JP Morgan May Take Over Bank Of America

[mstng86]

There is a rumor circulated on Wall St. that JP Morgan (NYSE: JPM) will takeover Bank of America (NYSE: BAC) within the week. The government will support the deal with a $100 billion investment in preferred shares issued by the combined entity. Alternatively, the government may guarantee the value of a large pool of Bank of America assets. The word is that Treasury Secretary Geithner has discussed the transaction with JP Morgan CEO Jamie Dimon.The "merger" would completely destroy the value of BAC's common shares.

The government feels that the deal may be necessary as Bank of America struggles unsuccessfully to close several transactions to bolster its balance sheet. The Wall Street Journal reported that the financial firm will need to raise $200 billion which would be another possible event that would wipe out common shareholders.

Bank of America's fortunes have been hurt by events in just the last few days. A New York State judge agreed to allow institutional investors to intervene in an $8.5 billion settlement between the bank and groups that lost money on mortgage-backed securities. China Construction Bank Corp said Bank of American will continue to hold 50% of its share in the foreign financial firm. Many investors hoped Bank of America would sell its entire stake to raise money. Several analysts believe that the costs of owning mortgage firm Countrywide Credit have grown unexpectedly large.

Under federal law, JP Morgan and Bank of America could not combine because together they would have too large a share of several financial markets in the US. Treasury would apparently work with other government agencies to have those rules suspended and then the new combined bank would sell assets to get back into compliance later.

The government's preference for a deal with JP Morgan rather than a federal takeover may be because it does not want to set the precedent of Washington owning one of the world's largest banks "paid for" with taxpayer money.

Note: Credit default swap insurance on the bank's unsecured debt jumped 64 basis points to 435 basis points, meaning it would cost $435,000 per year for five years to insure $10 million in bonds, according to Markit (via Reuters)

http://www.marketwatch.com/story/jp-morgan-may-take-over-bank-of-america-2011-08-23

[Broncojohnny]

This is certainly getting interesting.

http://blogs.wsj.com/marketbeat/2011/08/23/bank-of-america-fires-back-at-blodget/

* August 23, 2011, 1:03 PM ET

Bank of America Fires Back at Henry Blodget


Bank of America has just released a statement in response to Henry Blodget’s raising the question of whether the bank’s capital hole could be as big as $200 billion.

In short, they say he’s way off the mark, and they take a swipe at his personal history.

Here’s the full statement, which minces no words:

Mr. Blodget is making “exaggerated and unwarranted claims,” which is what the SEC stated publicly when he was permanently banned from the securities industry in 2003.

The sovereign exposure is off by a factor of 10.

The commercial real estate figures are off by a factor of four.

The mortgage analysis was provided by a hedge fund that has acknowledged it will benefit if our stock price declines.

The blogger’s recommendations on goodwill accounting would be prohibited by generally acceptable accounting practices.

Traditional bank valuation relies upon tangible book value per share, which excludes by definition 100 percent of goodwill and other intangibles. As of June 30, our tangible book value per share was $12.65.

Bank of America’s stock is still down 1%, though it is well off its lows of the day. That may have more to do with the stock market being up a bunch than anything else.

[Broncojohnny]

Personally, I can't think of any reason why they would need to raise $200 billion. To me that number is so large that it isn't anything but comedy to even suggest it.

[mstng86]

Personally, I can't think of any reason why they would need to raise $200 billion. To me that number is so large that it isn't anything but comedy to even suggest it.

That is just ungodly money.

[Broncojohnny]

This is that guy Blodget's article.



Here's Why Bank Of America's Stock Is Collapsing Again
Henry Blodget | Aug. 23, 2011, 6:53 AM | 28,577 | 53

Image: AP
See Also:
brian-moynihan
UPDATE: Bank Of America Tanks As Capital Concerns Grow
BAC stock
Bank Of America May Need To Raise $40-$50 Billion Of New Capital -- Analyst
chart of the day, bank of america stock performance, aug 2011
CHART OF THE DAY: The Bank Of America Death Spiral

It's deja vu all over again.

