Bank of America

Bank of America (BAC – $14.72)

May 27, 2014
 
What a great name!  If anything portrays the image of the economic colossus known as the United States of America, it is the “Bank of America”.  The image that the name conveys is powerful.
 
The Bank of America is a microcosm of the powerhouse known as the United States of America. Its tentacles extend across the globe. Its tremendous power extends around the world. Its excesses mirror the excesses of the tremendous economic cycles garnered by the economic system know as Capitalism. 
 
But those excesses can be extreme.  When the crash came, the damage was dramatic. The good part is that the Bank of America is big enough and strong enough to change direction, and recover.
 

What Happened

When BAC goes in the wrong direction, its failures are also enormous. In 2007, its stock price was in the $50.00 range. It was at the height of its power. But like America, the Bank of America does things in a big way. MBS (mortgage backed securities) brought BAC to its knees. The purchase of the infamous  Countrywide Financial Corp in January 2008, was the final nail in the coffin.

Just before Bank of America Corp. swooped in to buy Countrywide Financial Corp. in 2008, the bank’s then-chief executive, Kenneth D. Lewis, told analysts why he had dropped his resistance to owning a mortgage lender.

“Arithmetic overcomes all your issues,” he told analysts. “If I ever did anything in the mortgage business, I would have to eat about seven years of my words, so it would have to be pretty compelling.”  The nation’s largest bank by assets has been haunted by Countrywide’s numbers ever since the $2.5 billion deal was completed.

To this day, this purchase of Countrywide Financial has haunted the company.

 

Where is Bank of America now

The problems and settlements continue. In January 2014, the Bank of America announced, as expected, an $8.5 billion settlement with investors who took a beating on mortgage bonds issued by Countrywide before the housing market collapsed.

The Charlotte, N.C., bank also will swallow an additional $5.5 billion to buy back other defective mortgages in the future. And it took a $6.6 billion hit for lawsuits, foreclosure snarls, a write-off in the value of its mortgage business and loan-servicing adjustments. 

The losses and settlements continue. The $8.5 billion was only one of a continuing series of lawsuits, penalties and settlement, that some say will eventually bring the bank to its knees.

Banks are now inspected much more closely than before the 2008 meltdown. As part of this process, the banks are required to report their status on a regular basis to the regulators. Bank of America stumbled yet again, and reported in April that a $4 billion mistake had been made.  “The mistake, which had gone undetected for several years, led the bank to incorrectly report recently that it had $4 billion more capital than it actually had.”  After Bank of America reported its error to the Federal Reserve, the regulator required the bank to suspend a share buyback and a planned increase in its quarterly dividend.

More problems continue to surface, almost on a weekly basis.

 

The Share Price

Like all the big banks. the stock price has risen on a continuous basis over recent years, reaching $18 / share. Then the latest debacle of the $4 billion overstatement of capital hit, and the stock plunged to $15, and then below.

Candlesticks 2014

 
There are multitudes of analysts and pundits who are forecasting doom and gloom for this company, and I shall not attempt to go through the myriads of detail and analysis here, If you are interested enough, there are innumerable sources of comment and analysis.

The Sheer Size of this Bank

While the sheer magnitude of these losses, settlements and fines are greater than normal comprehension, one has to look at the size of this enormous institution itself. Let’s look at some numbers:
 
Market Cap today (at today’s depressed price: $155,000,000,000  That is $155 BILLION.   So the most recent $4 billion fine, is 2% of the Market Cap – the fine is not terribly significant.
 
Enterprise Value:  $187 BILLION
 
Net Income Y/E Dec 31, 2014:  $10 BILLION
 
Keep in mind, that these figures are taking into account all of the fines and settlements occurring or known about in the period. This is a cash machine, with enormous profits, and tremendous potential. The Bank of America was proposing to raise its dividend, and commence buy back of its shares before this latest announcement. These moves have now been cancelled – but only temporarily.
 

 A Quote From the Oracle of Omaha

 Great investment opportunities come around when excellent companies are surrounded by unusual circumstances that cause the stock to be mis=appraised. ~ Warren Buffett
 
To be fair about Mr. Buffet, he came to the rescue of BAC in the meltdown and has an enormous number of warrants at a very cheap price that he has many years to exercise. BAC should prove to be one of his greatest investments.
 

Buy Bank of America $14.72

 

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By Larry Cyna

Mr. Cyna is an accomplished investor in the Canadian public markets for over 20 years, and has managed significant portfolios. He is a financing specialist for private and public companies, and has expertise in real estate and debt obligations. He has assisted private companies accessing the public markets, has been a founding director of public companies and continues as a strategic consultant to selected clientele. He is and has been a director, a senior officer and on the Advisory Board of a number of TSX and TSXV public companies in the mining, resource, technology and telecommunications sectors, and the Founding Director of two CPC’s with qualifying transactions in mining and minerals. He was an honorary director of the Rotman School of Management MBA IMC program, has completed the Canadian Securities Institute Canadian Securities Course & Institute Conduct and Practices Handbook Course, was a former Manager under contract to an Investment Manager at BMO Nesbitt Burns, a roster mediator under the Ontario Mandatory Mediation Program, Toronto, a member of the Institute of Corporate Directors of Ontario, a member of the Upper Canada Dispute Resolution Group, and the Ontario Bar Association, Alternate Dispute Resolution section. He obtained his designation as a Chartered Accountant in Ontario in 1971 and was the recipient of the Founder’s Prize for academic achievement together with a cash reward. He became a CPA in the State of Illinois, USA in 1999 under IQEX with a grade of 92%. He is a Member of the Institute of Chartered Accountants of Ontario and the Canadian Institute of Chartered Accountants. He holds certificates in Advanced ADR & in Civil Justice in Ontario, Faculty of Law, University of Windsor, certificate in Dispute Resolution from the Ontario Institute of Chartered Accountants. Previous accomplishments are Manager of Cymor Risk Consultants LP specializing in Risk Management Assessment; CEO of Cyna & Associates specializing in mediation and ADR; Founder & Senior Partner of Cyna & Co, Chartered Accountants, a fully licensed and accredited public accountancy firm with international affiliations; and was a partner in a large public accountancy firm. Mr. Cyna is well known in the Canadian Investing community. He is invited to, and attends presentations given by public companies usually 3 or 4 times each week. These presentations are intended by the various hosting companies to present their inside story to sophisticated parties and Investment Managers for the purpose of attracting funding, or of making parties more interested in acquiring shares of those companies. Being a part of this keeps Mr. Cyna deeply involved in the current market and leads to numerous investment opportunities.

1 comment

  1. It’s useful article about Bank of America and its stock prices during last several years. Congratulations to the Author.

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