Bank of America

We have previously discussed the maturity cliff in Treasuries, Commercial Real Estate, Financials and High Yield. Focusing on the latter, a recent report from Moody's, indicated that there is roughly $800 billion in high yield bonds maturing by 2014. Today, Bank of America jumped on the HY maturity warning bandwagon, discussing the "maturity wall" which while alarming, is estimated by BofA to be $600 billion, or materially less than Moody's estimates. So while not in any way novel, Bank of America does provide a rather convincing view of therelative maturity schedule in HY currently versus the historical average in both loans and bonds. The results should be troubling to all CFOs and PE-owners of highly indebted organizations: absent raising equity rapidly, the ability to roll these loans in a rising interest rate environment will be next to impossible. Because with 89% of loans maturing in under 5 years (compared to 36% on average), and 50% of bonds (37% average), the maturity cliff,whether defined by Moody's or by Bank of America, is fast approaching.

Standard and Poor's whacks Citi and Bank of America, revising its outlook on both firms from Stable to Negative, cites "increased uncertainty about the U.S. government's willingness to provide additional extraordinary support to highly systemically important financial institutions in a way that will benefit debt holders."

After today's ban on prop trading, the bulk of the attention has been focused on Goldman Sachs and for good reason: without the ability to commingle trading information from the biggest flow operation in the world, with its own principal risk exposure, Goldman becomes just another B-grade bank, which has a solid balance sheet, a massive inventory of products in its flow business it must offload regularly (and unable to capitalize on, by taking the opposite side of the trade), and is eagerly anticipating the "boom" in M&A and underwriting advisory deals that is "just around the corner." While we wish Goldman well, having to compete on a fair basis with the remaining banks should make for a novel departure from its traditional, monopoly-facilitated business model. Is the current stock price fair? Absolutely not, and if indeed Goldman finds no way to prevent the prop ban, it is very much overvalued here. Yet speaking of overvalued companies, and the prop trading ban impact, one company that may have well slipped under the radar today is none other than Bank of America. Ironically, after fooling around with the most recent BAC model by none other than Goldman's Richard Ramsden, we have uncovered just what a huge impact on the bottom line BAC's "trading account profits" aka prop trading has. If we zero out the revenue contribution from this line item, 2011P EPS goes from $2.25 to... $1.25. This may be relevant information for all those massive hedge funds who believe that Bank of America is a slam dunk double from here. It will be poetic justice if the stock price is indeed mispriced by 50%...in the wrong direction.

WSJ reports that the president of Consumer & Small Business Banking for Bank of America has been named CEO. Yet will the track record of the new CEO be spotted from the beginning: recall that Moynihan served as emergency General Counsel replacement after then GC Tim Mayopoulos was suddenly fired in December 2008, presumably for objecting to the Merrill deal. With the lawsuit on the Merrill debacle yet to come, courtesy of Judge Rakoff, will Moynihan be implicated, in addition to lame duck Ken Lewis?

"When I asked Ken Lewis, Bank of America’s CEO, about why he had not disclosed the mounting losses to shareholders before the shareholder vote, he told this Committee that he relied on the advice of counsel. Protecting shareholders is often, in the final instance, the practical responsibility of corporate General Counsels and their outside counsel. The Subcommittee’s investigative findings demand the question, “Where were the lawyers?” The glaring omissions and inaccurate financial data in the critical November 12 Forecast
make Bank of America’s decision not to disclose to shareholders unsupportable. Furthermore, the flaws in the forecast document were so obvious that they should have alerted the attorneys to the necessity of a reasonable investigation before making a decision on Bank of America’s legal duties to disclose. The apparent fact that they did not mount such an investigation makes the decision not to disclose Merrill’s losses to shareholders an egregious violation of securities laws." - Dennis Kucinich

Ken Lewis may think everyone has forgotten about him... But we haven't. Tomorrow's hearing before the House Oversight Committee will see the SEC's Robert Khuzami field questions about BofA's "criminal" acquisition of Merrill, which according to Dennis Kucinich represented an "egregious violation of securities laws." Consider it an appetizer ahead of the full blown jury trial before one Judge Jed Rakoff, coming soon to a publicly accessible courtroom near you.

