by Jeff Reeves | September 7, 2011 8:38 am
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.
Bank of America is trying a lot of things right now to right the ship — but they all involve trying to raise cash and trying to fend off lawsuits. Clearly Bank of America is not focused on growing its business or delivering shareholder value. No, BAC is scrambling to raise money just to keep the lights on and protect itself from bad debt and legal liabilities.
As I mentioned in a previous article about how broke Bank of America really is, the company is scrambling to raise enough Tier 1 capital to meet new regulatory requirements and still have enough cash to lend and grow its business in this difficult environment.
I freely admit I was bullish on Bank of America at the beginning of 2011. That was because, perhaps naively, I expected the economic recovery to continue gaining momentum and Bank of America to continue improvements in its core consumer lending operations. And while it’s true that some metrics in this core business continue to improve, the overall economic outlook is grim, and that means BofA is going to have a tough way out of the very deep hole it has dug itself thanks to the mortgage meltdown and Countrywide buyout.
Instability in Europe hasn’t helped, since any fears over debt and credit instantly hit the financial sector first and hit it hard.
Throw in a brutalized housing market with no bottom in sight and lingering 9% unemployment and you have the recipe for quite a disaster.
At this rate, the world might never know just how ugly Bank of America stock truly is right now — or at least, how ugly it was earlier this year. As the company tries to sell itself off for parts to unwind toxic mortgages on its balance sheet, you need a graphic calculator to compute the losses BAC has suffered and exactly what future profits it is shortchanging for a quick influx of capital.
Jeff Reeves is editor of InvestorPlace.com. As of this writing, he did not own a position in any of the stocks named here. Follow him on Twitter via @JeffReevesIP and become a fan of InvestorPlace on Facebook.
Source URL: http://investorplace.com/2011/09/bank-of-america-toxic-assets-countrywide/
Short URL: http://invstplc.com/1nyYfFH
Copyright ©2017 InvestorPlace Media, LLC. All rights reserved. 700 Indian Springs Drive, Lancaster, PA 17601.