John Bougearel
Today is the tale of two story’s about BAC’s health. On the one hand Bloomberg wrote today how BAC’s purchase of Merrill was a “steal” based on company filings with the SEC. On the other hand, bank analyst wrote just the opposite on BAC’s health last night. In fact, Whalen discredited BAC’s SEC filings. And rather than being a steal, the implications of the MER and CFC acquisitions by BAC are that BAC’s equity is worth zero and bondholders might have to take a 30% or more haircut next year.
Whalen’s missive titled “BAC: How much should bond holders be haircut to restore solvency” last night.
In this missive, in which he disses the Lewis’ BAC corp culture as a Lewis crammed down “mediocrity” he states “the departure of Ken Lewis as CEO is probably the best news for BAC equity and bond holders in many years… , a culture where competent managers where systematically forced out by the human resources department of BAC… [the] HR department ruthlessly squeezed down personnel costs. These are “process” people, after all, who believe that you can identify tasks that can be done by one person, then train that person and pay him/her well below average. This is what they call “synergies” at BAC. This goal of short-term cost cutting pervades BAC and has led to an organization that produces narrowly focused employees and business units, with no incentive to innovate or manage risk…And the same penny-wise mentality has now stripped most of the value — that is, highly skilled, experienced people — out of Countrywide and Merrill Lynch. ”
Lewis made his purchases of ML and CFC before going through FDIC resolution. By buying these companies before having been restructured through the FDIC “they face the daunting task of cleaning up the mess left by the troubled acquistions” says Whalen.
“In the case of BAC, we hear that this includes buying defaulted mortgage paper at par from the various securitization vehicles sponsored by BAC directly or acquired from Countrywide and/or Merrill Lynch. The latter, in case you’ve forgotten, was the biggest CDO sponsor on Wall Street. This one reason we told our friends at Fast Money that we believe BAC is next in line behind Citigroup in terms of financial problems and could be back in the arms of the US government by the middle of 2010.”
The reason I went to all the effort to requote excerpts from Whalen’s missive is because of a Bloomberg article this morning putting a positive spin on BAC’s acquisition of Merrill that was titeld “Merrill Bringing Down Lewis Gives Bank 30% Profits.”
The lead sentence to Bloomberg’s rosy outlook for BAC is “Merrill Lynch which helped bring down Ken Lewis may end up savign his bank.” The article goes on to say that MER is “generating more than 25% of the banks profits…
Merrill’s businesses contributed $1.8 billion to Bank of America’s first-half net profit of $7.5 billion, or 28 percent, even after the bank posted $27 billion in loan charge-offs and higher loan-loss reserves, according to company filings.”
The maligned and discredited Richard Bove said regarding BAC’s purchase of MER: “This merger made sense from just about every angle one could look at,” Richard Bove. In hindsight this deal was a steal because it now appears that the bank can pay for Merrill’s price with one year’s worth of Merrill revenues.”
The juxtaposition of Whalen, a long term reputable and outstanding Bank Analyst against biased company filings from BAC to put Ken Lewis in a positive light, well who you gonna believe. I have pointed out elsewhere time and again, we could not trust anything that came out of BAC spokesman Robert Stickler, so why should market participants trust company filings that would appear to have the clear aim of boosting Ken Lewis’ profile as he faces almost certain indictment from AG Anthony Cuomo.
Whalen goes on to say :”Securitization was once a hidden cash cow, but now that the situation is reversed. Collateral values have fallen dramatically and will fall further in the next 12-18 months, thus banks such as BAC, WFC and C must take that hidden windfall profit out of their pockets and essentially reverse the original transaction – and then some. Otherwise they get sued.” Apparently, says Whalen, “by the early part of this decade, the practice of under-collateralization of securitizations became a pervasive problem for any organization that had scale” particularly among “institutions for whom cheating was the business model, including CFC, C and LEH.” No mention of MER undercollateralized cheating was made, to MER’s credit, but that does not mean it did not happen.
Back to Whalen: “So now you know why we remain so bearish on BAC, WFC, C and other aggressive sponsors of the trillions of dollars in securitizations originated over the past decade. And the sad part is that for retail investors, there is still virtually no disclosure by these banks describing this specific risk factor. That is why many Sell Side firms are still able to post “Buy” recommendations on BAC and its peers, because they can point to the paltry public disclosure filed with the SEC and say: “Gee, we didn’t know.” But you can bet that just about every Sell Side analysts who follows money center banks for a living knows precisely those hidden risk factors of which we speak.
And now too you understand why the banking industry and even federal bank regulators have been making noises about delaying the change in the FASB rules regarding OBS vehicles like QSPE1 in our hypothetical example above. But as we explained to subscribers to The IRA Advisory Service last week, whether the FASB changes the rules or not will be irrelevant to the economic and true legal reality facing the large issuers of securitization. We’ll be digging into the details of BAC’s OBS black hole in the IRA Advisory Service in coming weeks.
Whalen closes out the piece by stating “If you assume, as we do, that the equity of BAC is a zero, where should bond holders be haircut in order to recapitalize the bank without further financial support from the US taxpayer? We’ll start the bidding at 70 cents on the dollar.”
Personally, I am not an expert in the financial sector, Whalen is, so I can’t comment on what the junk bonds or equity is worth over there, but I do know this, Whalen has proven himself to be one of the best damn watchdogs we got in that sector.
Remember the part Whalen mentioned about the sell-side firms buy recommendations on BAC, “they can point to the paltry public disclosure filed with the SEC and say: “Gee, we didn’t know.” In short, Whalen is discounting the material disclosure docs by BAC made to the SEC. I would suggest too, that no one rely too heavily on BAC’s SEC disclosures for their investment decisions.
Sources: http://us1.institutionalriskanalytics.com/pub/IRAstory.asp?tag=385
http://www.bloomberg.com/apps/news?pid=20601109&sid=a5LQNbYX8dQ4
