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BofA Shareholders, ‘How Long Can You Tread Water?’

Posted by Larry Doyle on June 13, 2011 9:03 AM |

What did the Lord say to Noah?

The same thing that Bank of America CEO Brian Moynihan might now be saying to his shareholders. That is, ‘how long can you tread water?’

Bank of America’s stock is down approximately 25% on the year and close to 35% over the last twelve months. While it has doubled from the Armageddon lows seen in 2008, the stock has fully retraced any moves higher since early 2009.   (The graph of Bank of America below is sourced from Market Watch and covers the last three years).

What gives? Will Bank of America need to raise more capital? Will it need another lifeline from Uncle Sam?


While BofA is heavily involved in virtually every segment of consumer, commercial, and investment banking in the world today, at its core it is truly a consumer banking franchise. As such, its stock price is a reflection of the health of the American consumer. Within these circles, BofA’s mortgage operation is the real engine but also the real drag on the company. In fact, I view BofA as a proxy for the American housing market.

You do not need to read Sense on Cents to know that housing remains a real problem in our nation. The question for BofA shareholders is to what extent has the company recognized real losses in its current mortgage operation and reserved against impending future losses. Great questions.

BofA management would have us believe that those questions may not be able to be fully answered because who truly knows what the state of our nation’s housing market will be a year, two years, or even five years from now. These uncertainties hang over BofA like a shroud. Markets punish uncertainty and right now the market is punishing BofA’s stock for that very reason.

What type of uncertainty? This morning I see a number of stories which highlight this uncertainty. These stories include:

1. BofA May Post $27 Billion More Housing Losses, Bernstein Says; Bloomberg, June 13, 2011,

Bank of America Corp. (BAC), the largest U.S. lender, may face a further $27 billion of housing-related losses between now and 2013 as the economic and regulatory environment worsens, analysts at Sanford C. Bernstein said.

The losses would be in addition to the $46 billion the Charlotte, North Carolina-based lender has already recorded since the financial crisis, analysts led by John E. McDonald wrote in a note to clients today.

“The process of addressing legacy mortgage issues will be long and arduous,” the analysts said. “Recent declines in home prices and an uptick in employment trends create an upward bias to our loss estimates” for the lender. Bernstein has an “outperform” recommendation on the stock.

Outperform? Interesting!! Mr. McDonald must believe the current valuation already factors in these losses. But has the company properly reserved? What about other losses? Let’s continue to navigate.

2. The FT reports this morning, Concern Rises Over U.S. Mortgage Defaults,

Mortgages held by US banks are performing far worse than home loans sold to Fannie Mae and Freddie Mac, the government-controlled mortgage finance companies, according to federal data made available to the Financial Times.

The Office of the Comptroller of the Currency has never before released the data but is considering adding the information to its monthly mortgage report.

Think investors may like a look at this data? You think?

Bank-retained loans would typically be made to higher-risk borrowers and, therefore, tend to have higher default rates than loans sold to or guaranteed by the government. But the rate at which bank-held loans are going delinquent raises questions about whether the banks have properly reserved for future losses.

Nearly 20 per cent of non-government-guaranteed mortgages held by the banks are at least 30 days late or in some stage of foreclosure, compared with 7 per cent for loans held by Fannie Mae and Freddie Mac, now controlled by the federal government, according to the data.

The rate at which borrowers of these bank-held loans are falling behind on payments is second only to mortgages that were packaged by banks into securities and sold to investors.

Really? What does this tell us? The banks packaged and sold the real dregs when the markets were fully functioning.

Roughly 30 per cent of borrowers with mortgages in these instruments, known as “private-label” securities, have missed at least two payments, according to Laurie Goodman of Amherst Securities.

3. We all know banks have fabricated their accounting and reporting over the last few years. Is there any doubt that the regulators have given them a wink and a nod in the process? The Wall Street Journal indicates as much in its lead story this morning, Regions Financial Probes Executives,

The board review comes as regulators step up scrutiny of methods banks use to classify loans, which can make banks appear healthier than they are. Investigators are looking at so-called extend-and-pretend cases—where a bank gives a borrower more time and delays reclassifying a souring loan—as well as at “troubled-debt restructurings,” where a bank breaks up a nonperforming loan and labels a portion of it as performing.

