Bank of America’s stock continues to tank despite management’s assurances that the bank has enough capital.Now the stock has plunged below $7 and looks to be on its way below $6.
Bank of America’s stock is tanking because Bank of America’s investors don’t believe its assets are worth what Bank of America says they are worth.
In other words, it’s the fall of 2008 all over again.
Well, we’ve seen enough.
We’re so angry at Bank of America, Treasury Secretary Tim Geithner, and other folks responsible for the Bank of America debacle right now that we can hardly see straight, so this plan may take the form of a rant. But so be it.
(Yesterday, we were concerned about figuring out a solution for the U.S. economy. Today, thanks to the ongoing implosion of Bank of America, we have a far more pressing and annoying concern—a concern that should have been taken care of two years ago, a concern that is a colossal waste of our time and your time.)
Treasury Secretary Tim Geithner and many other Wall Street boosters have long contended that if Bank of America fails, the world will end.
We’re sceptical about that. In our experience, the world is pretty resilient. But we’re going to accept that, if Bank of America does collapse in a pile of wreckage, the way Lehman did, the world will get messy for a while. And we’re going to accept that there’s a better way out of this mess.
Here’s what it is…
First, Treasury Secretary Tim Geithner needs to set a “trigger price” for Bank of America stock. If Bank of America stock falls through this trigger price, he will then automatically put this plan into action. He should not tell anyone what this trigger price is, least of all Bank of America. If the trigger price is breached, he should not flinch or second-guess himself. He should just act.
(We’d make the trigger price $2 or $3 a share or something. This should give the bank a few more days to sell some assets or raise some cash or otherwise get its act together.)
If the trigger price is breached, Tim Geithner should wait until the close of market and then do the following:
- Seize the bank
- Issue a statement saying that the bank’s senior debt obligations and contracts and deposits will be honored and all of the banks businesses will continue to operate as usual during a temporary “workout period” (this will reassure senior bondholders, depositors, and customers, so they don’t freak out and yank their money.)
- Suspend trading of Bank of America’s stock, which will be rendered worthless. (If you feel the need to throw shareholders a bone even though they’d have lost everything eventually anyway, promise them warrants in the new capital structure)
- Fire senior management
- Hire a team of conservative, independent analysts to quickly assess the value of Bank of America’s assets. Tell them to err on the conservative side.
- Write down the value of Bank of America’s assets by whatever it takes to make the balance sheet bombproof—focusing on second mortgages, commercial real-estate, European obligations, goodwill, and other “assets” that the market is sceptical about
- “Haircut” the unsecured creditors by whatever amount is necessary to close the gap between the asset writedown and the equity (BOFA currently has $222 billion of equity, so there’s a lot to work with).
- Inject $300 billion (or some multiple of the asset write-off) of fresh capital into the bank in the form of preferred and common stock—enough to make the bank extremely well-capitalised
- Hire new senior management
- Issue new common stock with the Treasury initially owning 100% of it
- Sell 20% of this common stock on the public market
- Eventually, when things have calmed down, sell the rest
Ideally, all this will be accomplished in a couple of weeks (or even a weekend).
This will solve the Bank of America problem once and for all.
How is this different from the last Bank of America solution?
The last Bank of America solution, you will recall, was a bailout. Bank of America was allowed to keep operating as usual. Bank of America was also, crucially, allowed to maintain the inflated value of its assets, thus protecting its shareholders and bondholders from having to lose money.
This was a kinder, gentler, wimpier Bank of America solution. It was a huge gift to Wall Street and Bank of America’s stakeholders. And it was one that we and others argued against stridently at the time—because we didn’t think it went far enough.
The new solution we have proposed is much more akin to the “Swedish solution,” which acknowledges that Bank of America is 1) systemically important, 2) has forfeited the right to solve its problems itself (by virtue of losing investors’ confidence), and 3) will never solve its problems voluntarily (as evidenced by its failure to solve it over the past two years).
This solution is similar to the General Motors solution—the one that many people said was inconceivable at the time. (Note that GM is now fine and no longer our problem). It’s not a “bailout.” It’s a rapid restructuring.
Yes, this solution will certainly lead to a lot of screaming on the part of Bank of America shareholders.
So be it.
Bank of America shareholders made a bet that Bank of America could get its act together, and Bank of America failed to do that.
If Bank of America is “systemically important,” as everyone agrees it is, then the “system” has every right—legally and morally—to protect itself from Bank of America’s recklessness and incompetence.
The time for half-measures is over. The time for real solutions has come.
We just need to decide on the trigger price.