One of the most troubled big banks in the U.S., Bank of America, is aggressively trying to turn it around and stop the massive sell-off of its stock.
That’s the good news.
The firm’s share price is down nearly 50% since the beginning of this year, and CEO Brian Moynihan and his team are selling assets, trying to settle billion-dollar lawsuits, and laying 10,000 people off in a total restructuring in order to cut costs and gain capital.
By doing so, the firm is addressing investors’ concerns one by one. The question is, will it work? As you’ll see below, the firms’ solutions still leave issues unresolved.
Problem: A proposed $8.5 billion settlement over mortgage backed securities (MBS) was rejected, which made investors worry that liabilities might cost much more and be an indication of future failed attempts to resolve lawsuits.
Solution: Bank of America is right now trying to put a multi-state probe into whether firms servicing mortgages used bogus documents to justify foreclosures behind it with a reported settlement deal. The deal wouldn’t resolve all of the state’s probes, but most of them, according Bloomberg.
BUT that’s just one deal. Bank of America still has to fight many more lawsuits related to alleged mortgage fraud, foreclosure fraud, etc. Estimates on BofA’s exposure to mortgage liabilities range from
Problem: Sovereign debt issues. The Euro crisis has people worried that it might plunge the U.S. into recession, which would hurt financials like Bank of America.
Solution: Not much they can do about this other than reduce their risk, which, according to Moynihan, they started doing in 2010. He said on a conference call with investors recently: “What we did in the past few months in 2010 when the Euro crisis kicked at first, and markets froze, things shut down and we looked at it and said, let’s bring down our risk, we continued to and are still now, and so we started getting rid of risk last year.”
Problem: Its Basel III capital position. BofA has to meet Basel III’s capital requirements by 2013. Complicating this is $150 billion in risk-weighted assets that BofA “has to and will get rid of,” according to what Moynihan told investors.
Solution: Bank of America is having a fire sale to sell assets. Moynihan explains why: “Our non-core portfolio gives us capital, but hurts our balance sheet.”
BUT the firm hasn’t closed many deals yet.
Problem: It’s too big and costly.
Solution: Bank of America announced plans to cut 10,000 people today. They’re cutting 3,500 now and will cut the rest later. They’re also shuffling top management.
BUT that’s only 3.5% of their headcount and its unclear how much money it will save. Also, every bank is cutting people and Bank of America doesn’t seem to be cutting much more than anyone else, considering its large size.
So the big question on everyone’s mind is, will all of this work?
All of Bank of America’s efforts seem to be in the beginning stages of working out. Plus, they could always sell Merrill Lynch. But a lot is riding on BofA’s solutions to these problems. Including Moynihan’s job. And perhaps more is riding on a global recovery, which is out of his hands.
Bottom line, Bank of America’s big plan is in the puberty stages.