BofA shareholders resigned to life on skid row

August 23, 2011

By Antony Currie
The author is a Reuters Breakingviews columnist. The opinions expressed are his own.

Bank of America’s shareholders are resigning themselves to life on skid row. Fears of a dilutive capital hike have helped send the stock down to just 30 percent of book value. The worries may prove overblown. Even so, BofA’s long-running mortgage saga has moved a seemingly endless list of litigants ahead of equity investors in the pecking order.

Just yesterday, a judge allowed mortgage bondholders to challenge an $8.5 billion settlement the bank struck with 22 institutional investors in June. The deal to cap repurchase claims from government-owned mortgage guarantors Fannie Mae and Freddie Mac doesn’t look as solid as when it was sealed in January.

What’s more, state attorneys general are still battling over whether the foreclosure fiasco settlement should include future immunity for banks involved. Other cases keep coming out of the woodwork, like AIG’s $10 billion lawsuit earlier this month. Throw in heightened concerns of more losses if the U.S. economy dips back into recession and hopes of a turnaround for BofA shareholders look even more remote.

Despite all this, the bank is in better shape than when the last crisis hit in 2008. It has twice as much capital, some 50 percent more reserves against loan losses and at least another $20 billion set aside for mortgage claims. With $400 billion of cash and easy-to-sell securities on its balance sheet, BofA should be able to weather a liquidity crunch.

BofA, in theory, also has significant earnings power. Analysts reckon it could generate some $15 billion next year. There are assets to sell, including its $17 billion stake in China Construction Bank. Including tax benefits and balance sheet restructuring, there should be enough to boost BofA’s Tier 1 common equity ratio under new capital rules to 9 percent by the end of 2013, according to Credit Suisse.

If correct, it would put BofA on a solid capital footing six years ahead of the Basel III deadline. But that’s also the problem. If all those funds are needed to shore up the firm, benefits for shareholders get postponed. Until the legal claims can be resolved and BofA’s exposure to more losses clarified, the stock price looks set to stay in the gutter.

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What’s with journalists ‘reporting’ (more like opining) on this topic without even reviewing the relevant press releases? The Fannie-BofA transaction early this year was NOT, in any shape or form, setting a ‘cap’. It was simply settling up a tab on loans with issues that had already been identified.

Now, for Freddie, you’re right – that was a one time deal that should have resolved all past and future put back claims.

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