Fairholme's Berkowitz Still Bullish on Bank of America

With its stock having its first positive daily performance in some time, Bank of America shares won plaudits from one of its largest holders Thursday on the CNBC's "The Strategy Session."

Bruce Berkowitz
Bruce Berkowitz

Bruce Berkowitz’s Fairholme Fund owns 92 million BAC shares and he is standing by that position despite its having cost his fund holders a good deal of performance so far this year.

Berkowitz’s thesis is straight forward: he, like other large holders (think John Paulson) see a bank generating between $45 and $50 billion a year in pre-tax, pre-provision income and believe those provisions will continue their slow, but steady decline, significantly enhancing the bank’s bottom line.

“Commercial credit issues are hiding everything else that is there at Bank America,” said Berkowitz. They (the shares) are already priced for disaster.”

But judging from the recent market action, not everyone shares that belief. The concern at Bank of America still centers in part on mortgages. First, there’s the continue risk of so-called “putbacks” of mortgage securities and then there’s the basic concern that the quality of mortgages on its books is once again in decline (see Jeff Gundlach).

Simply moving a mortgage from delinquent to performing through modification does not a good loan make and it is worth noting that in the month of May, FHA (Federal Housing Authority), prime and subprime mortgages all showed increases in delinquencies, perhaps a sign that modifications that took place 12 to 18 months ago are once again going bad as the time line of those modifications ends.

For his part, Berkowitz seems prepared to wait. “I’ve studied these companies for decades. This is how I made my money in the 90’s with at the time what was Wells Fargo”, explains Berkowitz.

“Wells Fargo was said to be going bust, everybody was shorting Wells Fargo. Well, it only was up seven or eight times in as many years. I don’t know how the banks are going to work it out this time, but they’re very cheap, they are priced to fail and we’re going to make some good money.”

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