BofA's Plunging Stock Narrows Moynihan's Options
By Hugh Son and Dawn Kopecki – Aug 9, 2011 12:00 AM ET
Bank of America Corp. (BAC)’s $33 billion plunge in market value over the past week has stoked concern that Chief Executive Officer Brian T. Moynihan needs to raise capital even as his options for finding it narrow by the day.
The lender declined 34 percent in New York trading since Aug. 1 amid signs that the firm may face more expenses tied to soured mortgages, and that a stagnating U.S. economy will curb revenue. The company has the lowest price-to-book value ratio of the 10 biggest U.S. lenders, 32 percent, reflecting investor doubt that Bank of America has properly valued its assets.
Moynihan, 51, repeatedly said this year that the Charlotte, North Carolina-based bank doesn’t need to raise capital, a move that would reduce the value of the stake held by current investors. Analysts who initially agreed with him such as Mike Mayo at Credit Agricole Securities USA now won’t rule out the idea, and are speculating about parts that could be sold including the Merrill Lynch units.
Raising capital at yesterday’s $6.51 share price would be “a massively dilutive exercise,” said Paul Miller, an analyst at FBR Capital Markets with a “market perform” rating. “They probably don’t need to right now, but every day there’s another lawsuit out there that has merit,” he said, citing litigation tied to subprime lender Countrywide Financial Corp. “How in the heck are they going to settle all these suits unless there’s some way to break away from the Countrywide liabilities?”
Bank of America, the largest U.S. lender, fell 20 percent in yesterday’s New York Stock Exchange trading, the biggest drop since the credit crisis in April 2009, and Citigroup Inc. (C), ranked third by assets, tumbled 16 percent. Both needed taxpayer money to stay afloat during the worst of the crunch, which they’ve since repaid. Bank of America now faces demands for refunds on home loans from U.S.-controlled firms that still haven’t paid back their bailouts, such as American International Group Inc. (AIG) and Fannie Mae.
The two banks led the 12 percent decline of the 24-company KBW Bank Index (BKX) after Standard & Poor’s downgraded the credit of the U.S. government late last week, casting doubt on federal backing for U.S. lenders and increasing speculation that the world’s largest economy may stall into recession.
“The bias that exists, and that is gaining credibility, is that a double-dip is ahead of us,” said Charles Peabody, an analyst at Portales Partners LLC. “If that’s the case, then something like Bank of America is going to have to raise substantial equity externally.” Peabody rates Bank of America a “buy,” and said he doesn’t think the firm will raise capital.
Swaps and Options
Signs of investor doubt appeared in financial markets as credit-default swaps on Bank of America rose by the most on record and reached the highest price since May 2009. Options traders seeking protection from more losses pushed prices for the derivatives to the highest level since April 2009 and lifted volume on bearish bets to more than 1 million contracts, five times the four-week average. Bank of America’s August $10 puts, which give holders the right to sell the shares at that price, were the most-actively traded options of any U.S. company.
“This is a scary, scary market,” said Gary Townsend, a founder of Hill-Townsend LLC in Chevy Chase, Maryland, who added that he sold his fund’s 200,000 Bank of America shares before they fell below $9. “To protect my investors and so I could sleep at night, I thought it was wise to sell out of some things that looked as though they had no support.”
The bank sought to assure employees and investors that the company was strong in an internal memo, after Bank of America disclosed Washington-based Fannie Mae stepped up demands for refunds on soured home loans and New York-based insurer AIG sued to recover more than $10 billion in related losses.
Spinning Off Merrill
Bank of America could avoid raising capital by spinning off its Merrill Lynch wealth management and investment bank operations, said Joshua Rosner, an analyst at the New York-based research firm Graham Fisher & Co. Such a move could occur in a special dividend that would result in Bank of America returning to being a more focused retail bank, he said.
In a “base-case sale,” the Merrill Lynch units acquired in 2009 may be worth $50 billion, said Mayo at Credit Agricole. He downgraded Bank of America yesterday to “underperform” from “outperform” because investors “can no longer rule out a capital raise.”
Keith Horowitz, an analyst at Citigroup, reiterated his buy recommendation, saying there’s “significant value” in Bank of America and that it doesn’t need to raise capital.
Merrill Lynch is “absolutely core” to Bank of America’s mission of serving individuals, companies and institutional investors, Chief Financial Officer Bruce Thompson said last month in an interview. Executives have cited the sales potential of promoting products to clients among various divisions.
The AIG suit is the latest legal challenge faced by Moynihan, who took over as chief executive in 2010. Last month, former investors including BlackRock Inc. sued Bank of America after opting out of a $624 million settlement tied to Countrywide, which the bank bought in 2008. Plaintiffs said the company misled shareholders about its finances and lending.
AIG contends Bank of America and businesses it took over caused more than $10 billion in losses on $28 billion in securities, according to the suit.
The bank is “aggressively taking action” to put mortgage concerns behind it and has set aside about $18 billion for expected loan repurchase costs through June 30, the bank said in the Aug. 7 internal memo. Litigation and credit reserves are also available for such costs, the bank said.
“Collectively, those reserves are sufficient to cover our realistic estimate of the actual costs we expect to face in the future,” the firm said in the memo.
As for the AIG litigation, Bank of America rejects the insurer’s “assertions and allegations,” said Larry DiRita, a spokesman. “AIG recklessly chased high yields and profits throughout the mortgage and structured finance markets,” DiRita said. “It is the very definition of an informed, seasoned investor, with losses solely attributable to its own excesses and errors.”
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