Whatever happens in Europe, past BoA idiocies are coming home to roost
Last Thursday afternoon at 12.52, a man walked into the local Bank of America branch on South Broadway Street, Yreka, showed a black handgun to the tellers, and left with a sizeable amount of cash. It’s quite possible that the stick-up artist figured he only had a limited window before BoA went down.
The previous day, America’s Federal Reserve asked Bank of America to show what measures it might take if business conditions worsen, the Wall Street Journal reported yesterday (Friday). BoA chiefs apparently wrote the Fed a letter in reply, listing options such as the issuance of a separate class of shares tied to the performance of its Merrill Lynch securities unit.
Neither Bank of America nor the Fed were prepared to comment when faced with the story. However, it is true: and the Fed request was an odd one, given the degree of on-the -record formality involved; this is often the form used for arse-covering later. Some lessons (even if they aren’t especially useful) have been learned since 2008…at least by the bureaucrats.
I spent much of Friday (a sweltering afternoon here in Southern France) trying to gauge views and reactions about the BoA situation, and somehow plug in to someone with definitive knowledge about it. The heat was enervating to say the least, and Friday afternoons are not the best time to do this kind of trawl anyway….plus, a surprising number of people were still on holiday. Some facts, however, speak for themselves.
BoA’s share price has lost 40% since the beginning of the year. It recorded an $8.8 billion loss in its latest quarter – the biggest in its history. It has around a trillion dollars of toxic mortgages on its books. Just to put this last number into perspective, that’s more than all the bailout costs and liabilities taken on by the UK taxpayer from all the bad British banks of 2008…and only 20% less than all the US banks took from the Fed in 2008.
The Board of the bank has erroneously suggested that it will shed 10,000 jobs in an effort to save money: last night, Reuters confirmed that the real figure is 30,000. And lurking in the background behind all this, Wikileaks continues to claim that BoA has been doing criminally bad stuff….although for some reason, has shut up rather than put up about it of late. Most of it – for example, misrepresenting the quality of mortgages it sold on to AIG – may well be already out there anyway. (It looks like the US Government will sue most of the big banks on this topic before too long.)
Warren Buffet, by contrast, has put his money where his mouth is with a $5 billion investment in the troubled bank. Great PR for both parties and all that, but Buffet remains a master chess-player: he’s bought stock at half what it would’ve cost a year ago, already made 20% on it – and then watched yesterday as the price fell a further 7%. As the price plunges more next week, it wouldn’t surprise me if he bought more still. I think our Warren fancies having an asset to sell on in the fulness of time; that’s shrewd of him, but it doesn’t change BoA’s commercial situation: the bank appears to be in deep trouble.
All this makes one realise that the Yreka bank robber may well have been a man of great foresight. Perhaps he’s a keen student of European debt in those dull moments between bank heists: although BoA’s exposure to Eurodebt is no joke. It’s in for a half billion dollars in relation to Greece, whose Government announced Thursday evening that it can’t reach the deficit targets set by the Troika. Half a billion is a gnat’s bite compared to $1trillion in duff mortgages, but sadly, BoA also seems to have given credit unwisely to much bigger sovereign disaster areas than Greece.
So – the Fed asked BoA an awkward question: were they right to? Absolutely they were.
Last week, under pressure the Bank sold 50% of its stake in a Chinese bank to raise funds. It raised $3.3billion, but that looks to me like the overstretched Monopoly player mortgaging Asia after he lands on Europe. It’s doubtful such a sum would anywhere near cover the BoA exposure to EU bad debt and other associated collateral products: BarCap estimated in February that U.S. banks have $176 billion in exposure to troubled euro-zone countries – mostly concentrated in the 10 biggest banks.
“It’s a guesstimate,” one European banker told me yesterday, “But I’d say Bank of America’s total EU exposure is around $25 billion.”
So – pretty bad. But enough to start a panic? Possibly – given that US banks are already edgy about interbank lending: the amount they’re parking with the Fed is now higher than it was during the Lehman collapse in 2008. Are other banks already wary of BoA?
“I’d be amazed if they weren’t,” was one comment from the US West Coast last night, “because there are so many signs there now. [CEO] Moynihan says he can meet regulatory levels of liquidity, but so what? He’s going to need more than that. ‘Liquidity problem’ has become the new term for ‘massively exposed’ in banking. BoA is massively exposed in both the US and Europe….and it’s turning into a leper real fast.”
We don’t actually know the bank’s total exposure to EU insolvency, because derivative and other exposures could easily double the $25 billion estimate. But that would still add up to just 5% of its domestic mortgage exposure. And for me, that’s where the big wave is going to hit.
August payroll data in the US showed an economy standing still. Way back in May, a staggering 28% of American homeowners were already in negative equity, and values have fallen a further 6% since then. No job/Lose job + no equity = chuck keys into Bank and move on. My guess is that the payroll data accounted for much of the plunge in bank shares yesterday afternoon EDS. However, the White House has already told Bank of America to go easy on foreclosure (My name’s Obama and I wanna win in 2012) and rolled out a programme of refinancing underwater loans using Zirp rates. This is more can-kicking in my view; from BoA’s standpoint, it means still more exposure and lower margins – not really what the doctor ordered.
Obama’s plan – The Home Affordable Modification Program (HAMP) – isn’t working that well anyway, because the big banks don’t like it. But the Federal Government can’t bail every homeowner out – and Catch 22 is that if you’ve already got negative equity, the chances of getting refinancing elsewhere are non-existent. But if you want to know how serious the mortgage insolvency thing is, take heed of this nugget: Goldman Sachs yesterday agreed to forgive 25% of principal balances for mortgagees who are 60 days behind on their repayments. It might mean that this number is so small, this was just gesture spin by Goldin Sacks. But what I suspect it means is that Goldman know how much they could lose if this goes bad.
The Mortgage Bankers Association says one in eight US mortgage loans were 30 days or longer overdue the last time they looked – which was in Q2, up from Q1. The new payroll data suggest that the Q3 figure might be nearer one in seven. That’s about 7.4 million households. Being the biggest lender, BoA is the most exposed. There is no shortage of tooth-suckers and sharks who will have spotted this.
The bottom line is that the odds are stacked heavily against Bank of America. We have Labor Day on Monday, but then after that, business gets back to reality big-time. Whether the bank has days or weeks remains anyone’s guess, if only because the levels of reporting required by the Banks are still – like their deleveraging progress – disgracefully poor. But I doubt very much if its demise depends on European meltdown: its problems are home-grown, and they will be more than enough to sink it.
The Slog 