First dumb taxpayers, now even dumber investors: your money is much appreciated. In other news: use of proceeds - meet black hole. Black hole - meet use of proceeds.

In addition to paying back its $45 billion portion of TARP, the Bank, in what will be Ken Lewis' last act, will also raise incremental capital. $18.8 billion of new "common equivalent securities" to be issued, or the equivalent of 1.2 billion shares. And even as the firm is set to payout humongous bonuses ala Goldman, the firm will not touch its $44.5 billion in TLGP backed issues.

Earlier we presented one view on why gold is about to plunge. While that perspective was somewhat truncated, a report recently issued by Bank Of America's commodities team presents the case for gold at $1,500/ounce. As BACMLCFC observes, and agrees with other observations presented on Zero Hedge by both SocGen and by Jim Grant, "[d]uring the last decade we found that three variables alone could explain the fluctuations in the price of gold: risk, currency and commodity prices. In a nutshell, our analysis showed that gold is sometimes a currency, sometimes a commodity and sometimes a store of value. Of course, the elusive question will always be figuring out which market gold will track next." In essence, a detailed if longwinded report (get a cup of coffee now) to confirm that Paulson and Ackman will soon be much richer.

The latest Paulson & Co. 13F is out: the man who inspires a million hedge fund clone portfolios has made some interesting changes to his holdings. The most notable is the documented addition of 300 million shares of Citigroup, a new position for the firm. Offsetting this is the sale of 8.2 million shares of Bank of America (which at 160 million shares is still the firm's second largest holding). Paulson has also divested his entire 2MM share Goldman Sachs stake.

Remember Citi? The bank that once did stuff like investment banking and research, sales and trading, and some other things, and was a little more than just a zombifying and rapidly decaying ward of the state? Neither do we. For a vivid example of how things have changed, Citi today's added BAC stock to its "top picks live" list... and nobody gave a rat's ass. In fact the financial action was driven by Dick Bove's earlier downgrade of some regional banks, dragging down such "opportunity" firms as Bank of America with them. Yet Citi knows a thing or two about a thing or two, specifically that BofA, once it is done with all the assorted litigation facing its soon to be ex-CEO, and any potential dangers over the other orange guy they got for a steal when they acquired Countrywide, and maybe even prior, will need to raise capital, especially if its star traders want to be paid for churning the bejeezus out of stocks like Citi, CIT, FNM and FRE (and maybe BAC itself). The amount of the offering will have to be at least $45,000,000,001, in order to pay back the $45 billion of government TARP aid still on the books, and the token $1 for General Corporate Purposes.

Ahead of tomorrow's Committee of Oversight and Congressional Reform hearing on the Bank Of America - Merrill Lynch strong-arming by the Fed, entitled "Bank of America and Merrill Lynch: How Did a Private Deal Turn Into a Federal Bailout? Part IV" (which may or may not happen), Dylan Ratigan discusses some salient points with California Republican Darrell Issa. As a reminder, prominent witnesses tomorrow will be BofA GC Tim Mayopolous and Directors Charles Gifford and Thomas May.

A month ago Zero Hedge speculated that the SEC was preparing to throw Wachtell Lipton and Ed Herlihy at the wolves, in case its planned settlement to indemnify Ken Lewis of all sins failed. Well, it failed, now that a jury trial is in the works to determine just how guilty Ken Lewis et al have been of shareholder fraud. And, as expected, Wachtell Lipton is about to be run over by a 200 ton freight train.

In an ominous, one sentence disclosure just filed in Southern District Court of New York, the SEC has advised that it will demand a trial by jury for "all issues so triable." It appears the common man will finally have his say. Woe to ex-CEO Ken Lewis.

"If you reduce the increasingly difficult situation facing the largest banks down to its essence, the problem is politicians picking winners and losers. If we don't have losers in our economic life, then there are no winners either. If we don't resolve troubled banks, then all of our banks will be bad, as the century-old Whithers quote above suggests. And the fact that Washington will not let large, mediocre institutions such as BAC fail means that our entire financial system is getting sicker, not recovering as the politicians ask you to believe. The different financial and operational situations facing BAC and other members of the large bank peer group illustrate the point." - Chris Whalen