The business press and cable channels early this week were all abuzz with articles and segments about Brian Moynihan's plans to cut $5B of expenses and 30,000 net employees from the sluggish financial utility that BofA has become.
My take on Moynihan is aptly captured in these prior posts (here and here), with the second link containing a link to my piece written upon Moynihan's selection as BofA's CEO.
Interestingly, I noted in that last linked post, the one written in December of 2009, when Moynihan was named CEO of BofA, that he said he planned no significant strategic changes at the bank.
Well, it's nearly two years later, BofA is under legal attack for its Countrywide liabilities. Rather than hike the dividend or buy back shares, Moynihan did a generous deal with Warren Buffett to get $5B of additional preferred equity on terms no average investor would ever hope to receive.
And now he's planning on paring back the bank's massive consumer business, largely in response to Dodd-Frank's making those businesses- credit cards, debit cards, consumer lending, mortgages- structurally less profitable. Fair enough. The regulatory environment changed, so Moynihan is reacting, as Dick Bove contended, by retrenching in those areas hardest hit by the new laws.
But from an investment viewpoint, I see BofA as a toxic mess to be shunned for at least three years. Which is not to say that if you buy the bank's equity now, you might not see a big pop in 3-4 years. It's just that between the wait, and the risk of concentrating assets on a single troubled company, the return/risk may not be as rich as you think it will be.
My proprietary equity performance research found turnarounds of the type being attempted at BofA to be highly risky and usually a failure. Between the average total return gain and the chances of such a turnaround succeeding, the expected total return is far lower than investing in more stable, consistently-performing companies.
Then there's the nature of the sector and the bank. BofA has 288,000 employees and $27B in annual expenses, according to a Wall Street Journal article in Tuesday's edition. Thus, expenses are to be cut by 18%, and the net number of employees by almost 10%. But there's an unspecified churn in that employee number, as bank officials have said they'll fire more than 30,000, then hire some new people. That's going to be great for morale, huh?
You can imagine the amount of carnage that will begin to occur in focused businesses and locations. Chances are that expenses won't fall by the entire $5B, 30,000 employees will go, net, and revenues will fall further than Moynihan's optimistic planners expect.
These types of drastic downsizings tend to underestimate how the damage to morale throughout a large company will sap efforts to continue to just do business. Revenues in consumer businesses will likely decline by more than expected, and institutional revenues won't necessarily be immune, either.
Generally, firms which are cutting personnel and spending don't grow. Their total returns aren't typically attractive, either.
If BofA's cost- and personnel-cutting program was to spark a turnaround of some a sort that resulted in the company repositioning itself, exiting bad businesses, or entering promising new ones, there might be a chance that, a few years from now, the company would be an attractive investment.
But that's not the kind of restructuring that BofA is doing. Rather, it's trying to cut levels of spending on existing businesses, while shifting resources around among businesses it will largely still operate.
Worse, the same CEO who said two years ago he wasn't going to do anything substantially different, then said he'd push cross-selling, is putatively leading this effort. The first linked post I included above notes that Moynihan has no prior experience that would lead you to believe he has the slightest value to add to this project.
If BofA's board wanted to increase the chances of this effort making a difference for the company's shareholders, they should probably name Moynihan as a special counsel for mortgage-related legal matters, and replace him with a proven turnaround artist of the caliber of Robert Miller. But that's not going to happen.
Do you think that someone of Moynihan's limited banking experience, uneven corporate performance background, and generally legal-oriented skill set is the guy to oversee, let alone restructure, a company so complex as BofA, a modern global money-center bank?
I don't. It's Chuck Prince all over again.
And if Moynihan, by some miracle, succeeds in cutting expenses and headcount? What then? If you bought the stock now, took a lot of risk, you get a pop. Then it's back to your regularly-scheduled sleepy financial utility with little hope for breakout total return performances.
The truth is, banks of BofA's ilk- Chase, Citi, WellsFargo- are all pretty much similarly-organized and operated financial utilities. Aside from occasional timing plays, none are likely, for the foreseeable future, absent regulatory changes or serious breakups, to offer investors much hope of consistently superior total returns.
Showing posts with label BankAmerica. Show all posts
Showing posts with label BankAmerica. Show all posts
Thursday, September 15, 2011
Wednesday, September 07, 2011
Dick Bove's Sensible Comments on BofA's Executive Changes
I rarely find that longtime banking analyst Dick Bove has much of interest to say. His buy ratings on large banks are often so short-term as to be encouraging retail investors to time their trading to quarters.
But this morning, Bove had several useful comments regarding BofA CEO Brian Moynihan's so-called Tuesday afternoon massacre, in which Sally Crawchuck and Joe Price, both consumer senior executives, were fired. Two institutional banking executives were elevated in rank.
Bove sees the moves as reasonable reactions to Dodd-Frank, which has made consumer banking more difficult and less profitable. He further forecast 600 branch closures and 30,000 employees shed on the consumer side of BofA in the next two years, as the bank shifts resources from consumer to institutional businesses.
That makes sense.
But perhaps the shrewdest insight Bove made was one worthy of my old boss, Gerry Weiss, of Chase Manhattan Bank. By reshuffling senior executives, Moynihan, in Bove's opinion, bought himself several years time as CEO.
It's an old trick, yet, still works. A struggling CEO, rather than wait for the board to fire him, moves first and rearranges the deck chairs himself. This allows him to do three things: blame the fired execs for problems, claim to be (and look) forceful in making the changes, then, most importantly, use the new appointments to buy himself time while the newly-promoted managers and organization structures pan out.
It should not surprise that CEOs using these maneuvers are typically the ones whose companies are in the most trouble. Here, Bove and I part company. I believe Bove, with Tom Brown, predictably, both reacted with even more praise for the large, stumbling bank.
I believe it signals just how troubled BofA actually is. Moynihan's had plenty of time to do this, and Dodd-Frank is a year old. Either he's slow- take that any way you wish- or he realized, with this summer's appalling collapse of BofA's stock price, that if he didn't act soon, he'd be out.
But this morning, Bove had several useful comments regarding BofA CEO Brian Moynihan's so-called Tuesday afternoon massacre, in which Sally Crawchuck and Joe Price, both consumer senior executives, were fired. Two institutional banking executives were elevated in rank.
Bove sees the moves as reasonable reactions to Dodd-Frank, which has made consumer banking more difficult and less profitable. He further forecast 600 branch closures and 30,000 employees shed on the consumer side of BofA in the next two years, as the bank shifts resources from consumer to institutional businesses.
That makes sense.
But perhaps the shrewdest insight Bove made was one worthy of my old boss, Gerry Weiss, of Chase Manhattan Bank. By reshuffling senior executives, Moynihan, in Bove's opinion, bought himself several years time as CEO.
It's an old trick, yet, still works. A struggling CEO, rather than wait for the board to fire him, moves first and rearranges the deck chairs himself. This allows him to do three things: blame the fired execs for problems, claim to be (and look) forceful in making the changes, then, most importantly, use the new appointments to buy himself time while the newly-promoted managers and organization structures pan out.
It should not surprise that CEOs using these maneuvers are typically the ones whose companies are in the most trouble. Here, Bove and I part company. I believe Bove, with Tom Brown, predictably, both reacted with even more praise for the large, stumbling bank.
I believe it signals just how troubled BofA actually is. Moynihan's had plenty of time to do this, and Dodd-Frank is a year old. Either he's slow- take that any way you wish- or he realized, with this summer's appalling collapse of BofA's stock price, that if he didn't act soon, he'd be out.
Wednesday, August 31, 2011
A Reminder of Why Sell-Side Analysts Add So Little Value
On Monday I caught the second half of Tom Keene's noontime Bloomberg program. Within the space of just 20 minutes, I had two reminders of why sell side analysis provides so little value to investors.
First, I caught Citigroup's Deane Dray's monologue on why he prefers GE instead of UT.My 2008 post on the two conglomerates couldn't be more different. Dray essentially cast doubt on UT's decades of consistent performance, while essentially arguing for a timing play on GE.
The price chart on the left illustrates the point of my 2008 piece, even three years later. Dray, however, thinks UT's decade of impressive share price growth, which has outstripped both the S&P500 Index and Immelt's hapless GE, is just a souffle waiting to deflate. He apparently believes GE will experience a magical mean-reversion, despite the lack of adult leadership at the top.
Along with that, Dray talked about 3M, mixing in discussions of economic expansion phases and relative merits of the various firms. That took me aback, since I've seen work suggesting that the concept of simplistic, always-sequential and reliable economic phase occurrence is largely a myth. Not to mention, as I listened to Dray, that one would need to be correctly forecasting the phases flawlessly for his approach to work- if it does.
Honestly, that sort of 'analysis' seems to me to descend to the levels of voodoo.
Next up was Paul Miller of FBR. Miller spent his time questioning BofA's purchase of Countrywide. Well, I was already there the day after the acquisition. Does that make me a standout bank equity analyst or seer? No, I think it just makes me a sensible business person with some banking experience who saw one ailing firm buying a near-dead one and drew the obvious conclusion that the deal wasn't going to rehabilitate the former.
