Bank Of America As An Analog To WorldCon And, Of Course, Horseshit
Trust Bloomberg's Jonathan Weil to put two and two together, and to remember that everything new is just well forgotten old. In this case Bank of America. And we are not talking comparisons to Lehman (or even SocGen) - those are boring. No, it is much more fun to compare the insolvent bank to another world con, in this case WorldCom. As Weil reminds us, the news that Moynihan's last stand was considering a tracking stock reported earlier by the WSJ, as a means to demonstrate to the Fed its "viability", is nothing short of the comparison of WorldCom's last ditch in kind method, which none other than a WorldCom director likened to, well, horseshit.
Taking a step back, Weil reminds us that there are a lot of reasons why a desperate company might want to issue a tracking stock. "None of them are good. One company that did it in 2000 was WorldCom Inc., less than two years before it collapsed in one of the greatest accounting scandals ever. Here are some excerpts from a March 2003 investigative report by WorldCom's audit committee discussing the company's use of the gimmick."
So what did the report say?
"In WorldCom's November 1, 2000, press release, Ebbers said that the trackers enabled 'the respective businesses to achieve greater management and resource focus to execute business strategies that work most effectively for each' and 'create greater shareholder value by providing shareholders with two distinct, clear and compelling investment opportunities . . . .'
"By contrast, notes taken by the general counsel of corporate development, Bruce Borghardt, at a September 2000 board meeting indicate that Ebbers told the board that the tracker was 'financial engineering' and, by putting poorly operating businesses -- the 'dogs and cats' -- into MCI Group, they could show double-digit revenue growth in WorldCom Group. Borghardt’s contemporaneous notes also reflect that one director said that the tracker was the equivalent of 'put[ting] manure in the closet' and that it would 'still smell.' "
So aside from the vivid visual what did tracking actually achieve? Well, nothing:
"According to its public filings and press releases, the WorldCom Group stock tracked the 'primary growth drivers of the company' based on services provided to corporate enterprise customers; the MCI Group stock tracked 'the company’s high-cash flow' generated primarily by consumer and wholesale long-distance customers. By all accounts, the process of allocating the costs and revenues between the two stocks evolved over time and was highly subjective. WorldCom was not simply divisible into two clearly defined entities with distinct costs.'"
On the other hand BAC is perfectly divisible into two entities: BAC ex-CFC and CFC. The problem is that spinning off CFC, or rather is contingent liabilities involves two things: i) bankruptcy or ii) a spin out into an equity funded trust. Both of these mean the existing equity value will drop to about $0.00... or $0.01 tops.