Bank race to the bottom begins

Stay away from shares of Bank of America for now, but if the stock price drops further a buying opportunity may arise.

By Jim J. Jubak Jul 21, 2011 1:42PM
Jim JubakIt’s official: Citigroup (C) is no longer the most troubled big U.S. bank.

That honor now goes, hands down, to Bank of America (BAC).

Tuesday morning, the bank posted the largest quarterly loss in its history, thanks to a nasty combination of problems. Revenue continued to slide, and losses from defective mortgages continued to climb.

Revenue, including mortgage costs, plummeted to $13.5 billion -- a 50.2% drop from the second quarter of 2010. Even excluding those mortgage costs, revenue still fell by 10% from the second quarter of 2010, and declined 2.2% from the first quarter of 2011.

Earnings for the second quarter, including these mortgage-related charges, came to a loss of 90 cents a share. Excluding those charges, the bank reported net income of 33 cents a share. (Bank of America reported earnings of 27 cents a share in the second quarter of 2010.)

Bank of America’s mortgage problem is different from that faced by many of its big-bank peers.

At Citigroup, for example, the bank had to put aside reserves for mortgages that might default. Those reserves came out of earnings, but recently -- as the rate of credit losses has fallen -- those reserves have started to add back into earnings.

At Bank of America, though, the big problem has been lawsuits from investors in mortgage-backed assets, and from bond issuers who have sued the company claiming that Bank of America -- or more specifically the mortgage business, Countrywide Financial, it bought in 2008 -- used false or misleading information in writing mortgages that later defaulted.

On June 29, Bank of America told investors that it would book more than $20 billion this quarter in charges from faulty mortgages. The $20 billion wound up breaking down this way:
  • $8.5 billion for a June settlement with a group of big investors who had bought mortgage-backed assets that went sour; $5.5 billion to cover future claims; and $6.4 billion for a number of other charges.
  • Not all the bank’s businesses turned in bad quarters. Revenue from sales and trading climbed by $666 million. Investment banking fees rose 28%.
  • Revenue from fixed-income, currency, and commodities increased by $467 million. The wealth- and investment-management unit saw revenue climb 7% and profit soar by 54%.
But the mortgage losses overshadowed everything, because they raised questions about the bank’s plan to raise its dividend by the end of 2011, as well as the possibility that the bank would need to raise capital.

Chief executive Brian Moynihan said he didn’t think the bank needed to raise capital: It finished the quarter with a common equity ratio of 8.23%.

But under the proposed Basel III rules, the bank will need to achieve a 9.5% ratio of capital to risk-weighted assets between 2013 and 2019. According to guidance from the bank in June, that would mean the bank would have to either raise $50 billion in capital or reduce the total of risky assets on its books.

Bank of America is reported to be considering the sale of all or part of its $21 billion stake in China Construction Bank. That would raise capital and reduce the bank’s assets simultaneously.

I think the bank has more quarters of big mortgage-related charges ahead of it. And the biggest U.S. bank by assets will have to sell some of those assets and raise capital.

I certainly would stay away from these shares in the current crisis environment, when Wall Street analysts are asking nasty questions along the lines of, "how much more capital will you have to raise if Greece defaults, and the credit-rating companies downgrade the U.S. credit rating?"

But at some point, these shares become cheap enough to buy -- as a trade -- for a recovery in the bank’s core businesses. At the moment, I’d peg that price level at about $8 a share.

At the time of this writing, Jim Jubak didn't own shares of any companies mentioned in this post in personal portfolios. The mutual fund he manages, Jubak Global Equity Fund (JUBAX), may or may not own positions in any stock mentioned. The fund did not own shares of Bank of America as of the end of March. For a full list of the stocks in the fund as of the end of the most recent quarter, see the fund's portfolio here. 
13Comments
Jul 21, 2011 5:21PM
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All this from the bank that could AFFORD to pay 4.4 BILLION (not million) dollars in 2010 as BONUSES to the "top 10,000" people on the payroll.  And what do investors get?  PENNIES for a dividend.  What to customers get on their accounts?  PENNIES in interest.

 

I left Bank of America and switched to a Credit Union.  My monthly interest income on all 4 of my accounts went from 82 CENTS per month to aobut $8.00 per month.  On the exact same amount of money held.

 

Maybe because the credit union didn't pay 4.4 BILLION dollars in BONUSES in 2010, so they can AFFORD to give more to their MEMBERS instead of the Bankers paying the top PIGS.

 

Jul 21, 2011 6:01PM
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alan greenspan will never be held accountable for the mess he crafted. people can blame obama or bush or fannie mae or whoever they choose, but no single individual did more to destroy a stable banking system than the so called "maestro". we now have 6 or 8 bumbling institutions that control more than 70 or 80 percent of all us deposits. it is not a healthy situation. i think it is likely that more will have to be done to fix this problem. it would be nice if the industry got involved, so that government will not be drawn back into the fray.
Jul 21, 2011 8:56PM
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If there were ever a time specualtors could be heros...How we can we push this corporation of a$$ clowns out of business?
Jul 21, 2011 10:12PM
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BANK OF AMERICA (TBTF)  GOING DOWN  TAKE YOUR MONEY AND RUN  !!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!
Jul 21, 2011 8:46PM
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Dear Antikoolaid,

 

    THANKS FOR TELLING IT LIKE IT IS. BANK OF AMERICA SHOULD ROT AND IT'S BONUS BABIES SHOULD BE INVESTIGATED.