Moreover, Miller missed the essence of what BofA really is. At its core is, of course, the old BofA retail California franchise. But to that has been glued North Carolina National Bank's, a/k/a Hugh McColl's Nationsbank's dispersed bank acquisitions in the Southeastern US, plus, later, by McColl's lieutenant, Ken Lewis, the dying Countrywide and staggering Merrill Lynch. Which is to say, an unfocused mess of a financial utility which paid too much for its last two mistakes, which were pursued in the same spirit of the banking acquisitions which bulked up the original NCNB. In fact, BofA itself was stumbling when Nationsbank captured it in 1998.
The second chart compares the S&P500 with BofA's share price from 1985. It's not a pretty picture. Lewis' tenure from 2001-2009, was marked by the bank essentially treading water relative to the index. The latter fell after the technology bubble burst in 2000, against which BofA appeared to rise. But a decade later, the bank is back where it was 26 years earlier, while the index only fell slightly.
You needn't have been a genius, or, I guess, Paul Miller to have had doubts about BofA for at least the past three years. Probably a lot more than that.
Why Tom Keene happened to have these two analysts as guests on Monday, I don't know. But it troubles me a bit that he seemed so enamored with both of them, when their comments were so unremarkable, when not specious.
The price chart on the left illustrates the point of my 2008 piece, even three years later. Dray, however, thinks UT's decade of impressive share price growth, which has outstripped both the S&P500 Index and Immelt's hapless GE, is just a souffle waiting to deflate. He apparently believes GE will experience a magical mean-reversion, despite the lack of adult leadership at the top.
Along with that, Dray talked about 3M, mixing in discussions of economic expansion phases and relative merits of the various firms. That took me aback, since I've seen work suggesting that the concept of simplistic, always-sequential and reliable economic phase occurrence is largely a myth. Not to mention, as I listened to Dray, that one would need to be correctly forecasting the phases flawlessly for his approach to work- if it does.
Honestly, that sort of 'analysis' seems to me to descend to the levels of voodoo.
Next up was Paul Miller of FBR. Miller spent his time questioning BofA's purchase of Countrywide. Well, I was already there the day after the acquisition. Does that make me a standout bank equity analyst or seer? No, I think it just makes me a sensible business person with some banking experience who saw one ailing firm buying a near-dead one and drew the obvious conclusion that the deal wasn't going to rehabilitate the former.
The second chart compares the S&P500 with BofA's share price from 1985. It's not a pretty picture. Lewis' tenure from 2001-2009, was marked by the bank essentially treading water relative to the index. The latter fell after the technology bubble burst in 2000, against which BofA appeared to rise. But a decade later, the bank is back where it was 26 years earlier, while the index only fell slightly.
You needn't have been a genius, or, I guess, Paul Miller to have had doubts about BofA for at least the past three years. Probably a lot more than that.
Why Tom Keene happened to have these two analysts as guests on Monday, I don't know. But it troubles me a bit that he seemed so enamored with both of them, when their comments were so unremarkable, when not specious.
Friday, August 26, 2011
Regarding Warren Buffett's Investment in BofA Preferred Stock
Yesterday's other major business news story, aside from Steve Jobs' resigning as CEO of Apple, was Warren Buffett's Berkshire Hathaway buying $5B of BofA preferred stock with a 6% dividend, plus warrants- terms set by Buffett.
As with his prior capital infusions to Goldman Sachs ($5B @ 10%, plus warrants) and GE ($3B @ 10%, plus warrants) during the 2008 financial crisis, Buffett capitalized on BofA's weakness in the eyes of investors, but carefully avoided buying common equity.
Despite Moynihan's and Buffett's comments that this represents the latter's vote of confidence in the bank, that's not strictly true. If it were, Buffett would have purchased common equity in the market. It's more a case of Buffett extracting a hefty price- the 6% dividend and warrants- for being an unofficial credit rating agency whose selective investments calm other investors.
It's crucial to understand that in all three cases- Goldman, GE and, now, BofA, Buffett focuses on preferred stock, which is senior to common equity, and on which he can demand a special premium, plus warrants, just in case the firm pulls out of its problems.
Think of him as a sort of reverse greenmailer. Instead of the greenmailers of old, like Carl Icahn, whom companies paid to go away, these companies pay Buffett to come on in. In short, it's crony capitalism, because you'll never get access to the deals Warren Buffett does. But don't expect the SEC to be investigating him anytime soon for extracting such a high dividend rate on his preferred shares. Or, apparently, the BofA board for being so wasteful with its shareholders' money.
However, as the nearby chart illustrates, and at least one Bloomberg talking head had the guts to say yesterday, Buffett's equity kickers, the warrants, have been busts. Neither his GE nor Goldman warrants are in the money.
I've included in the nearby price chart Wells Fargo, as well, since Buffett is known to maintain a large position in that bank. I don't know when he began building his position, but it, too, has underperformed the S&P500 Index for the past five years.
In searching for articles with information on the date of Buffett's initial Wells Fargo investment, the best I could do was to estimate that he's been invested in the bank since at least 1999. He says he bought equity prior to the 1998 Norwest merger. The second price chart displays WFC's and the S&P500 Index's prices since 1985. If Buffett bought Wells in, say, 1995, then he's done better than the index. But if he bought later than sometime in 1997, he's probably no better off than he would have had he bought the index.
So much for Buffett's fabled equity selection skills, and back to the BofA preferred equity buy.
Late this afternoon, a family office manager and guest on Bloomberg explained that he had done much the same as Buffett only about a week or so ago. Not wanting to risk his capital on BofA equity, he found the preferred to yield an acceptable dividend with much less risk. But his yield is not as great as the one demanded by Buffett.
One of the Bloomberg anchors jokingly asked a pundit if he thought the administration asked Buffett to shore up BofA by investing in it. I don't think that's just a joke.
It also focuses on the lack of risk in Buffett's position, which is different than that of the bank or its common equity holders. First, Buffett has so ingratiated himself with this administration that it's unlikely to take any actions toward BofA which would endanger Buffett's investment.
Second, Buffett knows that BofA is one of the 'too big to fail' institutions, so chances are it will be bailed out by the government before Buffett loses his investment.
Recall, if you will, that freely-operating markets are supposed to result in neither buyer nor seller having sufficient power to dictate price or terms. Buffett's move, the third such example of his dictating investment terms to his targets in three years, demonstrates how our financial markets aren't fair. Buffett can engage in crony capitalism, using his name and resources to extract expensive terms for his borrowers, while other market participants have to resort to the markets to buy their investments.
On that subject, I learned yesterday that Buffett had insisted, as part of the terms of his Goldman Sachs investment, that no Goldman senior executives could sell shares in the firm until he had his money back. In that case, I suspect Buffett realized he was playing with some very sharp operators who wouldn't think twice about leaving him holding an empty bag.
In BofA's case, it was reported that no such terms were required. I suspect that speaks both to Buffett's sense that the firm's management is mediocre, and that the government will unquestionably step in to save his investment before it would vaporize amidst a bankruptcy.
Watching this sort of activity by Buffett, while generating no whiff of impropriety, validates for me how useless the SEC has become.
As with his prior capital infusions to Goldman Sachs ($5B @ 10%, plus warrants) and GE ($3B @ 10%, plus warrants) during the 2008 financial crisis, Buffett capitalized on BofA's weakness in the eyes of investors, but carefully avoided buying common equity.
Despite Moynihan's and Buffett's comments that this represents the latter's vote of confidence in the bank, that's not strictly true. If it were, Buffett would have purchased common equity in the market. It's more a case of Buffett extracting a hefty price- the 6% dividend and warrants- for being an unofficial credit rating agency whose selective investments calm other investors.
Think of him as a sort of reverse greenmailer. Instead of the greenmailers of old, like Carl Icahn, whom companies paid to go away, these companies pay Buffett to come on in. In short, it's crony capitalism, because you'll never get access to the deals Warren Buffett does. But don't expect the SEC to be investigating him anytime soon for extracting such a high dividend rate on his preferred shares. Or, apparently, the BofA board for being so wasteful with its shareholders' money.
However, as the nearby chart illustrates, and at least one Bloomberg talking head had the guts to say yesterday, Buffett's equity kickers, the warrants, have been busts. Neither his GE nor Goldman warrants are in the money.
I've included in the nearby price chart Wells Fargo, as well, since Buffett is known to maintain a large position in that bank. I don't know when he began building his position, but it, too, has underperformed the S&P500 Index for the past five years.
So much for Buffett's fabled equity selection skills, and back to the BofA preferred equity buy.
Late this afternoon, a family office manager and guest on Bloomberg explained that he had done much the same as Buffett only about a week or so ago. Not wanting to risk his capital on BofA equity, he found the preferred to yield an acceptable dividend with much less risk. But his yield is not as great as the one demanded by Buffett.
One of the Bloomberg anchors jokingly asked a pundit if he thought the administration asked Buffett to shore up BofA by investing in it. I don't think that's just a joke.
It also focuses on the lack of risk in Buffett's position, which is different than that of the bank or its common equity holders. First, Buffett has so ingratiated himself with this administration that it's unlikely to take any actions toward BofA which would endanger Buffett's investment.
