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Economy Title: Is Bank of America At Risk of a Death Spiral? 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. Post Comment Private Reply Ignore Thread Top • Page Up • Full Thread • Page Down • Bottom/Latest Begin Trace Mode for Comment # 4. #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!
#4. To: lucysmom (#3) Give those guys another raise! They've got Unlimited raises because they are First in Line to the ZIRP Treasury Window. As long as Commodities go up the USSA is winning. "Pentagon Cuts Are Totally Fake, There Are NONE The present budget talks are all about cutting the butter from our economy and increasing war spending. But our political leaders in both parties don’t mention this. Instead, they are now pretending they will cut our military budget, too. This is a TOTAL LIE.
Replies to Comment # 4. " The group has been dubbed the Chipping Norton Set because its key members, including Prime Minister David Cameron, all own homes within a few miles of the Oxfordshire town. One prominent member of the set described its allure – and its value to the Murdochs. 'It is like the social wing of the Murdoch media empire. Rupert wields his influence through his newspaper and TV network. Elisabeth and Matthew feed off this by providing a link between the worlds of politics, business and showbusiness. Their wealth means they can provide for them all to meet in complete privacy at Burford. Behind it all is the unspoken assumption that if you are out of favour with Rupert Murdoch, you are not likely to get invited.' It's a Big Club. And you're not in it....;}
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