What all these cases have in common is “a tendency not to want to report bad news,” said Bert Ely, a longtime bank analyst based in Alexandria, Va.

Add this all up and the smoke and mirrors in many a banking operation today continue to cloud the real health of these organizations. While BofA’s shareholders specifically may be faced with the same question the Lord posed to Noah, the fact is in light of the unknown size of losses throughout our banking system, all investors and individuals in our nation today are faced with another Biblical uncertainty. What may that be?

The great unknown presented in the garden of Eden when Adam confronted Eve.

Navigate accordingly.

Larry Doyle

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I have no affiliation or business interest with any entity referenced in this commentary. The opinions expressed are my own. I am a proponent of real transparency within our markets so that investor confidence and investor protection can be achieved.


  • Peter S.

    Historically, government has prescribed to the notion that “what we don’t know can’t hurt us.” How’d that work out?

  • Tom

    Pray tell, LD, just what is …

    “The great unknown presented in the garden of Eden when Adam confronted Eve.”?

    • LD

      Tom, in regard to

      “The great unknown presented in the garden of Eden when Adam confronted Eve.”?

      Biblical scholars are well aware that Adam told Eve,

      “Stand back, I don’t know how big this thing gets!!” (LOL)

      In similar fashion, do we really know just how large the losses in our nation’s banking system have been and ultimately will be?…Stand back…!!

  • Rob

    “That entire industry needs to be thoroughly investigated… but it won’t happen for two reasons: The powers-that-be have been bought and paid for; and there would have to be army of investigators and a ton of cooperation to complete such a probe. “

    • RR

      The government would never allow a major suit against BofA go to trial because they are in bed with them.

  • fred


    Even if we don’t go back to mark to market, (which to provide good pricing requires a “smoothly fuctioning market”), we can certainly generate more accurate mark to model valuations, by the Fed mandating the applied default rate. Pre-crisis, bankers were plugging in a default rate of 1-2%, post-crisis, a 5% rate. Based on the article sited by you in FT the default rate is closer to 20%.

    Why don’t banks just come clean, err on the side of caution, plug 25% into their models, lever to a moderately agressive 10:1 to 20:1 based on tier 1 assets and adjust reserve requirements accordingly.

    Regulators should enforce, facilitate, and expedite “best practices” in the forclosure and short sale processes,
    and, in situations where borrowers and lenders agree, negative equity could be exchanged for future appreciation rights in newly purchased properties.

    Let the markets work, it really is, “JUST THAT SIMPLE”.

  • Shadow

    The results of Wall Street’s fraud are numerous FRAUDclosuers, topped with the ignorance that works well for those who committed the biggest financial crime in the history of this country (and probably the world).

    Even when faced with the facts, with the truth about Wall Street’s ponzi mortgage securitization scam fueled by their never ending greed, most of the people are still not standing up demanding answers.

    We must do that, we should not rest until the truth is out and all those responsible are prosecuted.

    Please send a letter to your Registrar of Deeds – they are the key players vs MERS and they should take a lead in this fight for justice and our future.

    MA Essex County Reg. O’Brien is the first in the nation to say NO to robogsigning, MERS, BofA :

  • RJH

    MANY of us would love to see BOA, along with Citi, and GS, DIE! Wither on the vine.

    When you think about the unindicted criminal enterprises our CORRUPT 2 political Parties back, these 3, are truly DESERVING of an agonizing death….do YOUR PART, and withdraw any business you have with them.

    • Bob

      Hey right on!!!! How can people commit hundreds of thousands of FELONIES and we never hear of a single indictment?? These people OWN the government. I hate to say it but of all people, George Carlin was right, he used to say to his audience, “It’s a CLUB and YOU aren’t in it!!” It s true. Uncle Ben and the Boys are looting us to death, Bob


    In other news regarding BofA,

    U.S. Says BofA Hindered Foreclosure Probe,

    A U.S. official said Bank of America Corp. “significantly hindered” a federal investigation of the company’s foreclosure practices.