Second, Buffett knows that BofA is one of the 'too big to fail' institutions, so chances are it will be bailed out by the government before Buffett loses his investment.
Recall, if you will, that freely-operating markets are supposed to result in neither buyer nor seller having sufficient power to dictate price or terms. Buffett's move, the third such example of his dictating investment terms to his targets in three years, demonstrates how our financial markets aren't fair. Buffett can engage in crony capitalism, using his name and resources to extract expensive terms for his borrowers, while other market participants have to resort to the markets to buy their investments.
On that subject, I learned yesterday that Buffett had insisted, as part of the terms of his Goldman Sachs investment, that no Goldman senior executives could sell shares in the firm until he had his money back. In that case, I suspect Buffett realized he was playing with some very sharp operators who wouldn't think twice about leaving him holding an empty bag.
In BofA's case, it was reported that no such terms were required. I suspect that speaks both to Buffett's sense that the firm's management is mediocre, and that the government will unquestionably step in to save his investment before it would vaporize amidst a bankruptcy.
Watching this sort of activity by Buffett, while generating no whiff of impropriety, validates for me how useless the SEC has become.
Wednesday, August 24, 2011
Mike Holland vs. Tom Brown On BofA Equity
Another week...another disappointing decline in BofA's equity price. This morning's Wall Street Journal carried an article highlighting the record prices of insuring BofA debt, and the implied higher borrowing costs for the financial utility down the road.
Most assuredly, then, bank fund manager Tom Brown was on Bloomberg, all carefully coiffed and attired in conservative blue suit yesterday, naming BofA as first among his three top financial service selections.
Meanwhile, this morning on Bloomberg, veteran fund manager Mike Holland politely said, when asked, that he had zero interest in BofA shares. He quickly lauded the bank's lawyer/CEO Brian Moynihan as being "all over" the various legal issues involving lawsuits from the legacy home lending business his predecessor, Ken Lewis, bought via Countrywide.
But Holland made clear he wouldn't touch the troubled North Carolina-based bank with a ten-foot pole. Except, of course, he said it in a manner calculated not to cause a run on the bank or a bear attack on its equity by short-sellers.
A check of the nearby 5-day chart of equity prices for BofA, Chase, Wells Fargo, Citi and the S&P500 Index reveals that the index beat all four of the banks. Wells and Chase declined by only about 5%- just a bit more than the index.
Citigroup fell by about 10%, and BofA by more than 15%.
I have no direct knowledge of Brown's fund. I don't know its size or its management style, other than it is restricted to financial entities and selections are apparently on Brown's subjective whims.
Thus, I don't have direct knowledge as to whether Brown tries to juice returns with leverage. But can you imagine the panic he would feel if Brown had borrowed to fund the BofA positions which he (see my prior posts under the BankAmerica label for details) late in the spring?
The second chart shows the same entities' price series for the past three months. The rank orders and relative performances look about the same, except, of course, that magnitudes are larger.
The S&P, Chase and Wells Fargo are down twice as much as for the past five days, while Citi and BofA are down about three times as much.
The worse news for Tom Brown's fund clients is that BofA's equities have declined pretty much monotonically for the past six months. So their loss could be in the 50% range on that position.
No wonder Brown is on Bloomberg as often as possible shilling for the hapless financial leviathan's equity. His fund's holders- and presumably Brown, as well- have lost a bundle on his call this time.
Oh, as an aside, in his Bloomberg appearance yesterday morning, Brown replied "yes" to the anchor's question/assertion that Brown was only a financial sector portfolio manager now, and no longer holds himself out as an (presumably-objective) analyst.
Most assuredly, then, bank fund manager Tom Brown was on Bloomberg, all carefully coiffed and attired in conservative blue suit yesterday, naming BofA as first among his three top financial service selections.
But Holland made clear he wouldn't touch the troubled North Carolina-based bank with a ten-foot pole. Except, of course, he said it in a manner calculated not to cause a run on the bank or a bear attack on its equity by short-sellers.
A check of the nearby 5-day chart of equity prices for BofA, Chase, Wells Fargo, Citi and the S&P500 Index reveals that the index beat all four of the banks. Wells and Chase declined by only about 5%- just a bit more than the index.
Citigroup fell by about 10%, and BofA by more than 15%.
I have no direct knowledge of Brown's fund. I don't know its size or its management style, other than it is restricted to financial entities and selections are apparently on Brown's subjective whims.
The second chart shows the same entities' price series for the past three months. The rank orders and relative performances look about the same, except, of course, that magnitudes are larger.
The S&P, Chase and Wells Fargo are down twice as much as for the past five days, while Citi and BofA are down about three times as much.
On a raw actual price basis, the third chart shows BofA fell from between $11-$12 after mid-May to $6 and change yesterday. I don't know exactly when Brown bought his BofA positions for his fund, but it must have been prior to his June 3rd Bloomberg appearance.
No wonder Brown is on Bloomberg as often as possible shilling for the hapless financial leviathan's equity. His fund's holders- and presumably Brown, as well- have lost a bundle on his call this time.
Oh, as an aside, in his Bloomberg appearance yesterday morning, Brown replied "yes" to the anchor's question/assertion that Brown was only a financial sector portfolio manager now, and no longer holds himself out as an (presumably-objective) analyst.
Tuesday, August 16, 2011
BofA Slowly Implodes
On Friday I wrote this post concerning banking analyst/fund manager's latest Tom Brown's latest comments praising BofA. Brown has been doing this ever since he put his fund's investors into BofA equity back in the spring of this year. I've written several pieces describing his various appearances on Bloomberg television shilling for his positions.
Yesterday came fresh news regarding Bofa's growth prospects. It announced the sale of its Canadian credit card portfolio, part of the expensive business it acquired from former credit-card segment leader MBNA, to Toronto Dominion Bank.
But that's not all. In the same Wall Street Journal article on this sale, BofA disclosed plans to sell several of its European card portfolios, as well.
Now, I distinctly recall Tom Brown talking last week about how much BofA was going to be growing earnings in the future.
But when a bank sells credit card portfolios, it's a signal that the bank is in serious trouble. Never mind the excuse BofA gave- to focus on other management issues.
Credit card lending is a core bank business. It's a bread-and-butter consumer business. A key component of relationships with consumers.
For BofA to be auctioning off its overseas credit card portfolios is to basically concede the final loss of international business which began with Sam Armacost's initial troubles back in the 1980s. Back then, BofA began dismantling its overseas network, then one of only three among American money center banks.
Since growth in the US, a developed economy, is probably going to be slower than overseas growth, BofA is essentially withdrawing from the sort of growth opportunities which Tom Brown promised would be coming in just a few years.
It's understandable, with similar examples among large US banks now over 20 years old, that many pundits and analysts aren't comprehending the gravity of this latest BofA move. But I vividly recall credit card portfolio sales as a harbinger of the decline of commercial banks. The resignation of a bank's management to balance sheet problems by, in effect, selling the silver to meet the mortgage payment.
That's what BofA is now doing.
Yesterday came fresh news regarding Bofa's growth prospects. It announced the sale of its Canadian credit card portfolio, part of the expensive business it acquired from former credit-card segment leader MBNA, to Toronto Dominion Bank.
But that's not all. In the same Wall Street Journal article on this sale, BofA disclosed plans to sell several of its European card portfolios, as well.
Now, I distinctly recall Tom Brown talking last week about how much BofA was going to be growing earnings in the future.
But when a bank sells credit card portfolios, it's a signal that the bank is in serious trouble. Never mind the excuse BofA gave- to focus on other management issues.
Credit card lending is a core bank business. It's a bread-and-butter consumer business. A key component of relationships with consumers.
For BofA to be auctioning off its overseas credit card portfolios is to basically concede the final loss of international business which began with Sam Armacost's initial troubles back in the 1980s. Back then, BofA began dismantling its overseas network, then one of only three among American money center banks.
Since growth in the US, a developed economy, is probably going to be slower than overseas growth, BofA is essentially withdrawing from the sort of growth opportunities which Tom Brown promised would be coming in just a few years.
It's understandable, with similar examples among large US banks now over 20 years old, that many pundits and analysts aren't comprehending the gravity of this latest BofA move. But I vividly recall credit card portfolio sales as a harbinger of the decline of commercial banks. The resignation of a bank's management to balance sheet problems by, in effect, selling the silver to meet the mortgage payment.
That's what BofA is now doing.
Friday, August 12, 2011
BofA's Equity Price Has Cratered- So What's Tom Brown Saying?
I've written a few posts involving former banking sector analyst-cum-banking sector fund manager Tom Brown. Most notably here, here, here and here. He appears on Bloomberg with distressing frequency these days. Just like Bob Albertson- both long in the tooth banking analysts, though Brown is really now a banking sector fund manager. As such, as I noted in one of those posts, when he appears in his analyst role, he's effectively shilling for his own fund.
In that first linked post, I noted that Brown said, in an early June interview, that he'd recently gone long BofA for his fund.
How's that working out, Tom?