The stock of a humongous American bank, Bank of America (BAC), is collapsing.

This is stoking fears that Bank of America will go bust, taking the whole economy down with it.

Why is Bank of America's stock tanking?

Because the market thinks Bank of America is worth much less than Bank of America's management says it is.

In fact, in what is fast becoming a formal law of bank-stock thermo-dynamics, the more the bank insists that everything's fine, the more investors take this as a signal to run for the hills.

Meanwhile, the more the bank's stock drops, the more expensive and painful it will be for it to raise cash if and when it finally admits that the market was right all along (the next formal law of bank stock thermo-dynamics being that the market is generally right.)

And given that Bank of America has now persuasively broken the $7 barrier and now has a mere $65 billion of equity value left, this death spiral can't continue much longer. (The good news, we suppose, is that the stock can't fall below zero).

chart of the day, bank of america stock performance, aug 2011Let's leave aside for a moment the question of what will happen if Bank of America's stock keeps tanking. After observing the government's behavior during the financial crisis, the obvious bet would be that Treasury Secretary Tim Geithner is even now cooking up some new bailout scheme that, per usual, will save the bank and hose taxpayers. But Americans certainly have gotten sick to death of bailouts, so maybe that isn't such a foregone conclusion this time.

(A year or so ago, if memory serves, the Treasury was trumpeting "financial reform" that allows it to go in and seize any huge institution whose failure threatens the economy, so maybe that's also a possibility. But the government had that power last time, too--at least with respect to the banks--and it refused to use it. So we're not sure why it would use it this time.)

The question for today is why is Bank of America's stock collapsing? What does the market see that Bank of America's management and auditors don't?

Thanks to the efforts of a few tireless Bank of America observers, including Zero Hedge and Yves Smith at Naked Capitalism, we have our answers.

Bank of America has about $222 billion of "book value"--the amount that's supposedly left over when you subtract Bank of America's stated liabilities from its stated assets.

The trouble is that the market doesn't believe Bank of America's assets are worth anything close to what Bank of America says they are worth. The market also doesn't believe that Bank of America has reserved anywhere near enough to pay the costs of litigation surrounding its mortgage behavior during the housing boom.

And when you put a more reasonable value on Bank of America's assets, the market thinks, the difference between that reasonable value and today's current value will have to be subtracted from the company's "book value." And that subtraction, the market thinks, will so demolish Bank of America's book value that the company is basically insolvent. (And, therefore, will need to raise more capital or go bust).

Here are some of the things that the Bank of America observers think should or will be subtracted from the bank's $222 billion of book value:

* $15-$20 billion in Increased mortgage-litigation reserves. Zero Hedge thinks BOFA is understating the liability for mortgage litigation costs by this amount. See explanation here.
* Some percentage of $80 billion of "second mortgages." Yves Smith thinks these should probably be written down by 60%, or $48 billion. You can pick your own number.
* Some percentage of $182 billion in commercial real estate loans.* The "extend and pretend" game in commercial real-estate is even more pronounced than in residential real estate. So as Yves Smith observes, there's almost no chance those loans are actually worth $182 billion.
* A healthy percentage of $78 billion of "goodwill." Bank of America built itself by acquisition. "Goodwill" is what's left over when management overpays for something. As Yves Smith observes, Bank of America's former CEO Ken Lewis loved overpaying for things. He overpaid for Countrywide, for example, which has since been written off to zero, and Merrill Lynch, which he could have had for free by waiting a couple more days.
* Untold amounts of exposure to collapsing European banks and sovereign debt.* Yves Smith says Bank of America says its sovereign exposure is $17 billion. Really? Has the firm not written any credit default swaps protecting customers in the event that European banks or countries go belly up? Might the firm have to post some cash "collateral" to satisfy these contracts? That's what Lehman had to do, after all. And that's what made Lehman go from "having plenty of capital" to being broke overnight.

So, taking some back of the envelope numbers, it looks as though we could easily come up with, say, $100-$200 billion in write-offs and exposures to "clean up" Bank of America's balance sheet.

