The Gift That Keeps On Taking: Bank Of America Facing $6.2 Billion Collateral Call
There is hardly any more long-suffering investor in this market than anyone who has held the stock of that worst of breed American bank: Bank of Countrywide Lynch (BAC), which following the worst M&A transaction in history, namely its purchase of Countrywide, has found out that one does not pay billions for hundreds of billions in contingent liabilities, which will manifest themselves in tens of billions in putback claims against the underreserved bank over time. But all that is now known, grudgingly, after being pointed out here back in 2010, and when all is said and done, BofA will be finished, with the contingent liability pool spun off in a special purpose entity which files for bankruptcy, while the equity remaining at the successor entity will be worth pennies on the dollar. The question is what are the catalysts that get the bank there. Luckily, yesterday the bank itself highlighted what the key driver to put events in motion may be, after it disclosed that should the bank be downgraded, which it will be as Moody's has warned, it would need to post up to $6.2 billion in collateral: an amount which would cripple the bank's liquidity, and send its stock plunging as visions of AIG resurface, and concerns about a toxic downward spiral emerge.
Bank of America Corp., the lender that has bought back debt to strengthen its balance sheet, said credit downgrades in a hypothetical scenario could trigger demands for about $6.2 billion in collateral.
A two-level downgrade of long-term senior debt ratings would have prompted the bank to post about $5.1 billion of collateral tied to derivatives contracts and other trading agreements as of March 31, the Charlotte, North Carolina-based firm said today in a regulatory filing. It would have had to post an additional $1.1 billion of collateral if trading partners opted to tear up contracts in a two-level cut.
Moody’s Investors Service, which is reviewing banks and securities firms with global capital markets operations, has said it’s considering downgrades of lenders including Bank of America, ranked second by assets in the U.S. While ratings cuts typically raise borrowing costs and force banks to increase collateral, analysts have said the change was expected.
Bank of America may be cut by one grade to Baa2, the second-lowest investment-grade rating, Moody’s said on Feb. 16.
Competitors such as New York-based Morgan Stanley may be cut as many as three levels, Moody’s said. The ratings company wrote that credit profiles of investment banks are weakening amid worsening government finances, economic uncertainty and higher funding costs.
Finally, it is not a question of whether BofA will be downgraded but when. The answer: soon. We hope readers are ready for what may be the long-anticipated waterfall moment.
True to form, Bank of America continues to perform just like any highly contagious virus contract on a wilde spree in Las Vegas. Only in reverse.