Let's see, the market's been whipsawed, banks have been bloodied. What line do you think Tom Brown is peddling this week?
You see, as you'd expect, Brown was on Bloomberg this week exhorting investors to buy more BofA, despite it's getting hammered far worse than the other three remaining large US commercial banks, as indicated in the nearby chart.
It was pretty sickening to hear and watch Brown dance his way to a conclusion that investors would be smart to buy BofA after the pounding it's recently taken. But, without more suckers buying it, how's Tom ever going to get his own position, now down something like 40%, back into the black? Wouldn't you like to be one of Tom's fund customers, opening your quarterly statement in a few weeks, after Brown bet so much on his favorite bank?
As I suspected, the price chart indicates that the smartest move would have been to just stay with the S&P500 and avoid the bank stocks recently. And probably for the foreseeable future, as well.
Incredibly, Brown's excuse....err.....reason for buying BofA now is that it's reward/risk is far higher than it was recently, because so much risk is gone now that it's price has sunk so low. He hurriedly mentioned something about 'sure revenues will be lower, but, gee, that risk is so low.....'
To continue the old Wall Street maxim,
'If you liked it at X, you'll love it at less than X, and marry it even less'.......I think Tom Brown's having children with BofA as it's down 40%.
You can't make this stuff up, can you?
How's that working out, Tom?
Let's see, the market's been whipsawed, banks have been bloodied. What line do you think Tom Brown is peddling this week?
You see, as you'd expect, Brown was on Bloomberg this week exhorting investors to buy more BofA, despite it's getting hammered far worse than the other three remaining large US commercial banks, as indicated in the nearby chart.
It was pretty sickening to hear and watch Brown dance his way to a conclusion that investors would be smart to buy BofA after the pounding it's recently taken. But, without more suckers buying it, how's Tom ever going to get his own position, now down something like 40%, back into the black? Wouldn't you like to be one of Tom's fund customers, opening your quarterly statement in a few weeks, after Brown bet so much on his favorite bank?
As I suspected, the price chart indicates that the smartest move would have been to just stay with the S&P500 and avoid the bank stocks recently. And probably for the foreseeable future, as well.
Incredibly, Brown's excuse....err.....reason for buying BofA now is that it's reward/risk is far higher than it was recently, because so much risk is gone now that it's price has sunk so low. He hurriedly mentioned something about 'sure revenues will be lower, but, gee, that risk is so low.....'
To continue the old Wall Street maxim,
'If you liked it at X, you'll love it at less than X, and marry it even less'.......I think Tom Brown's having children with BofA as it's down 40%.
You can't make this stuff up, can you?
Wednesday, July 27, 2011
BofA, Merrill Lynch & Counterparty Risk
I saw an unbelievable story on Monday's CNBC noontime program.
Merrill Lynch is offering a 4-year bond which pays, if I remember correctly, according to the following conditions:
S&P500 down 16% or more: 99% of principal
S&P500 down 0-16% : 100% of principal
S&P500 up 0-15% : 100% of principal plus 15%
S&P500 up 16%+ : 100% of principal plus S&P gain
A quick look at the structured payoffs reveals that an investor appears to get all the S&P upside and virtually no downside, thus competing with simply buying the S&P.
However, Gary Kaminski asked the correct question, which is, if a herd of investors bought this offering and the S&P rose, say, 50% in four years, how will Merrill Lynch, a unit of the too-big-to-fail BofA, hedge its exposure? What if it doesn't or can't?
Isn't an investor assuming a large amount of counterparty risk of the sort that counterparties to AIG effectively assumed? Yes, an investor is assuming an immense counterparty risk on the part of a firm which imploded in 2008 due to risk mismanagement.
How can our new, souped-up, fancy, so-called-smarter Dodd-Frank regulators be allowing this to occur at the subsidiary of one of the nation's four largest commercial banks? One currently viewed probably as third weakest, in front of Citi, but behind Chase and WellsFargo?
Isn't this the sort of risk-taking that isn't supposed to be funded or subsidized by taxpayers anymore?
Merrill Lynch is offering a 4-year bond which pays, if I remember correctly, according to the following conditions:
S&P500 down 16% or more: 99% of principal
S&P500 down 0-16% : 100% of principal
S&P500 up 0-15% : 100% of principal plus 15%
S&P500 up 16%+ : 100% of principal plus S&P gain
A quick look at the structured payoffs reveals that an investor appears to get all the S&P upside and virtually no downside, thus competing with simply buying the S&P.
However, Gary Kaminski asked the correct question, which is, if a herd of investors bought this offering and the S&P rose, say, 50% in four years, how will Merrill Lynch, a unit of the too-big-to-fail BofA, hedge its exposure? What if it doesn't or can't?
Isn't an investor assuming a large amount of counterparty risk of the sort that counterparties to AIG effectively assumed? Yes, an investor is assuming an immense counterparty risk on the part of a firm which imploded in 2008 due to risk mismanagement.
How can our new, souped-up, fancy, so-called-smarter Dodd-Frank regulators be allowing this to occur at the subsidiary of one of the nation's four largest commercial banks? One currently viewed probably as third weakest, in front of Citi, but behind Chase and WellsFargo?
Isn't this the sort of risk-taking that isn't supposed to be funded or subsidized by taxpayers anymore?
Tuesday, July 19, 2011
Tom Brown At It Again
Just last week I wrote this post discussing Tom Brown's gung ho, self-serving talking of his bank sector equity portfolio book on Bloomberg.
Unbelievably, he was back at it again this morning on the same network. This time it was to bemoan Goldman Sachs' disappointing earnings announcement, specifically its trading revenues.
Facing obviously uneven results in the banking sector, Brown had to act fast on air to try to convey why investors should remain interested in banks with such earnings problems.
What came next was something for which I was unprepared- old fashioned Wall Street sell-side hucksterism.
Brown harked back over 20 years to when, he so modestly disclosed, he had coined a now-famous meaning for BofA's ticker, BAC- "Buy All you Can."
Wow. I mean, how much more distilled can Brown's brilliance get? And it's so long-lived, too! Over twenty years!
I first heard this sort of nonsense years ago when I briefly dated a stock broker. She repeated the apocryphal phone patter for me by rote, in her thick Brooklyn accent,
"If you liked it at 60, you'll love it at 50 and you marry it at 40."
In short, declines are always and only opportunities to buy before the equity swings ever-upward again. Colossal management mistakes which led to current losses are surely one-time gaffes. These same managers, or their successors, will never- never- make another mistake of similar size. Really. Trust him. It's safe now. This time, it'll be different.
This morning, Brown went on to forecast, somewhat murkily, that in six quarters, BofA would be doing just fine, so load up on it now.
Funny thing about those pesky investors- they actually don't like to be told to wait six quarters for a return. They prefer constant, positive returns, when possible. And when you're counseling investors to buy and wait for a stock in a sector that cratered so badly in 2008 that it had to receive a federal bailout of unprecedented proportions, it is not a comforting recommendation. A lot can happen in six quarters.
But consider Tom Brown's dilemma.
If he tells the truth- that the large-bank sector is moribund, populated by slow-moving, heavily-regulated financial leviathans which are only good as very risky timing plays, retail investors will leave his fund.
If he tells the truth that right now just isn't the best time to buy large-bank stocks, retail investors will leave his fund.
Brown's objective is to say things, preferably on air, appearing as an objective analyst, rather than an interested portfolio manager, which keep his investors in his bank stock portfolio fund.
Once investors sell out of his fund, they may never return, captured by some other manager's line about some other sector. Perhaps technology, or cloud investing, or even gold and other commodities.
So Brown must act quickly to prevent such redemptions and departures.
In this light, BofA's recent large losses become an opportunity to buy low. Goldman's lower trading revenues? You should love it even more at its new low price!
Witch hunts on Wall Street come and go. New regulations, like Dodd-Frank, come and go.
But basic, unvarnished sell-side Wall Street hucksterism of Tom Brown's variety never, it seems, goes out of style.
Unbelievably, he was back at it again this morning on the same network. This time it was to bemoan Goldman Sachs' disappointing earnings announcement, specifically its trading revenues.
Facing obviously uneven results in the banking sector, Brown had to act fast on air to try to convey why investors should remain interested in banks with such earnings problems.
What came next was something for which I was unprepared- old fashioned Wall Street sell-side hucksterism.
Brown harked back over 20 years to when, he so modestly disclosed, he had coined a now-famous meaning for BofA's ticker, BAC- "Buy All you Can."
Wow. I mean, how much more distilled can Brown's brilliance get? And it's so long-lived, too! Over twenty years!
I first heard this sort of nonsense years ago when I briefly dated a stock broker. She repeated the apocryphal phone patter for me by rote, in her thick Brooklyn accent,
"If you liked it at 60, you'll love it at 50 and you marry it at 40."
In short, declines are always and only opportunities to buy before the equity swings ever-upward again. Colossal management mistakes which led to current losses are surely one-time gaffes. These same managers, or their successors, will never- never- make another mistake of similar size. Really. Trust him. It's safe now. This time, it'll be different.