Jul 21, 2011 11:37PM
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Banks race to the bottom? You mean they are not there already? How low can an operation go before it is finally labeled as a bottom feeding leech. Leeches have higher standards than the banks of this country.
Jul 22, 2011 5:08AM
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 BofA bought my mortgage a while ago. Just wonder what crook will get it when they FOLD? Maybe they can just send me the deed and call it even. LOL Good bet they wont try that too big to fail BS this go around. These shady banks need to fold.
Jul 22, 2011 1:17AM
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it TIME FOR CHASE BANK PAY THE PRICE, THEY NEED TO GO DOWN. PLEASE ALL THE BONDS HOLDERS IT IS TIME TO DESTROY THE CHASE, SUE THEM, THEY HAVE RUIN MILLION OF LIVES DESTROY DESTROY CHASE,,,, IT IS TIME TO ACT
Jul 21, 2011 8:19PM
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When are we going to stop calling these huge conglomerate instutions BANKS???
Jul 21, 2011 6:04PM
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Looks like George Soros has decided to allow the USA to survive just a bit longer.
Jul 22, 2011 8:04AM
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The money changers have always been an evil lot. Their greed brought this country to its knees and their connections in congress have blocked all meaningful change to prevent it from happening again. So what is next?

 

I’m looking at the banksters current bait and switch strategies for pushing exploding ARMs and exploding balloons. They don’t even believe their sector will improve.

 

They are all too big to fail and need to be busted up to restore a free market. What we need is lots of little sociopaths competing to ream us. So where is the current administration and the whole of congress (both sides); still in bed with banksters and having fun. What is it going to take to see some regulatory movement; A zero approval rating.

 

The more things change the more they stay the same; Vaseline anyone????

Jul 21, 2011 7:01PM
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When I think of Brian Moynihan or Barabra Desoer, I think of the song by John Lennon called Piggies:

.

So if it walks like a piggy, talks like a piggy, by golly it’s a PIGGY!

.

 

WHERE IS MY LOAN MODIFICATION BANK OF DESTROYING AMERICA!

.

BofA and it’s CEO Brian Moynihan reminds me of that song by John Lennon and George Harrison  titled "Piggies" I invite you to listen to this song on youtube and see if it appropriately fits.

.

http://www.youtube.com/watch?v=ovD9rTzs2q4&feature=player_embedded

.

Have you seen the little piggies
Crawling in the dirt
And for all the little piggies
Life is getting worse
Always having dirt to play around in.
.
Have you seen the bigger piggies
In their starched white shirts
You will find the bigger piggies
Stirring up the dirt
Always have clean shirts to play around in.
.
In their ties with all their backing
They don't care what goes on around
In their eyes there's something lacking
What they need's a damn good whacking.
.
Everywhere there's lots of piggies
Living piggy lives
You can see them out for dinner
With their piggy wives
Clutching forks and knives to eat their bacon.
.

 

When I filed my lawsuit against Bank of America, I thought of the many others out there in the same situation.  It was then that we decided to educate the public on what these piggy banks are doing, as well as unite us all together as one voice.   Please help me turn this David vs. Goliath modification process, into a Goliath vs. Goliath. 

.

Please stand with me and Brookstone Law Firm, and send an email to Bank of Abusing America that states that we will no longer tolerate their potentially illegal, fraudulent, irregular and abusive business methods. 

.

So please send your email directly to Bank of America and include the following:

.

1.  Your name

2.  Your complaint concerning your experience with Bank of America.

3.  Please end your email “I support John Wright vs. BofA Lawsuit!”

4.  Please send a copy of your email to piggybankblog@earthlink.net

5.  Please send your email to BofA CEO Brian Moynihan:

     brian.t.moynihan@bankofamerica.com

.

I HAVE HAD ENOUGH AND  I AM FIGHTING BACK! 

.

I have created piggybankblog.com for all of those who have been abused by Bank of Destroying Americas potentially irregular, fraudulent and simply abusive home loan modification process. 

.

Divided we might have fell America. UNITED WE MUST STAND!

.

http://www.youtube.com/watch?v=PoOJMr7OJ0s

.

My name is John Wright AND I AM FIGHTING BACK!

.

John Wright

piggybankblog.com

Jul 21, 2011 9:49PM
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Jim, in all due respect, I don't understand your rationale behind your characterization of BAC. First, the recent investor settlements are a one-time expense unless there are several billion dollar settlements that have been kicked further down the road we do not know about. If not, then all the negative financial transactions that did and are now afflicting BAC, in my opinion, have been already baked into the current price. Moreover, the picture would have been rosy for BAC if it were not for that settlement but kudos to BAC for taking the hit now rather than later. As far as revenues, mortgage rates have declined. Mortgage rates have discounted 40% since 2009. As far as mortgage defaults, credit losses appear to have peaked according to statistics from US Housing report and BAC's annual report. As far as recommending potential investors to hold off unless BAC falls to $8 rather than $10 is like saying buy Apple at $400 but not at $500. It is irrelevant. BAC HAS TREMENDOUS INHERENT VALUE and the best bang for the buck is to buy BAC and hold it for years or until the mortgage market restores some sanity. They continue to derisk what was a risky situation and that is not yet baked into their price. 
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