B of A: Too many toxic assets to add up

The bank is in a constant state of patching its holes.

By InvestorPlace Sep 7, 2011 9:46AM
By Jeff Reeves, InvestorPlace.com

August certainly was an interesting month for the stock market. The Dow suffered about a 5% decline and the S&P lost almost 7%, but that's not the whole story. A chart of the major indexes looks like a big W, thanks to white-knuckle volatility, with the Dow Jones Industrial Average having moved in a roughly 1,500-point range. Some traders made a mint on well-timed buys.

One of the biggest movers in August was Bank of America (BAC). The financial stock shed about 18.5% last month to continue its ugly streak in 2011. However, shares did leap from $6 to $8 in just two trading days, rewarding those savvy few who bought the bottom.

Amid this volatility, the billion-dollar question for B of A investors should be whether the stock has the potential for another big move like that. 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 (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 (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 (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.

Related: Is Buffett's Buying History Repeating Itself?

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 B of A 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."

Related: 5 Dividend Stocks With Double-Digit Returns

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.

What’s next for BAC
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 the 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.

Related Articles

Bank of America is not worthy of their name...they are a disgrace..they are the worst bankersters they should be jailed...they have done more to put people out of their homes, dishonest robo signing, outsourcing jobs to all over the world to make it hard for clients to communicate they are A W F U L!!!
Sep 7, 2011 3:14PM
I'm not in disagreement with you I have many bank accounts with different banks I also own a business and can tell you with out clients i would go broke unless the tax payers wanted to keep bailing me out
Sep 7, 2011 1:48PM
This guy couldn't get it right at the beginning of the year so what makes him right now ? just asking
Sep 7, 2011 2:39PM

People are leaving Bank of America en masse.


I closed my last accounts with them last week and while I was in the bank, two other people were in there also closing their accounts.  I didn't even have to tell her WHERE I was moving my money to.. She guess correctly on the first try.


What does that tell you?


1 week later, a new 84-page "Account and Fee" pamphlet shows up on my door.  The first 30 pages of this book are nothing but FEE SCHEDULES of the 900+ ways they can greedily take your money (so called "fees") and pay their fat porkers BILLIONS in BONUSES each and every year.


Leave people.  FLEE Bank of America.  Go to credit unions and watch your PENNIES each month on your accounts from Bank of UnAmerica turn into DOLLARS at the credit union.


They want to swim in their greed, let them.  Their new fee structure is required to pay  $300 million/year to buffet on his stock investment.

Sep 7, 2011 3:08PM
@ antikoolaid I got some bad news for ya they all do business the same way get you in the door and then put it to you so i guess you will be saying the same thing in a year or two about your new bank/ credit union until the politicians let the free market work nothing will change. I guess what im saying is if a company doesn't take care of there clients they go broke if you save those types of companies with bailouts then your not letting the FREE markets work and here we are.
Sep 7, 2011 12:50PM
BAC will be $ 60 by 2014  !!!$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$
Please help us to maintain a healthy and vibrant community by reporting any illegal or inappropriate behavior. If you believe a message violates theCode of Conductplease use this form to notify the moderators. They will investigate your report and take appropriate action. If necessary, they report all illegal activity to the proper authorities.
100 character limit
Are you sure you want to delete this comment?


Copyright © 2014 Microsoft. All rights reserved.

Fundamental company data and historical chart data provided by Morningstar Inc. Real-time index quotes and delayed quotes supplied by Morningstar Inc. Quotes delayed by up to 15 minutes, except where indicated otherwise. Fund summary, fund performance and dividend data provided by Morningstar Inc. Analyst recommendations provided by Zacks Investment Research. StockScouter data provided by Verus Analytics. IPO data provided by Hoover's Inc. Index membership data provided by Morningstar Inc.


StockScouter rates stocks from 1 to 10, with 10 being the best, using a system of advanced mathematics to determine a stock's expected risk and return. Ratings are displayed on a bell curve, meaning there will be fewer ratings of 1 and 10 and far more of 4 through 7.

123 rated 1
262 rated 2
480 rated 3
651 rated 4
649 rated 5
629 rated 6
616 rated 7
496 rated 8
346 rated 9
111 rated 10

Top Picks

TAT&T Inc9



Top Stocks provides analysis about the most noteworthy stocks in the market each day, combining some of the best content from around the MSN Money site and the rest of the Web.

Contributors include professional investors and journalists affiliated with MSN Money.

Follow us on Twitter @topstocksmsn.