This morning, Brown went on to forecast, somewhat murkily, that in six quarters, BofA would be doing just fine, so load up on it now.
Funny thing about those pesky investors- they actually don't like to be told to wait six quarters for a return. They prefer constant, positive returns, when possible. And when you're counseling investors to buy and wait for a stock in a sector that cratered so badly in 2008 that it had to receive a federal bailout of unprecedented proportions, it is not a comforting recommendation. A lot can happen in six quarters.
But consider Tom Brown's dilemma.
If he tells the truth- that the large-bank sector is moribund, populated by slow-moving, heavily-regulated financial leviathans which are only good as very risky timing plays, retail investors will leave his fund.
If he tells the truth that right now just isn't the best time to buy large-bank stocks, retail investors will leave his fund.
Brown's objective is to say things, preferably on air, appearing as an objective analyst, rather than an interested portfolio manager, which keep his investors in his bank stock portfolio fund.
Once investors sell out of his fund, they may never return, captured by some other manager's line about some other sector. Perhaps technology, or cloud investing, or even gold and other commodities.
So Brown must act quickly to prevent such redemptions and departures.
In this light, BofA's recent large losses become an opportunity to buy low. Goldman's lower trading revenues? You should love it even more at its new low price!
Witch hunts on Wall Street come and go. New regulations, like Dodd-Frank, come and go.
But basic, unvarnished sell-side Wall Street hucksterism of Tom Brown's variety never, it seems, goes out of style.
Friday, July 01, 2011
BofA's CountryWide Tab Explodes
Back in January of this year, I wrote this post concerning the escalating tab for Ken Lewis' purchase of CountryWide in 2008 for BankAmerica, of which he was CEO. I wrote then,
"So that makes the running tab for Countrywide $9B, when you include the $18/share purchase of Countrywide equity in August of 2007 for a total of about $2B. By the way, when Lewis made the January purchase, Countrywide's stock was less than half its August price, or $8/share.
According to the Journal article, a Sanford Bernstein analyst assesses the additional put back risk to BofA at as much as $4B."
On Wednesday, current BofA CEO Brian Moynihan settled outstanding claims on Countrywide bonds and 'defective' mortgages for $8.5B and $5.5B, respectively, plus an additional $6.6B prospectively for future costs and losses against old Countrywide business.
Adding this $20.6B in losses to the prior $9B cost, and you get the Wall Street Journal's subheadline $30B cost of Countrywide to BofA. They printed this comment regarding the deal Lewis so extolled at the time he made it in mid-2008,
" 'It turned out to be the worst decision we ever made,' said one Bank of America director who voted for the Countrywide deal. "
According to the Journal piece, this may not be the end of BofA's losses on the deal.
My old mentor at Chase Manhattan Bank, Gerry Weiss, made sure several of us who worked for him got plenty of contact with the bank's EVPs, Vice-Chairman, CEO and Chairman. He used to say that many of them woke up in the morning saying, as they looked into the mirror to shave,
'God, don't let them realize today how incompetent I really am and how little I actually know about what I'm doing.'
Next time you read or hear about some large US bank CEO making an incredible acquisition, think carefully about whether you believe him or her.
Citigroup should have been bankrupt by now, and is still headed by an inexperienced, over-matched former middle-office manager of an investment bank. Wells Fargo is choking on its own acquisition of Wachovia's problems from Golden West, the former California S&L, as well as its own real estate portfolio. Chase remains simply slower and stodgier than the other large commercial banks, thus having accidentally avoided the worst of the last financial crisis.
Ken Lewis' type of self-inflicted fiasco at BofA could easily happen again.
"So that makes the running tab for Countrywide $9B, when you include the $18/share purchase of Countrywide equity in August of 2007 for a total of about $2B. By the way, when Lewis made the January purchase, Countrywide's stock was less than half its August price, or $8/share.
According to the Journal article, a Sanford Bernstein analyst assesses the additional put back risk to BofA at as much as $4B."
On Wednesday, current BofA CEO Brian Moynihan settled outstanding claims on Countrywide bonds and 'defective' mortgages for $8.5B and $5.5B, respectively, plus an additional $6.6B prospectively for future costs and losses against old Countrywide business.
Adding this $20.6B in losses to the prior $9B cost, and you get the Wall Street Journal's subheadline $30B cost of Countrywide to BofA. They printed this comment regarding the deal Lewis so extolled at the time he made it in mid-2008,
" 'It turned out to be the worst decision we ever made,' said one Bank of America director who voted for the Countrywide deal. "
According to the Journal piece, this may not be the end of BofA's losses on the deal.
My old mentor at Chase Manhattan Bank, Gerry Weiss, made sure several of us who worked for him got plenty of contact with the bank's EVPs, Vice-Chairman, CEO and Chairman. He used to say that many of them woke up in the morning saying, as they looked into the mirror to shave,
'God, don't let them realize today how incompetent I really am and how little I actually know about what I'm doing.'
Next time you read or hear about some large US bank CEO making an incredible acquisition, think carefully about whether you believe him or her.
Citigroup should have been bankrupt by now, and is still headed by an inexperienced, over-matched former middle-office manager of an investment bank. Wells Fargo is choking on its own acquisition of Wachovia's problems from Golden West, the former California S&L, as well as its own real estate portfolio. Chase remains simply slower and stodgier than the other large commercial banks, thus having accidentally avoided the worst of the last financial crisis.
Ken Lewis' type of self-inflicted fiasco at BofA could easily happen again.
Thursday, June 23, 2011
Large US Bank Performance In The Wake of Concerns Over Increased Capital Requirements
Tom Brown's announcement in early June that he had bought BofA shares for his sector fund. That post was on June 3rd, so Brown bought no later than that- perhaps in late May, perhaps earlier that week.
![]()
On June 9th, I wrote this post discussing the subsequent call by various regulators for large "too big to fail" banks to hold from 3% to perhaps 7% additional capital.
As of yesterday, the major US banks included in the nearby price chart, have all declined since late May. The S&P500 Index is about flat.
We don't know precisely when Tom Brown bought his fund's BofA shares, but all of the banks shown- Citigroup, Chase, BofA and Wells Fargo- have declined absolutely and relative to the S&P for the past three months.
No wonder Brown was cheering on Jamie Dimon's objections to the sensible call for these banks to be capitalized as, well, banks, rather than unsecured loan providers.
Could it be that between the divestitures and closures of now disallowed businesses, and the specter of higher capital requirements, these banks are in for a long term correction down to price levels more consistent with giant, slow-growing, government-insured deposit-taking financial utilities?
As of yesterday, the major US banks included in the nearby price chart, have all declined since late May. The S&P500 Index is about flat.
We don't know precisely when Tom Brown bought his fund's BofA shares, but all of the banks shown- Citigroup, Chase, BofA and Wells Fargo- have declined absolutely and relative to the S&P for the past three months.
No wonder Brown was cheering on Jamie Dimon's objections to the sensible call for these banks to be capitalized as, well, banks, rather than unsecured loan providers.
Could it be that between the divestitures and closures of now disallowed businesses, and the specter of higher capital requirements, these banks are in for a long term correction down to price levels more consistent with giant, slow-growing, government-insured deposit-taking financial utilities?
Friday, June 03, 2011
Tom Brown's BofA Call
I happened to catch long time bank analyst, now, a sector portfolio manager, Tom Brown's appearance on Bloomberg television yesterday.
During his interview, Brown disclosed that for the first time in years, his fund has gone long BofA equity.
When questioned on his decision, Brown outlined his view of the bank's near term future under CEO Brian Moynihan. Essentially, Brown sees Moynihan shrinking the bank, which he believes is a good thing.
Running through the sort of micro-analysis that people like Brown do, he rattled off EPS and P/E numbers, claiming that the share price should double sometime in the next 18-24 months.
Wow. That's some performance!
If you look at the nearby price chart of BofA and the S&P500 Index, you can see this would be new territory for the bank's stock price performance.
Over the past two years, it's essentially been flat. Over five years, it's down nearly 80%. Is Tom Brown making a simple timing bet that BofA will eventually regain its valuation at roughly pre-crisis levels? A variant of the old P/E target approach, whereby one treats P/E as a cause, rather than an effect of a company's fundamental performance?
It seems like a pretty tall order to me. Typically, shrinking firms don't perform consistently well for very long. And total returns of 100% over two years seems heroic. Especially when it's supposed to magically result from a change in the firm's direction, rather than something like better execution of a good strategy.
Personally, I would be surprised if my equity strategy selection process even includes a bank anytime soon. I know it certainly wouldn't be including BofA by the time Brown predicts the firm's stunning performance success.
When questioned on his decision, Brown outlined his view of the bank's near term future under CEO Brian Moynihan. Essentially, Brown sees Moynihan shrinking the bank, which he believes is a good thing.
Running through the sort of micro-analysis that people like Brown do, he rattled off EPS and P/E numbers, claiming that the share price should double sometime in the next 18-24 months.
Wow. That's some performance!
If you look at the nearby price chart of BofA and the S&P500 Index, you can see this would be new territory for the bank's stock price performance.
