August 24th, 2011
by John Lounsbury
At 6:53 am on August 23, Business Insider CEO Henry Blodget posted an article entitled “Here’s Why Bank of America’s Stock is Collapsing Again.” Blodgett says that BAC has an accounting specified book value of $222 billion. At the price it closed on August 22, the market was valuing the company at $65 billion. The obvious inference is that investors are discounting the stated book value by $157 billion ($222 - $65 billion). That’s what Blodget pointed out in his article, quoting other analysts Zero Hedge and Yves Smith for some of the possible reasons, including liability exposures resulting from litigation over its mortgage business, risky sovereign debt exposure and insufficiently reserved bad loans. Follow up:
Bank of America Statement
Bank of America has issued a statement later in the day (Aug. 23) which is quoted from The Wall Street Journal:
Mr. Blodget is making “exaggerated and unwarranted claims,” which is what the SEC 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 blogger’s 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.
Numbers Blodget Quoted
So let’s total up the factors that Blodgett presented as the analysis work of others, who were specified. We get a conservative total of about $60 - $70 billion by lowballing everything from the following items discussed:
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.
Readers are welcome to try their own valuation attempts and see what other result can be estimated.
What did Blodget Conclude?
Here is Blodgett’s conclusion from the 6:53 am article:
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.
That's why Bank of America's stock is tanking. The owners of that stock will be the first folks to get hit if Bank of America has to raise more capital. And the lower Bank of America's stock is when it raises more capital, the more they'll get hit.
Here are the problems I have with what has gone down:
- Why does BAC feel it necessary to attack a blogger for an informal summary of what others are saying?
- Why does BAC’s defense imply they think that critical questioning is not appropriate when their own rebuttal indicates that the stock is selling at 50% of book value? And that book value is exactly what is being challenged by analysts.
- The BAC rebuttal is very non-specific in offering any numbers that could be used in calculations.
- Another analyst has issued a report with analysis indicating additional capital in the area of $40 - $50 billion may be required by BAC.
Listening to all this I am reminded of Shakespeare: “BAC, me thinks thou dost protest too much.” After all, it's not these individuals who have said that Bank of America stock price is/was too high. The market has rendered that verdict. All that Henry, Yves and Zero Hedge and others have done is report on some of the reasons the investing world has rendered that verdict.
Should You Buy BAC?
As all this was raging today, the market had a huge rally, with the Dow gaining 322 points (almost 3%). But BAC lost another $1.6 billion in market value as the stock declined 1.9% to $6.30 a share. In after hours trading the stock has fallen further to $6.20. Good-bye to another $1.3 billion.
As for me, I’ll stand aside and wait to see what settles out. If BAC breaks below the 2009 lows of ($3 intraday March 6, 2009) I’ll start to look at a possible penny stock gamble.
Update: In trading Wednesday (August 24) BAC is up strongly, trading as high as $6.97, for a gain of more than 12% from aftermarket lows last night. At $7, market cap would be nearly $71 billion.