Tuesday, August 16, 2011

BofA: The vultures are gathering ...

Barely 3 days after I blogged on the death spiral Bank of America seems to be sliding into, the signs of death throes have become clearer. Already, its share price represents only 32% of its book value, showing that the market agrees with my assessment that its assets are massively overstated. I had pointed out only one asset, Goodwill, that called for significant impairment.  
Wall Street Journal now reports that Bank of America has entered into deals to sell the following:
  • its Canadian Credit Card portfolio to TD Bank
  • its Spanish Credit Card unit 
  • its small-business cards in the UK to Barclays
WSJ also reports that BofA intends to sell other card units in Europe. It further speculates that BofA may also sell its stake in China Construction Bank Corp. Another report states that Bank of America has also sold off portions of its credit card business within the United States to Sovereign Bank and to Regions Financial Corporation. In April this year, BofA sold its stake in Black Rock Inc.. 
All these sales are obviously intended to shrink its way into a viable situation by raising money without a share issue, and also thus raising "tangible net worth per share" of Bank of America.
If you think BofA was the only bank in trouble, look at this list of 64 FDIC-insured banks that have failed and closed down in the first 7 months of 2011. This is in addition to 157 banks that failed in 2010, and 138 in 2009. It is obvious that things aren't getting better. But that they have company is cold comfort for BofA, around whom vultures are gathering. 

  • In early 2011, it settled charges of mortgage-backed securities fraud charges with BlackRock, PIMCO, Freddie Mac, Fannie Mae, insurer Assured Guaranty and a few others, agreeing to pay $8.5 Bn. These settlements have run into some trouble, and are now facing opposition.
  • Already, AIG has claimed $10 Bn damages for securities fraud in sale of mortgage-backed securities by BofA, Merrill and Countrywide. 
  • In addition, over 90 similar suits have been filed demanding damages of $197Bn, says the above article, quoting LawyerLinks, a legal consulting firm.
  • Now, it  is being reported that the National Credit Union Administration has declared that it is suing several banks for damages of up to $50Bn for misrepresenting safety of securities it sold to several credit unions that collapsed as a result of the investments. Among those likely to be sued is Merrill, now part of BofA. 
  • Credit Default Swaps on BofA have risen to their highest level since May 2009, showing nervousness of investors.
  • BofA has begun writing down principal on Californian "underwater" home loan mortgages of troubled borrowers. BofA is reported to be seeking immunity from prosecution in return for paying fines and writing down principal outstandings of underwater mortgages.
  • Elsewhere, BofA is facing energetic protests from locals fed up of the number of foreclosed properties that are ill-maintained, sending property values in entire localities tumbling. 
  • The richest Hedge Fund Manager in the world according to Forbes' 2011 List of Billionaires, John Paulson, and who is known for sticking to his bets for longer than most fund managers, has sold half his stake in BofA and Citigroup.

There is speculation that it could spin off Merrill Lynch Wealth Management and Investment Banking operations. There is also some speculation that BofA could put Countrywide, acquisition of which is by consensus considered as a big corporate blunder, into bankruptcy. However, moves taken to consolidate Countrywide and BofA have clouded BofA's ability to ringfence Countrywide-related liabilities. 
Watch this space! 

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