Over the past two years, it's essentially been flat. Over five years, it's down nearly 80%. Is Tom Brown making a simple timing bet that BofA will eventually regain its valuation at roughly pre-crisis levels? A variant of the old P/E target approach, whereby one treats P/E as a cause, rather than an effect of a company's fundamental performance?
It seems like a pretty tall order to me. Typically, shrinking firms don't perform consistently well for very long. And total returns of 100% over two years seems heroic. Especially when it's supposed to magically result from a change in the firm's direction, rather than something like better execution of a good strategy.
Personally, I would be surprised if my equity strategy selection process even includes a bank anytime soon. I know it certainly wouldn't be including BofA by the time Brown predicts the firm's stunning performance success.
Thursday, March 10, 2011
BofA's Moynihan Proves My Point
You have to laugh at BofA's CEO, Brian Moynihan, trying to make a virtue out of a vice.
As the chart in this recent post illustrated, BofA has performance problems. It has no business even thinking about expansion and acquisitions. And Moynihan, being a lawyer, is probably over-matched as it is trying to run such a large, diverse company. Remember the last time a lawyer ran a large US commercial bank?
That's right- Chuck Prince tanked Citicorp so badly the government had to step in and buy part of it to keep it from dissolution.
Anyway, back to our story. Moynihan gave a carefully-timed interview to CNBC the other afternoon, echoing a recent Wall Street Journal article announcing his "peace dividend." That's Moynihan's term for the value he plans to return to shareholders by not pursuing acquisitions. Considering the last two large BofA acquisitions cost Moynihan's predecessor, Ken Lewis, his job, you can understand his attitude toward expansion.
Laughably, according to the article, BofA thinks it will break new ground trying the oldest large commecial bank trick of all- cross-selling.
The short story on this vain attempt is that the customers with money know better than to give all their business to one giant mediocre banking firm, while the customers who want to do this aren't profitable enough to make it worthwhile.
Of course, being new to managing a bank, Moynihan probably doesn't realize this yet.......
Meanwhile, the firm is buying back its equity and closing branches. That sounds like a bank that acknowledges the over-banked nature of the US market.
Hardly a reason to invest, is it? I stand by my conclusions of the prior, linked post.
As the chart in this recent post illustrated, BofA has performance problems. It has no business even thinking about expansion and acquisitions. And Moynihan, being a lawyer, is probably over-matched as it is trying to run such a large, diverse company. Remember the last time a lawyer ran a large US commercial bank?
That's right- Chuck Prince tanked Citicorp so badly the government had to step in and buy part of it to keep it from dissolution.
Anyway, back to our story. Moynihan gave a carefully-timed interview to CNBC the other afternoon, echoing a recent Wall Street Journal article announcing his "peace dividend." That's Moynihan's term for the value he plans to return to shareholders by not pursuing acquisitions. Considering the last two large BofA acquisitions cost Moynihan's predecessor, Ken Lewis, his job, you can understand his attitude toward expansion.
Laughably, according to the article, BofA thinks it will break new ground trying the oldest large commecial bank trick of all- cross-selling.
The short story on this vain attempt is that the customers with money know better than to give all their business to one giant mediocre banking firm, while the customers who want to do this aren't profitable enough to make it worthwhile.
Of course, being new to managing a bank, Moynihan probably doesn't realize this yet.......
Meanwhile, the firm is buying back its equity and closing branches. That sounds like a bank that acknowledges the over-banked nature of the US market.
Hardly a reason to invest, is it? I stand by my conclusions of the prior, linked post.
Wednesday, January 05, 2011
Ken Lewis' BofA Tab for Countrywide Up 50% Over 2008's Price
Three years ago next week, I wrote this post discussing Ken Lewis' purchase of the part of Countrywide which BofA, of which he was CEO, didn't already own, for some $4B.
Yesterday's Wall Street Journals Money & Investing section headline read 'BofA Pays for Soured Loans,' with the subheading 'Lender Gives Nearly $3 Billion to Fannie, Freddie Over Countrywide Mortgages.'
So that makes the running tab for Countrywide $9B, when you include the $18/share purchase of Countrywide equity in August of 2007 for a total of about $2B. By the way, when Lewis made the January purchase, Countrywide's stock was less than half its August price, or $8/share.
According to the Journal article, a Sanford Bernstein analyst assesses the additional put back risk to BofA at as much as $4B.
I'd love to see Ken Lewis questioned now by someone with good data on the August, 2007 and January, 2008 final Countrywide equity purchases. With the $6B paid for Countrywide by three years ago, $1B of which had already vanished as loss between mid-2007 and early-2008, this week's $3B, and up to $4B more in givebacks over the next two years to private investors, Lewis' Countrywide deal might ultimately cost BofA over double it's 'final' price three years ago.
It's difficult to believe that would still make the Countrywide acquisition by BofA the profitable masterstroke Lewis contended it was.
Oddly, the Journal article didn't seem to mention any of this. But a glance at the nearby price chart for BofA and the S&P500 Index shows how far the former's stock price has collapsed since Lewis closed the Countrywide deal.
While the S&P has lost a few percentage points of value, BofA has dropped by more than 60%!
What do you suppose was BofA's manner of assessing risks of the Countrywide portfolio and its upstreamed mortgages? Could they really have assumed no or minimal losses, when Countrywide was collapsing due to a general residential real estate value meltdown?
Perhaps the Countrywide deal will serve commercial bankers as a cautionary tale of buying badly-damaged financial institutions with far-flung liabilities in the form of loan sales.
Yesterday's Wall Street Journals Money & Investing section headline read 'BofA Pays for Soured Loans,' with the subheading 'Lender Gives Nearly $3 Billion to Fannie, Freddie Over Countrywide Mortgages.'
So that makes the running tab for Countrywide $9B, when you include the $18/share purchase of Countrywide equity in August of 2007 for a total of about $2B. By the way, when Lewis made the January purchase, Countrywide's stock was less than half its August price, or $8/share.
According to the Journal article, a Sanford Bernstein analyst assesses the additional put back risk to BofA at as much as $4B.
I'd love to see Ken Lewis questioned now by someone with good data on the August, 2007 and January, 2008 final Countrywide equity purchases. With the $6B paid for Countrywide by three years ago, $1B of which had already vanished as loss between mid-2007 and early-2008, this week's $3B, and up to $4B more in givebacks over the next two years to private investors, Lewis' Countrywide deal might ultimately cost BofA over double it's 'final' price three years ago.
It's difficult to believe that would still make the Countrywide acquisition by BofA the profitable masterstroke Lewis contended it was.
While the S&P has lost a few percentage points of value, BofA has dropped by more than 60%!
What do you suppose was BofA's manner of assessing risks of the Countrywide portfolio and its upstreamed mortgages? Could they really have assumed no or minimal losses, when Countrywide was collapsing due to a general residential real estate value meltdown?
Perhaps the Countrywide deal will serve commercial bankers as a cautionary tale of buying badly-damaged financial institutions with far-flung liabilities in the form of loan sales.
Friday, October 22, 2010
BofA's Dismal Performance
Bank of America announced a $7.3B loss this week. By way of explanation of the gigantic lawsuit involving mortgage servicing, the firm's spokesman informed investors,
"We're not responsible for the poor performance of loans as a result of a bad economy."
True, but doesn't the bank pay a high-priced economist to forecast economic conditions? And shouldn't underwriting standards have allowed for less-than-rosy economic conditions for the next 30 years?
Of course, if the excuse is that the loan loss-related servicing issues came from purchased portfolios, well, that would suggest other management mistakes. But mistakes, none the less.
The huge loss apparently came from writing down credit-card business goodwill.
As is so often the case, the bank and, I assume, analysts will urge investors to view this as an 'exceptional' item.
Too bad that making questionable acquisitions wasn't all that exceptional for BofA a few years ago. One suspects they'll have a lot more 'exceptional' losses in years to come, thanks to Ken Lewis' misguided strategic moves.
The nearby price chart for BofA and the S&P500 Index shows how far the former has declined since late 2007. That was the last time that BofA's rate of return neared that of the S&P.
Now, it's down about 70% while the S&P has more or less flattened over the period.
Hardly the type of performance that makes investors cheer, is it? I suppose there are those that will believe it's the perfect time to bottom fish.
But with BofA and its checkered recent past, I would think that investment decision would come with substantial risk.
"We're not responsible for the poor performance of loans as a result of a bad economy."
True, but doesn't the bank pay a high-priced economist to forecast economic conditions? And shouldn't underwriting standards have allowed for less-than-rosy economic conditions for the next 30 years?
Of course, if the excuse is that the loan loss-related servicing issues came from purchased portfolios, well, that would suggest other management mistakes. But mistakes, none the less.
The huge loss apparently came from writing down credit-card business goodwill.
As is so often the case, the bank and, I assume, analysts will urge investors to view this as an 'exceptional' item.
Too bad that making questionable acquisitions wasn't all that exceptional for BofA a few years ago. One suspects they'll have a lot more 'exceptional' losses in years to come, thanks to Ken Lewis' misguided strategic moves.
Now, it's down about 70% while the S&P has more or less flattened over the period.
