Tuesday, August 23, 2011

Naked Capitalism: BAC and the Cratering Share Price (Again)

Posted: 23 Aug 2011 02:42 AM PDT
Yesterday, the S&P 500 ended flat, yet Bank of America continued its truly impressive implosion, with its stock tanking 7.89%. It is now trading at a market cap of $65 billion, versus a book value of common equity of roughly $215 billion.
Market commentators were having so much fun discussing the meltdown that FT Alphaville even dedicated a post to the “The Bank of America Explanation Game.” This was its tally, and the post includes an explanation for each:
1. An analyst note suggesting BofA will need to raise $40bn-$50bn
2. Reports that BofA is keeping a stake in China Construction Bank
3. Yet more talk of snags in a broad mortage settlement deal
4. General market weakness and BofA’s susceptibility to HFT
5. Wikileaks has apparently destroyed some of its BofA data files
Henry Blodgett at Clusterstock endorsed the “BofA needs a lot more capital” view, and pointed out the obvious: the bank had had plenty of opportunity to sell equity when its share price was higher, and if it did need to sell stock now, it was going to be extremely painful for existing holders. Concerns about BofA’s ability to bolster its balance sheet are probably not helped by rumors that the bank is trying to unload Merrill and (not surprisingly) finding no takers.
Now narrowly, the trigger yesterday likely was the Jefferies view re Bank of America possibly needing to raise $40 to $50 billion. But that isn’t the most helpful way to frame the issue.
Think about it. BofA has $215 billion in book value of common equity. $40 to $50 billion is a huge number relative to that. For investors to react suddenly to one firm’s view (what, you own the stock and this is news to you?) points to something much more fundamental.


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