August certainly was an interesting month for the stock market. The market suffered about a 4.5% decline on the month, but that’s not the whole story. A chart of the major indexes looks like a big W thanks to white-knuckle volatility and triple-digit moves in the Dow. All told, the Dow Jones Industrial Average moved in a roughly 1,500-point range and gave investors one heck of a ride.
One of the biggest movers in August was Bank of America (NYSE:BAC). The financial stock shed about 18.5% to continue its ugly streak in 2011, putting shares down about 50% from where they started the year.
But the billion-dollar question isn’t where BofA has been, but where it’s going. And unfortunately, the direction of this stock seems to be down, down, down.
It’s hard to get a handle on what’s going on at Bank of America because so many big developments are happening so fast. But here’s a Reader’s Digest version of the past 30 days:
On Aug. 8, bailed-out insurer American International Group (NYSE:AIG) sued Bank of America over hundreds of mortgage-backed securities. The suit seeks to recover more than $10 billion in losses on $28 billion of investments in what was reportedly the largest single mortgage-security-related lawsuit caused by the financial crisis.
On Aug. 15, Bank of America announced it would exit the international credit card business with the sale of its card business in Canada to Toronto-Dominion Bank (NYSE:TD) for about $8.5 billion. It also said it will try to exit its larger credit card businesses in Britain and Ireland, that combined have $12 billion in loans outstanding.
On Aug. 17, the Financial Times reported Bank of America was in hush-hush talks with Blackstone regarding the sale of Merrill Lynch’s real estate investments for up to $1 billion. The deal would include “non-performing” loans — that’s bank-speak for mortgages that aren’t getting paid — from both Europe and the U.S.
On Aug. 25, billionaire Warren Buffett bought into BAC stock via Berkshire Hathaway (NYSE:BRK.B). As a result of a $5 billion buy-in to preferred shares that yield 6% dividends, Bank of America will pay Buffett a staggering $300 million per year. Some call the deal little more than a move to make Buffett a “celebrity spokesman” for the battered bank.
On Aug. 29 we got word that Bank of America was selling half its stake in China Construction Bank to raise $8.3 billion and turn a hefty $3.3 billion profit on the buy-in. The move was telling, since it drastically reduces the financial stock’s footprint in the rapidly growing Chinese real estate market. In effect, BAC was selling its future to finance its present troubles and past mistakes. That’s not inspiring for investors — even if the company got a fairly good return on its initial investment.
On Aug. 30, the attorney general of Nevada threatened to rip up a deal forged with Bank of America that prohibits a lawsuit against the bank, accusing BofA of repeatedly violating loan modification agreements struck in 2008. Such a suit in one of the worst-hit real estate markets of the U.S. could have ugly implications for BAC. The same day, several homeowners filed a lawsuit in Manhattan to block a proposed $8.5 billion settlement between Bank of America and major mortgage investors, with plaintiffs saying the deal will just speed up foreclosures and will perpetuate “servicing abuses.”
On Aug. 31, Bank of America CEO Brian Moynihan announced plans to sell or close its “correspondent mortgage unit” to reduce its losses on bad home loans. Correspondent loans often are originated by third-party firms, which then sell them to larger lenders like BofA. If the loans sour, buyers can ask originators to repurchase the debt — presuming that third party hasn’t gone under. But in August, Bank of America revealed 27% of outstanding troubled mortgages were correspondent loans, and many of those originators are defunct. The result is correspondent mortgages fueling BAC’s $14.5 billion in mortgage losses in the second quarter.