BOA Out of Luck? (Bank of America/Citi (Naaah) Deathwatch?) Just Listen! (Read!)

Remember the problems at Bank of America?

No, they are not resolved. And it looks like they will not be without moneyshed (like bloodshed, but worse.) Neil Garfield is my source today.

[On a sidenote, please accept my heartfelt thanks for the support you've given to my blog this year (or any other). It's been a particularly difficult economic time in my life, and I want to thank my friends for any contribution you have made to me personally and/or the well being of this political blogspout. From my heart, I send you my sincere gratitude and joyous wishes for a better new year.]

BOA Selling at 60% Off Stated Book Value

EDITOR'S NOTE: for those of you who have read my incessant posts that the mega banks are broke, especially, BOA, the article below spells it out in simple arithmetic terms. BOA is selling at 40% of what it SAYS it has in book value. Citi is at 50%, Morgan Stanley, 60% etc. See for yourself.

Normally finding a stock whose value in the stock market is below book value is a possible signal to buy, but it also  can be a red flag. In this case it is giant red flags with trumpets blaring. My prediction is that BOA and Citi for sure are going to bite the dust shortly. They simply cannot sustain themselves because their assets are overstated and their liabilities are understated. Market analysts obviously agree since few, if any, have put out the word for people to buy these stocks.

The outcome seems inevitable from my point of view. BOA and Citi will collapse and be sold off in pieces. Notwithstanding the whole Too Big To Fail Hypothesis, the financial markets will probably react favorably when this happens. It is obvious that nobody believes the balance sheet at BOA and Citi and that the stock has already been discounted for the inevitable result.

The reason this is relevant to homeowners is that BOA and Citi account for a large percentage of all foreclosures. The overstated "assets" are actually derivatives that supposedly derive their value from home mortgages - which the bank neither owns nor has any other interest. As these facts seep out into our collective consciousness, it will be apparent that most BOA foreclosures are exercises in generating fees rather than collecting the balance due on loans that are unpaid. If the regulators do their job right, it will be apparent that the foreclosures were faked.

My advice is to keep your eye on these banks and see what comes out. Make requests under Freedom of Information and discovery that are directed at how they are accounting for loans they say they own, and for details of the transaction on each particular loan. You will most likely find that the bank has no loan receivable on that home loan you are researching. Armed with that information, if you get it, you can clearly make the argument that there was no transaction in which BOA became the owner of the loan, despite the appearance of paperwork to the contrary. When you drill down, you will see that BOA never bought those loans, never paid for them, and that the transfer documents and other documents are all fabrications behind which there is no actual transaction.

Why 2011 Was So Brutal for Big Banks

By Anand Chokkavelu, CFA 

December 17, 2011

As we approach the end of a tumultuous 2011, it's time to look back on the year that was.

Few, if any, industries had a worse 2011 than the big banks. Check out the carnage (and remember that the S&P 500 was basically flat after factoring in dividends).

Bank Name	2011 Return	Price-to-Tangible Book Value
US Bancorp (NYSE: USB  )	(2.1%)	2.4
Wells Fargo (NYSE: WFC  )	(14.7%)	1.5
JPMorgan Chase (NYSE: JPM  )	(23.2%)	1.0
Morgan Stanley (NYSE: MS  )	(44.5%)	0.6
Citigroup (NYSE: C  )	(44.9%)	0.5
Goldman Sachs (NYSE: GS  )	(45.8%)	0.7
Bank of America (NYSE: BAC  )	(60.8%)	0.4

Source: S&P Capital IQ. Return includes dividends.

None of these seven largest U.S. banks is leaving 2011 unscathed. US Bancorp and Wells Fargo, the two least Wall Street-y banks, came closest.

To recap the news this year, pretty much every negative macroeconomic event batters the banking stocks because they're players in so much of the economy, both domestic and foreign:

• They're all still recovering from the housing-bubble burst. When we hear about subprime lending, liar loans, derivatives run amok, poor documentation, and the need for better regulation, it's largely this group.
• In August, the U.S. lost its AAA debt rating while Congress played politics instead of fixing the budget. If you look at the stock charts for these banks, you can see the effect of this added friction and uncertainty.
• European sovereign-debt problems become problems for U.S. banking stocks because (1) the global financial system is increasingly tied together and (2) investors are having a hard time determining exactly how much direct European exposure the largest banks have.
• To expand on that last point, the U.S. financial crisis highlighted how opaque bank balance sheets can be (and how much stuff banks can hide off the balance sheet). This forces investors to assume the worst.

On the plus side, all the banks except Bank of America have been able to profit off cheap interest rates (thanks to the Fed) and high trading volume. That's why you see some low P/E ratios in this group. But much of that profitability is fleeting, especially if regulations cramp their style.

But this is more a balance-sheet tale than an income-statement tale.

When you go down the table from best-performing to worst-performing, you see a rough order of the likelihood of exposure to shaky lending and derivatives. US Bank and Wells Fargo are mostly regular old banks. JPMorgan is a hybrid Main Street and Wall Street bank that weathered the crisis better than the remaining four largely because of the leadership of Jamie Dimon.

Bank of America and Citigroup are also hybrids, but they've been proving to be the weakest of the herd. Citi did it organically, while Bank of America had help with its Countrywide acquisition. You can see the fear in their tiny price-to-tangible-book values, both half what JPMorgan gets.

Meanwhile, Goldman and Morgan Stanley are the only two full-fledged Wall Street megabanks left.

I see value in this uncertainty. The market is definitely valuing these banks on fear. And a lot of it is justified. Investing in these banks (especially as you go down the list) takes a leap of faith that the balance sheets can't be that bad. It may even require some faith that the government would bail them out again without destroying common shareholders if need be.

Investing in the largest banks isn't for the faint of heart. Fortunately, there is an alternative if you like bank stocks. Smaller regional banks are generally a lot simpler. Like US Bank and Wells Fargo, they mostly stick to taking in deposits and lending. Smaller bank stocks are by no means easy to decipher, but they're a heck of a lot more transparent than the Wall Street banks.

Neil Garfield

December 20, 2011