    In a seven-page statement filed June 8 in an Arizona state court in Phoenix, William W. Nixon, a Department of Housing and Urban Development assistant regional inspector general, detailed numerous examples in late 2010 when officials of the Charlotte, N.C., bank allegedly failed to cooperate with investigators.

    Mr. Nixon said Bank of America lawyers refused “on a number of occasions…to allow employees to answer questions” about changes in the company’s foreclosure process.

    When HUD investigators tried to conduct a previously scheduled “walkthrough of the document execution group,” an outside lawyer and a Bank of America vice president “asserted that they did not understand the need for a walk-through and instead showed my staff a set of file cabinets,” Mr. Nixon said.

    When is the trial going to be heard? Come on, DOJ!! File the suit.

    • Bob

      My name is Bob and I am a former Texas State Certified Real Estate Appraiser, actually I still have the license but I have not “practiced” since December 2004

      BOA is a bunch of CROOKS from the TOP to the BOTTOM and back up. I have done real estate appraisals for them. They have NO regard for the law whatsoever.

      I had a Florida Loan “Officer” (they are not an “officer” of anything, just a commission only salesman). But I had one of them too many fire me because I would not violate the law for them so I decided to not take it lying down as usual.

      So I called all around their phone tree looking for the Compliance Officer. Never could get one of those, but I did end up with the REGIONAL MANAGER in Dallas Texas.

      When I complained of the problem, the loan officer demanded I break the law and when I refused I was fired, she told me, “I have been in this business for 33 years and THAT is the way it is, it is the way it has ALWAYS BEEN, and it is the way it will always be, if you don’t like it, YOU need to get out of the business.

      Since that business had broken my health, I took her advice about a year later and quit. I have been out of work for over 6 years. I am 60 years old, what am I going to do????

      These people have ruined so many lives. My 86 year old mother owns BOA and Wells Fargo Stock. I try to get her to get rid of it EVERYDAY. But she won’t, she thinks these big companies are almighty.

      They are nothing but crooks ALL of them. I have worked for over 200 lenders and I have NOT found an honest one YET!!!! Not a single one.

      In 2005 I wrote some things that took off about this situation. I told my Congressman Joe Barton NINE years ago that Fannie Mae and Freddie Mac were going to collapse and he laughed at me and vehemently argued to the point that I knew he knew this was going on. He was just trying to cover it up.

      Let me tell you how to spot a crooked real estate appraiser, HE IS MAKING A LIVING. It is that easy.

      Where is the outrage?? Why is nobody going to jail over this??? Hundreds of thousands of cases of felony loan fraud have occurred, I do not know of a SINGLE crooked appraiser or a single crooked loan officer going to jail. WHY???? Why do the American people ALLOW themselves to be LOOTED and say NOTHING??? There are just too many football games on TV. That is all they care about. They will wait until it is too late to rise up and fix the problem. It is ALREADY too late.

      They should have raised holy hell in 1934 when Roosevelt started Keynesian Economics. Keynes was WRONG, just like Marx was wrong. Keynesian Economics are flawed, they are unsustainable and we have reached the “Keynesian Endpoint”. We will have QE-3 and soon as it is gone, 4 then 5 then 6 then 10 until we have hyperinflation like Weimar Republic Germany or Argentina. That is where we are going like a runaway train.

      Ellis County Texas, Life ruined by crooked banks

  • Spock

    The ‘purchase’ of Countrywide continues to look like Ken Lewis had a death wish. Meanwhile, we have to ask if the advantages gained by taking in Merrill Lynch outweigh those Countrywide related losses.

    Me? I’m thinking not. Wachovia tried buying its way into the mortgage business before BofA did and it ended up costing them their independence [forced sale to Wells Fargo on very favorable terms for Wells].

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