A $100-$200 billion hit to Bank of America's $222 billion of equity capital, needless to say, would do some serious damage. Specifically, it would force the company to raise about the same amount to restore its capital ratios.

That's why Bank of America's stock is tanking. The owners of that stock will be the first folks to get hit if Bank of America has to raise more capital. And the lower Bank of America's stock is when it raises more capital, the more they'll get hit.

And, for obvious reasons, they're not excited about that.

*UPDATE: In an extraordinary move, Bank of America has issued a statement addressing some of the "claims" in this post. In addition to taking a shot at me personally, the bank says that the "European exposure" Yves mentions above is off by a factor of 10, and the commercial real-estate explosure is off by a factor of 4. If that's true, I'd be happy to link to a document showing that. The central point of the post still stands, however: The reason the stock is tanking is because the market does not believe Bank of America's assets are worth what they say they are worth.

Read more: http://www.businessinsider.com/bank-...#ixzz1VstOV86M

[mstng86]

So Al, do me and probably a couple of other people need to get out of the stock now?

[Broncojohnny]

So Al, do me and probably a couple of other people need to get out of the stock now?

Shit I'm not going to make that call, if you own it then you should be educated and know how much of a sell off you can handle.



Here is a good article:

http://www.cnbc.com/id/44243865

Bank Stocks Getting Worst of Fears Recession Is Back
Published: Tuesday, 23 Aug 2011 | 2:42 PM ET
Text Size
By: Jeff Cox
CNBC.com Staff Writer

While investors in major indices have been pricing in the end of the recovery, bank investors appear to be pricing in the end of the world.

That has been the case since the sector hit its April highs and then sold off more than 30 percent since, despite ostensibly being awash in cash provided to it during the post-financial crisis liquidity infusions from the Federal Reserve . [cnbc explains]

"What you have at the moment is the market making the assumption that these companies aren't worth their liquidation value, even if their liquidation value is 100 percent in cash," said Dick Bove, vice president of equity research at Rochdale Securities in Stamford, Conn. "You have to ask yourself what is going on. Do they believe that the American banking industry is finished?"

"Basically if what the market is telling us about banks is correct, then we're heading toward a financial crisis which will cripple the American economy and all these stocks," he added in an interview.

Bove famously made the call nearly a month ago that the market was too volatile and investors should shed all their positions, including banks.

But even his mind was changed by the rapid-fire selling that, despite Tuesday's sharp rally, told him the banks had been beaten up enough and it is now time to get back in.

"You should be going in full bore and buying banks here, because the situation is not going to stay the way it is," Bove said. "I don't care how many idiots there are in Washington, I don't care how many people are trying to hoodwink everybody in Europe. The cash is there and it isn't going to sit there with no return."

A sharp increase of some $200 billion in deposits has analysts such as Bove convinced that banks have enough capital to withstand the bevy of factors conspiring against the industry. They include the torrent of foreclosures yet to hit the market as the government has tried to forestall a seemingly inevitable conclusion to the housing crisis, as well as fallout from the European debt [cnbc explains] crisis and a sharp slowing in the U.S. economy.

At the focal point of the selling has been Bank of America [BAC 6.30 -0.12 (-1.87%) ], which is most exposed to the foreclosure crisis, including through allegations of improprieties in the way it handled its own cases.

BofA stock has tumbled more than 31 percent in the past month alone, taking its peers down for the ride as well.

Yet Credit Suisse analyst Mosche Orenbuch, even while taking down its price target for BofA from $17 to $14, said it "remains the cheapest bank in our coverage universe" and expressed optimism that the company would be able to meet capital requirements and weather the foreclosure storm.

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Current DateTime: 12:45:33 23 Aug 2011
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* Boutique Banks Rise
* What's Wrong With BofA?
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That seems to be the overriding prognosis for the sector, even as the Keefe, Bruyette & Woods Bank Index has crumbled 32 percent since its April 6 high.

