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Around midnight the New York Times broke the news of a $10 billion AIG lawsuit against Bank of America over bad mortgages. This news prompted an immediate selloff in the premarket, with shares trading down 8% at the opening bell.Citi’s Keith Horowitz probably hadn’t seen this article when he reiterated a buy on Bank of America in a morning note.
Citi looks silly now, as noted by Chris Whalen, though the argument for why BoA was oversold last week may hold true. Last week’s pummelling followed a 10Q disclosure that mentioned “more rigid” handling of mortgage putbacks by GSEs. According to Horowitz, this has been public knowledge since June 30:
In our view, GSE language in the 10-Q was new…but does not appear to be guidance change. We believe the language was meant to provide further detail on the reserve that was established as of June 30, and does not represent a subsequent change post June 30 to its view of the reserve. The incremental language points to more “rigid” GSE behaviour which BAC mgmt has mentioned in the past. In addition, disclosure notes a change in the handling of mortgage insurance rescissions, which could increase the putback liabilities as rescissions move to BAC more quickly. However, this seems to be more a matter of how the process is handled than a change in the ultimate losses at stake.
Citi set a price target of $14 and called it the best bank stock:
We rate the shares of Bank of America Buy/High Risk (1H). We believe BAC represents the best value in the group trading at a discount to the group on normalized earnings. BAC is highly levered to an improved economy, which we believe will take a while to materialise. However, we believe the valuation discrepancy is too wide, and continues to offer investors the best way to invest in the banking sector.
BoA shares are currently priced at $7.50.
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