Hardly the type of performance that makes investors cheer, is it? I suppose there are those that will believe it's the perfect time to bottom fish.
But with BofA and its checkered recent past, I would think that investment decision would come with substantial risk.
Thursday, October 21, 2010
The Spreading Mortgage Foreclosure Mess
Things has certainly gotten out of hand in the mortgage foreclosure processing mess, haven't they?
With the NY Fed weighing in on a lawsuit against BofA, things have escalated to an unprecedented level.
Yet, at root, it continues to appear to be much ado about nothing. A tempest in a proverbial teapot.
According to a Wall Street Journal editorial which ran yesterday, the number of inappropriate foreclosures they could find numbered no more than dozen, in a nation of over 300 million people.
So the bottom line is that almost nobody who has not been delinquent on their mortgage is being foreclosed.
Meanwhile, I listened to a Fox News report yesterday which included an interview with the owner of a home with a modified mortgage. I won't get the numbers exactly right, but the woman's mortgage declined from about $1,800/month to something in the neighborhood of $700/month after modification.
Talk about injustice! This is why so many people resent those who made unwise home purchases, then receive generous modifications which leave them in homes they can't actually afford. Rather than putting those homes on the market at the market-clearing, lower prices which others could afford.
To me, the allegations of robo-signed foreclosures is a red herring. The real issue remains that politicians have been improperly leaning on and coercing banks to suspend legitimate foreclosures since the presidential primaries of 2008.
With the NY Fed weighing in on a lawsuit against BofA, things have escalated to an unprecedented level.
Yet, at root, it continues to appear to be much ado about nothing. A tempest in a proverbial teapot.
According to a Wall Street Journal editorial which ran yesterday, the number of inappropriate foreclosures they could find numbered no more than dozen, in a nation of over 300 million people.
So the bottom line is that almost nobody who has not been delinquent on their mortgage is being foreclosed.
Meanwhile, I listened to a Fox News report yesterday which included an interview with the owner of a home with a modified mortgage. I won't get the numbers exactly right, but the woman's mortgage declined from about $1,800/month to something in the neighborhood of $700/month after modification.
Talk about injustice! This is why so many people resent those who made unwise home purchases, then receive generous modifications which leave them in homes they can't actually afford. Rather than putting those homes on the market at the market-clearing, lower prices which others could afford.
To me, the allegations of robo-signed foreclosures is a red herring. The real issue remains that politicians have been improperly leaning on and coercing banks to suspend legitimate foreclosures since the presidential primaries of 2008.
Tuesday, September 28, 2010
Jamie Dimon's "Halo" Effect
It never fails to amaze me how many people ascribe unique managerial powers and skill to Jamie Dimon, despite any significant evidence that he's ever been anything but a cost-cutter trained at Sandy Weill's knee.
In yesterday's Wall Street Journal's book review, Philip Delves Broughton reviewed Paul Sullivan's new book, Clutch. Here's the passage from the review that I found to be amazingly ill-informed and wrong-headed.
"At one point he contrasts the performances of Jamie Dimon, chief executive of JPMorgan Chase, and Kenneth Lewis, the former head of Bank of America, during the financial crisis of 2008. Both men went into the crisis with their firms in good health. By the end of it, Mr. Dimon had acquired Bear Stearns and Washington Mutual and handsomely increased his company's share price. Mr. Lewis had acquired the teetering Merrill Lynch and seen Bank of America lose $90 billion in shareholder value.
Why the difference? Mr. Lewis made the errors typical of chokers. He over-thought the situation, and he was over-confident. When the Merrill deal was criticized, he tried to avoid the blame. He acted, according to Mr. Sullivan, as an "imperial chief executive," refusing to believe that the worst might happen. Mr. Dimon, by contrast, immersed himself in every detail of his acquisitions, fought to get prices that made hard financial sense and never shirked from the consequences. It was as if all his experience as a financier and manager had found its perfect expression in that moment."
Really?
Well, here's an alternative view. Substantiated by facts. The accompanying chart displays stock price series for Chase, Goldman Sachs, Wells Fargo and the S&P500 Index from 2006 to the present. Dimon became CEO of Chase at the beginning of 2006.
In yesterday's Wall Street Journal's book review, Philip Delves Broughton reviewed Paul Sullivan's new book, Clutch. Here's the passage from the review that I found to be amazingly ill-informed and wrong-headed.
"At one point he contrasts the performances of Jamie Dimon, chief executive of JPMorgan Chase, and Kenneth Lewis, the former head of Bank of America, during the financial crisis of 2008. Both men went into the crisis with their firms in good health. By the end of it, Mr. Dimon had acquired Bear Stearns and Washington Mutual and handsomely increased his company's share price. Mr. Lewis had acquired the teetering Merrill Lynch and seen Bank of America lose $90 billion in shareholder value.
Why the difference? Mr. Lewis made the errors typical of chokers. He over-thought the situation, and he was over-confident. When the Merrill deal was criticized, he tried to avoid the blame. He acted, according to Mr. Sullivan, as an "imperial chief executive," refusing to believe that the worst might happen. Mr. Dimon, by contrast, immersed himself in every detail of his acquisitions, fought to get prices that made hard financial sense and never shirked from the consequences. It was as if all his experience as a financier and manager had found its perfect expression in that moment."
Really?
Well, here's an alternative view. Substantiated by facts. The accompanying chart displays stock price series for Chase, Goldman Sachs, Wells Fargo and the S&P500 Index from 2006 to the present. Dimon became CEO of Chase at the beginning of 2006.
That BofA and Citi are the worst two performers is no particular surprise, is it? While it's not crystal clear from the chart, one can deduce that Goldman and Chase performed roughly the same, while Wells Fargo and the S&P500 did a little worse.
Much of Chase's milder value loss during the recent financial crisis stemmed, as I've written in prior posts, from it's simply being slower and less agile in getting into the mortgage-backed game in the first place. Thus, the bank's traditional stodginess and slow execution accidentally saved it from becoming another Citigroup or BofA. It was an error of omission, not commission.
Regarding the acquisition of various wrecked investment and commercial banks, I think Broughton wrongly gives Sullivan a pass on incomplete understanding of the situations.
Bear Stearns was the smallest of the publicly-traded investment banks, and Chase only rescued it with assurances of loss guarantees from the government. Maybe that counts as Dimon's skill, maybe not. At that point, with mortgage-backed instruments having caused tens of billions of write-offs on bank balance sheets beginning in late 2007, only an idiot would not have required such guarantees when agreeing to purchase a bushel full of them by way of taking over the failed Bear Stearns. It surely wasn't rocket science.
By the way, Lewis did the same thing with Merrill Lynch, even to the point of trying to walk away from the deal, only to be basically blackmailed by the Treasury and Fed.
Regarding Chase's WaMu takeover, it is positioned as more brilliant than it actually was. As a commercial bank, WaMu's dissolution was a relatively straightforward event. The FDIC handles these routinely, albeit on a smaller scale. But a bank like WaMu was, in comparison with Bear Stearns, a fairly simple 'acquisition.' Chase simply took over the deposits and branches, negotiating with the FDIC on various aspects of the assets. But it was a known business.
I see the difference between Lewis and Dimon as more a matter of different types of flaws. Dimon has never been a big-picture guy. Yes, he is probably very astute on details, because that's what his mentor, Sandy Weill, focused on as he acquired his string of brokerages to build Shearson Lehman. But every large-scale concept Weill pursued exploded in loss. Particularly....Citigroup. Nobody would ever accuse Dimon of having new, innovative strategic concepts, or implementing any successfully.
Lewis, on the other hand, evidently thought strategic acquisitions came with the executive suite he inherited from Hugh McColl. The missing acquisition mistake in the review, and perhaps the book, is BofA's purchase of the wreckages of Countrywide. As a mortgage bank, Countrywide's demise didn't really threaten the financial system, so Lewis' overpayment for it was a self-inflicted wound. There was no pressure for any bank to 'rescue' the troubled mortgage lender. It wasn't seen as a key financial institution in the fabric of the US economy.
The Merrill Lynch acquisition was more complex than Chase's of Bear Stearns. I see Lewis' mistake, again, as one of scope, rather than detail. And, frankly, both Lewis and Dimon, already heading firms that were among the largest five commercial banks in the US, did not really need any of these acquisitions to remain so. Consolidation is the dominant trend in the sector, but these two firms were already pretty much impervious, absent tremendous operating losses, to losing their positions as financial utilities, whether they bought any of the failed investment and commercial banks, or not.
Wells' successful digestion of Wachovia remains uncertain. Wachovia had unwisely overpaid for Golden West, which helped destroy the North Carolina bank.
To me, viewing the last five years of performances of these institutions, the lesson is that only the most and least aggressive two firms came out on top. Goldman maneuvered through the crisis, while Chase more or less hunkered down, with a few distressed asset purchases relying on government guarantees.
Perhaps the better lesson from Lewis' and Dimon's behaviors is that it's better not to operate beyond your capabilities in the first place. That doesn't mean Dimon is a better overall manager, but, in this case, that his particular skills in micro-management and small-picture thinking happened to dovetail with the brief era. The sort of skills, come to think of it, which are all one probably needs to oversee a lumbering, slow-growth, unexciting financial utility.