"The developing economic outlook of slowing U.S. growth coupled with a yield curve [cnbc explains] where the short end is zero for the indefinite future and the 10-year bond yield [cnbc explains] is below 2 percent is a very difficult environment for banks," said Fred Cannon, director of research and chief equity strategist at KBW.

"That said, this is an earnings issue for banks, not a liquidity or capital issue in the U.S.," he added. "The liquidity and capital issues in our view are being overdone. But there is a real legitimate concern of the ability of banks to earn money."

In BofA's case, the company could, for instance, sell its stake in China Construction Bank to raise much of the capital needed for Basel III and Dodd-Frank requirements.

Yet that has failed to assuage investor concerns.

"Bank of America seems to be dragging down a lot of the financials because of concerns about its capital position," Cannon said. "The reason the market is concerned is it is the weakest capitalized bank of the large financial institutions in the US....That said, when we look at the amount of liquidity resources, Bank of America is still in extremely strong shape."

It's not just BofA, though. Investor concerns shifted this week to Goldman Sachs [GS 106.86 0.35 (+0.33%) ], on news that CEO Lloyd Blankfein has hired a defense attorney as Congress investigates whether the Wall Street titan violated laws during the financial crisis.

"Washington is now looking for scapegoats to the real estate fiasco it had itself created, and Goldman Sachs and Lloyd Blankfein make easy marks for politicians," Dennis Gartman, hedge fund manager and author of The Gartman Letter, wrote. "This is wrong."

Goldman's shares continued to fall Tuesday, after tumbling nearly 5 percent Monday, indicating how fragile the market's psyche is regarding the financials in particular.

Bove, though, said the problem is more with Blankfein than it is with Goldman.

"He's become an irritant to the stock price and shareholders," Bove said. "Let's assume he's not guilty of anything. But I'm not willing to make the assumption that he's operating with the degree of freedom that he operated with before all these potential lawsuits showed up."

The best of class in the big bank group continue to perform well—JPMorgan Chase [JPM 34.78 1.37 (+4.1%) ] in particular, which hasn't had to chart the same course as its peers. Credit Suisse's Orenbuch said recently that the bank is well-positioned thanks to "strength and stability of senior leadership team, strong capital levels, and competitive positioning."

As for the rest of the industry?

"We continue to believe you can make good investments today," KBW's Cannon said. "Some of the top-quality franchises have what look like good long-term returns without taking excessive long-term risks. We do think investors need to be way that earnings estimates, especially for 2012 and 2013, are going to be under some pressure."

[Denny]

Personally, I can't think of any reason why they would need to raise $200 billion. To me that number is so large that it isn't anything but comedy to even suggest it.

Hidden loses. Wait for tomorrow.

[Denny]

So Al, do me and probably a couple of other people need to get out of the stock now?

That's going to have to be your call (just saw Al's post). I was talking with him on another thread about getting in ealier today, but I'm glad I held off. I'm by no means an expert on this, but this definately turned me away from even thinking about investing in BAC.

I bet that vulture (Al) swoops in and picks apart the scraps, though... that's just how he rolls.

No risk, no money.

[Broncojohnny]

Hidden loses. Wait for tomorrow.

Ok what happens tomorrow?

[mustangguy289]

I thought Denny was crashing JP Morgan?

[mstng86]

Ok what happens tomorrow?

yea no shit, what happens tomorrow?

[Denny]

Ok what happens tomorrow?

yea no shit, what happens tomorrow?

Nothing I know, just figured someone will be at the bottom of this with better details tomorrow.

[Denny]

I thought Denny was crashing JP Morgan?

Mr. Dimon eats from my hand (when I allow it).

[Broncojohnny]

Nothing I know, just figured someone will be at the bottom of this with better details tomorrow.

I find it speculative at best as far as the JPM thing goes.

As for the ex ML analyst who was banned forever from the securities business for pumping dot com companies, he is just taking the worst numbers he can dream up and putting them in a story. One great example of that is the amount of loans in commercial real estate, he said they have $182 billion, they have $44 billion. I don't think PWC would let that slide unless they want to go the way of Arthur Andersen.