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Title: Is Bank of America At Risk of a Death Spiral?
Source: Naked Capitalism
URL Source: http://www.nakedcapitalism.com/2011 ... at-risk-of-a-death-spiral.html
Published: Jul 21, 2011
Author: Yves Smith
Post Date: 2011-07-21 11:12:25 by lucysmom
Keywords: Mortgage Crisis, 2 Big 2 Fail
Views: 4494
Comments: 16

Bloomberg’s Jonathan Weil took a look at Bank of America’s stock price, which is trading at less than half of the Charlotte bank’s book value, and discussed whether the bank is at risk of a serious crisis. If a levered financial firm’s stock trades at a severe discount from book value, it is not attractive to raise equity via selling shares (the dilutive impact on existing shareholders is punitive). Yet the steep discount is a sign that the market doubts the strength of the concern’s equity base. If those worries persist, and the company is not able to shore up its balance sheet via earnings (ie, either its profits are impaired or they are offset by writeoffs), first long term and eventually short-term lenders will start to demand higher interest rates. Once that happens, it is easy for confidence to vanish and a death spiral to start.

Weil enumerates the reasons for doubt. First, the bank has been overly optimistic. It refused to write down $4.4 billion of goodwill from Countrywide until late last year, and maintained it would only suffer $4.4 billion [yes, the same number] in mortgage-related losses, then wrote off $19.2 billion more last quarter. Second, the bank appears to be in denial:

The crucial question today is whether Bank of America needs fresh capital to strengthen its balance sheet. Moynihan emphatically says it doesn’t, pointing to regulatory-capital measures that would have us believe it’s doing fine. The market is screaming otherwise, judging by the mammoth discount to book value. Then again, for all we know, the equity markets might not be receptive to a massive offering of new shares anyway, even if the bank’s executives were inclined to try for one.

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Begin Trace Mode for Comment # 16.

#3. To: Badeye, A K A Stone, hondo68, Fred Mertz, Godwinson, go65, war, no gnu taxes, Skip Intro, ferret mike, jwpegler, brian s, mcgowanjm, Capitalist Eric, Mininggold (#0)

And let us tell you a dirty secret: while Bank of America, thanks to Countrywide, is patient zero of the housing mess, Wells is next in line. Residential real estate is proportionately even bigger relative to the bank’s earnings and balance sheet, its accounting has been somewhere between aggressive and misleading, and despite its pious claims otherwise, it is no better than any of the other big banks. Stay tuned.

Give those guys another raise!

lucysmom  posted on  2011-07-21   11:23:22 ET  Reply   Untrace   Trace   Private Reply  

#6. To: lucysmom (#3)

Here. Let me give you a taste of your Masters:

" Of course, no ruling class ever does anything entirely for itself - not the cooking, not the child-rearing, not the driving (or, in Rebekah Brooks' case, the helicopter piloting), and most certainly not the thinking. Hence, the active, conceptive ideologists of the ruling class who precisely formulate "the illusions of the class" are only rarely members of the ruling class. There are a few cases where they are - Thomas Friedman, and Bernard-Henri Levy are examples - but otherwise they tend to be simply well-remunerated professionals, the gold-diggers of the academia and media, the upper middle class. The means by which this happens are straightforward in the proprietor-driven newspapers.

The owner has a particular world-view, the editorial staff are expected to promote this world-view, and they duly hire and promote a suitably submissive and obedient staff to do just this. (Incidentally, such submissiveness is not only entirely compatible with hard-bitten individualism and self-interest, it is actually the form in which it is most encouraged as it constitutes an identification with the competitive weltanschauung of the master-class).

It has been pointed out, for example, that of all of Rupert Murdoch's dozens of newspapers across the globe, not a single one opposed the Iraq war. It has also been pointed out that Murdoch was personally very close to and supportive of the Blair administration in this period.

mcgowanjm  posted on  2011-07-21   11:38:14 ET  Reply   Untrace   Trace   Private Reply  

#8. To: mcgowanjm (#6)

It has been pointed out, for example, that of all of Rupert Murdoch's dozens of newspapers across the globe, not a single one opposed the Iraq war.

Imagine that.

Fred Mertz  posted on  2011-07-21   11:45:39 ET  Reply   Untrace   Trace   Private Reply  

#15. To: Fred Mertz (#8)

It has been pointed out, for example, that of all of Rupert Murdoch's dozens of newspapers across the globe, not a single one opposed the Iraq war.

Imagine that.

The Crossing Norton Set:

"a ruling class is such when it commands the state, when the state responds to its needs as absolute imperatives. It is not necessary for this to be effective that there should be corruption, that coppers should be bribed and top officers wined and dined. Nor is it necessary that there should be the kinds of industrial scale corporate lobbying that is familiar in K-Street. It is not necessary, but it helps - or rather, it represents a kind of advance for those sectors of capital able to effect it, because it circumvents the corseting formalities imposed by democracy (without suspending or overthrowing it).

The fact that politicians, policemen, and perhaps intelligence are imbricated with News International in networks of mutual corruption and lawlessness is indicative not that the system broke down, but that it worked as normal, producing the expected concentrations of capitalist class power in the hugely influential region of ideological reproduction. Given the agents involved, and the relations of power involved, what else could have happened?

And now it's breaking down.

mcgowanjm  posted on  2011-07-21   12:36:30 ET  Reply   Untrace   Trace   Private Reply  

#16. To: All (#15) (Edited)

Capitalism previews Oligarchy which itself previews Plutarchy...

then War.

At the end of War the Revolution/airy is crushed...


mcgowanjm  posted on  2011-07-21   12:38:50 ET  Reply   Untrace   Trace   Private Reply  

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