Photo: The Daily Ticker
As I described earlier, I had the bizarre experience this afternoon of glancing up from my sandwich to find that I was being personally attacked by Bank of America on Bloomberg TV on account of a post I wrote explaining why BAC’s stock was collapsing.Had I not been the object of the attack, I’d probably have written a post hypothesizing that if Bank of America was this freaked out by an article that just regurgitated some bearish arguments made by others, the bank really must be in trouble.
I was the object of the attack, though, so this didn’t seem appropriate.
Other Bank of America observers quickly came to the same conclusion, though. Including Rich Eckert of Second Derivative Research, who sent the following note to his clients:
There was an article in Business Insider from Henry Blodget summarizing the “bear case” against Bank of America. I do not believe he himself was taking a position, merely gathering and encapsulating bearish sentiments. BAC issued the following response:
“Blodget is making exaggerated and unwarranted claims which is what the Securities and Exchange Commission 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 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 per cent of goodwill and other intangibles. As of June 30, our tangible book value per share was $12.65. “
Although I concede that BAC had to respond given the free fall in its stock, the personal nature of the response and the bank’s defensive posture regarding its individual exposures only ratifies my belief that something is seriously amiss and that there is at least some merit to the bears’ theses. I think it is very telling that, when addressing sovereign exposure, BAC only spoke to its direct exposure to sovereign governments. It deliberately omitted any response to the argument that it has probably written trillions of dollars (notional principal) of CDS against that debt and the banks holding that debt. Or that where it has matched its swap book, it has bought protection from those very same European banks or the technically insolvent German Landesbanks (their version of “thrifts”).
That omission is more revealing than any of the statistics cited by Blodget or BAC. As is the failure of BAC to simply set the record straight with some kind of factual release, something to the effect of: “Our mortgage litigation exposure is $xx billion, our 2nd lien loan exposure is $xx billion, our sovereign debt exposure is $xx billion, our commercial real estate exposure is $xx billion, etc.” The personal attack on Blodget and the sensational nature of its denials (e.g., “by a factor of”) almost screams “mea culpa.”
To paraphrase Harrison Ford’s character, Deckard, in Blade Runner, “If I was short before, I’m twice as short now!”
For what it’s worth, Rich is correct: I wasn’t taking a position on Bank of America-the-company or stock—I was just explaining why the stock was tanking. As I mentioned earlier, I’m also a Bank of America shareholder, so I’d actually rather it were going up.
In happier news, Bank of America only fell 2% today. That’s an improvement!
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