Wednesday, September 15, 2010
This Is Banking Leadership? Moynihan's "Strategy" for BofA
Yesterday's Wall Street Journal covered BofA Brian Moynihan's earth-shaking new strategy for the financial utility. According to the article, Moynihan's brilliant conception,
"revolves around cross-selling to customers, companies and institutional investors who interact with the retail, corporate and wealth-management parts of the bank."
Wow! Deep, stunning stuff, isn't it?
In fairness to Moynihan, in about nine months he's been able to at least articulate one of money center banking's oldest standby strategies, which is considerably more than the hapless Vik Pandit of Citigroup has ever managed.
In admitting his stroke of genius "is just hard work," and nothing fancy, I think Moynihan has made a good case for his current $800K cash compensation to be substantially reduced in this and future years.
While the Journal piece quotes a typical analyst claiming that BofA is poised for juicy growth and returns due to its having banking relationships with half of the households in America, and any economic uplift will propel it to stellar performance, I'm not so sure.
We are in an era of financial utilities. The era of reckless growth of large commercial banks, at any price, and risk, is apparently over. With little ability to pump the few growing subsectors of finance while ignoring risks, it's unlikely that banking has the same future potential for consistently superior total returns that some members of the sector experienced in the past decades.
When regulators and new laws have proscribed so much of behaviors which led to unsustained growth of financial institutions in past years, it's hard to see how that growth will continue in the future.
Frankly, you could put a mediocre manager in terms of any of the three remaining US money centers- Chase, Citigroup or BofA- and, for that matter, Wells Fargo, too, and probably not notice any difference from current management.
Moynihan's choice of the retread approach of cross-selling and efficient operations have never actually provided any financial institution with consistently superior total returns in the past. Every institution which tried them, including James Robinson's American Express and Sandy Weill's Citigroup, failed miserably and expensively.
Moynihan's appointment as BofA CEO, and subsequent recycling of the oldest, dullest "strategies" in commercial banking, illustrates the bankruptcy of ideas in the sector, the lack of alternatives, and the reliance on old, failed approaches.
Too bad none of the nation's four largest bank CEOs, and their managements, can admit that US commercial banking just isn't, and shouldn't be, a high-growth sector anymore. Such growth doesn't come without risk, and, as protected, publicly-insured institutions, it's inappropriate for them to attempt such growth any longer.
"revolves around cross-selling to customers, companies and institutional investors who interact with the retail, corporate and wealth-management parts of the bank."
Wow! Deep, stunning stuff, isn't it?
In fairness to Moynihan, in about nine months he's been able to at least articulate one of money center banking's oldest standby strategies, which is considerably more than the hapless Vik Pandit of Citigroup has ever managed.
In admitting his stroke of genius "is just hard work," and nothing fancy, I think Moynihan has made a good case for his current $800K cash compensation to be substantially reduced in this and future years.
While the Journal piece quotes a typical analyst claiming that BofA is poised for juicy growth and returns due to its having banking relationships with half of the households in America, and any economic uplift will propel it to stellar performance, I'm not so sure.
We are in an era of financial utilities. The era of reckless growth of large commercial banks, at any price, and risk, is apparently over. With little ability to pump the few growing subsectors of finance while ignoring risks, it's unlikely that banking has the same future potential for consistently superior total returns that some members of the sector experienced in the past decades.
When regulators and new laws have proscribed so much of behaviors which led to unsustained growth of financial institutions in past years, it's hard to see how that growth will continue in the future.
Frankly, you could put a mediocre manager in terms of any of the three remaining US money centers- Chase, Citigroup or BofA- and, for that matter, Wells Fargo, too, and probably not notice any difference from current management.
Moynihan's choice of the retread approach of cross-selling and efficient operations have never actually provided any financial institution with consistently superior total returns in the past. Every institution which tried them, including James Robinson's American Express and Sandy Weill's Citigroup, failed miserably and expensively.
Moynihan's appointment as BofA CEO, and subsequent recycling of the oldest, dullest "strategies" in commercial banking, illustrates the bankruptcy of ideas in the sector, the lack of alternatives, and the reliance on old, failed approaches.
Too bad none of the nation's four largest bank CEOs, and their managements, can admit that US commercial banking just isn't, and shouldn't be, a high-growth sector anymore. Such growth doesn't come without risk, and, as protected, publicly-insured institutions, it's inappropriate for them to attempt such growth any longer.
Friday, July 16, 2010
More CEO Idiocy On CNBC This Morning
Probably because BofA announced earnings yesterday or this morning, its CEO, Brian Moynihan, had a lengthy interview on CNBC this morning.
After reading about Moynihan's checkered corporate past, about which I wrote here, I have zero interest in anything the guy would say. I'm guessing I'm not alone.
So why is Becky Quick breathlessly asking Moynihan about the state of the American consumer, after stating that BofA has relationships with some large percentage of them?
C'mon, Becky, you're smarter than that. That so-called "relationship," is, for many of the bank's customers, a checking account.
And why would Moynihan, a lawyer with a now-publicly highlighted spotty record of mediocre management at several banks, know anything more about American consumers than, say, someone who has actually conducted market research? Or a qualified economist?
Even Joe Kernen's pointed question about BofA being whipsawed by the feds to both lend more money, but make no bad loans, got a punt from Moynihan. Obviously, given the predatory regulatory environment in Washington these days, the BofA CEO wasn't going to utter a single word that could be viewed as combative by the federal government.
So much for honesty and candor from CEOs. Anywhere. Which is sort of the topic of this morning's prior post.
Anyway, I suppose this morning's puff session with Moynihan is CNBC's attempt to deify anyone in a CEO suite, no matter how unqualified or lacking in experience. Which is really just plain stupid.
After reading about Moynihan's checkered corporate past, about which I wrote here, I have zero interest in anything the guy would say. I'm guessing I'm not alone.
So why is Becky Quick breathlessly asking Moynihan about the state of the American consumer, after stating that BofA has relationships with some large percentage of them?
C'mon, Becky, you're smarter than that. That so-called "relationship," is, for many of the bank's customers, a checking account.
And why would Moynihan, a lawyer with a now-publicly highlighted spotty record of mediocre management at several banks, know anything more about American consumers than, say, someone who has actually conducted market research? Or a qualified economist?
Even Joe Kernen's pointed question about BofA being whipsawed by the feds to both lend more money, but make no bad loans, got a punt from Moynihan. Obviously, given the predatory regulatory environment in Washington these days, the BofA CEO wasn't going to utter a single word that could be viewed as combative by the federal government.
So much for honesty and candor from CEOs. Anywhere. Which is sort of the topic of this morning's prior post.
Anyway, I suppose this morning's puff session with Moynihan is CNBC's attempt to deify anyone in a CEO suite, no matter how unqualified or lacking in experience. Which is really just plain stupid.
Wednesday, July 07, 2010
Mediocrity At The Top: BofA's Brian Moynihan
Yesterday's Wall Street Journal's Money & Investing section carried a feature article discussing how BofA's CEO Brian Moynihan got his current job.
The details should bring shame and humiliation to everyone involved, but most especially the board.
That Moynihan should have joined the ranks of overpaid, mediocre large US bank CEOs is not, by itself, all that surprising. At least not to me. None of the CEOs of the few remaining large, authentic commercial banks are at all noteworthy for their outstanding skills or accomplishments. Moynihan is no exception to that.
But the details of Moynihan's career left me shaking my head. The guy literally hopscotched luckily from a general counsel job at Fleet through various unremarkable stints in business units at BofA. Soon after the Merrill acquisition, he refused a transfer to a credit card unit, and was told he was finished.
Little more than a year later, he was named CEO to replace Ken Lewis, the guy who promised to sack him for refusing the earlier job offer.
Go figure.
If this story, just by itself, doesn't tell you why there is so much ineptitude and mediocrity among US commercial banks, nothing else will.
But wait, as they say in the infomercials....there's more!
One BofA board member held out against Moynihan, encouraging fellow board members to seek an outside replacement. Nothing doing. The rest of the incompetent firm's board railroaded the improbably named William Boardman by forcing a vote on a unanimous decision. Boardman was reported as believing that his dissent on Moynihan's election would hurt the bank, so he caved.
He must be so proud.
Moynihan, too, I suppose.
Together, Lewis, Moynihan and BofA's board all contributed to the naming as CEO a rather unaccomplished, generic businessman with no outstanding instance of ingenuity, creativity or other quality involving unusual excellence.
Instead, Moynihan is a return to banking's Organization Man era. Very much according to this post, which I wrote upon Moynihan's being named CEO at BofA last December.It took a while, but the Journal's piece yesterday, which filled in the blanks on Moynihan's career and the BofA board's actions, have pretty much validated my initial sentiments.
The nearby five-year price chart for the S&P500 Index, BofA and its major large US commercial bank competitors does, as well. BofA is still the worse than all but Citigroup.
Way to go, Ken and Brian...and your board.
Subscribe to:
Posts (Atom)
