivity loop, and that loop is a noose wrapped right around Bank of America's neck. The more the stock price goes down, the more doubts there will be about the quality of its balance sheet. That threatens to eventually scare counter-parties and customers, who can pull lines of credit, demand additional collateral or seek safety by diversifying some assets away from Bank of America. Distrust is the death of banks.
Let's hope Bank of America can start to win some trust back soon.
Bank of America issued a statement in response to Blodget's post stating that "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 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. "
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