I Was So Wrong on Bank of America

by Lawrence Meyers | September 14, 2012 10:55 am

I Was So Wrong on Bank of America

I have looked askance at any bank stock for years. I simply don’t trust the banks, and I don’t trust their complex balance sheets. There have been limited exceptions to this rule. US Bancorp (NYSE:USB[1]), for example, has always been rock-solid and never had exposure to any toxic assets.

However, I’ve never been kind to Bank of America (NYSE:BAC[2]), viewing Berkshire Hathaway’s (NYSE:BRK.A[3]) $5 billion investment in the company as a bad sign that perhaps there was a serious liquidity issue.

What changed my mind? I ran into a fellow parent at my kid’s school who works for BofA and is pretty high up in a department that gives them a lot of access to information. There’s no insider information here, just so we’re clear. It’s just that they have been with the bank a long time and see a lot of things I don’t.

For starters, the bank is incredibly solvent. There are no liquidity issues here at all. The toxic assets have been shoved into a subsidiary where they are effectively insulated from the rest of the operation. Thus, my primary concerns turn out to be unfounded. The images of a long line of people anxiously waiting outside the bank, lest there be a run, vanished.

Well, I’m exaggerating, but the idea that BofA wasn’t terribly solvent seem rather silly now.

The key aspect to BofA’s business these days is that it services 80% of the country’s mortgages. You read that right — 80%! BofA’s fire-sale purchase of Countrywide put it in this enviable position. The banks isn’t exposed to the mortgages themselves. It just sits back and collects the fees for servicing those mortgages.

Meanwhile, the bank is finally getting tough on foreclosures. Scores of people have been sitting in their houses for free, literally, for years. The bank has had enough and is ramping up more aggressive actions to get rid of people in these houses. The bank is also shutting down unprofitable divisions, the most recent being the international credit card operation.

The weak side of all banks these days, as well as credit unions, is that people are deleveraging. Thus, the demand for loans of all kinds has been declining. To compensate, BofA is looking at new products to generate new revenue, such as reorganizing its account structures to enhance fees.

This is just a long-winded way of saying that Bank of America is a buy. It’s back on track. The mortgage servicing business is a blockbuster and will only get better when BofA gets the deadbeats out of those homes.

At a mere $9.50, the stock is well off its recent highs, and at some point will bump up its dividend.

Lawrence Meyers does not own shares of any company mentioned, but banks at BofA.

Endnotes:
  1. USB: http://studio-5.financialcontent.com/investplace/quote?Symbol=USB
  2. BAC: http://studio-5.financialcontent.com/investplace/quote?Symbol=BAC
  3. BRK.A: http://studio-5.financialcontent.com/investplace/quote?Symbol=BRK.A

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