Bank of America

After it was disclosed that Bank of America's firesale of its China Construction Bank is not going as well as expected, Moynihan's company, which was trounced by the market in the past week, continues to shed assets, this time offloading its $8.6 billion Canadian credit card portfolio to TD Bank for an unknown amount, a deal about which all BAC said was that the "transaction is expected to have a positive impact on the company's Tier 1 common and tangible common equity and the respective ratios." So it may also have a negative impact? That's encouraging. This news follows earlier disclosure that BAC has sold its UK and Ireland credit card business. Unfortunately for BAC shareholders, as long as the CFC bad bank is not nationalized by the Fed (sending its tracking CDS to parity with US default risk) such incremental asset sales will continue. Which also means that as BAC retains the non-performing assets, it is forced to sell its cash-generating trophies. At what point will there be nothing left of BAC but a husk that promises to everyone that going forward its Tier 1 ratio will be over 6% for real this time. And how long until the next Reps and Warranties lawsuit against BAC's mortgage handling practices?

A day after the US downgrade to AA+, Warren Buffett (who elsewhere continues his op-ed uber-campaign in hypocrisy by writing in the NYT that the government should "Stop Coddling the Super-Rich") said that in his book the US is AAAA. Amusingly, hours later S&P downgraded Berkshire to pari with the US. Judging by the record near surge in volatility in the ensuing days, the market was not too convinced with the octogenarian of Omaha's latest orations. What it was more convinced by, judging by market results, was the fact that Bank of America upgraded something totally different to an AAAA rating: gold, with a $2000 12 month target. To wit: "High commodity prices have now created a terms-of-trade shock for importers, feeding into current accounts, the financial sector and, ultimately, sovereign debt. How will these imbalances unwind? Physical gold is the ultimate collateral because it has no credit risk, so EM Central Banks have been diversifying their foreign exchange reserves into gold and other non-dollar, non-euro assets in recent quarters. Looking ahead, the deterioration in credit quality in Europe and the US coupled with an increased probability of QE3 means these pressures will continue. As a result, we revise our 12-month gold target to $2000/oz." Basically everything that Zero Hedge has been saying for about two and a half years now. Naturally, this coming from Bank of America, should set of contrarian call alarm bells everywhere. Regardless, here is BofA's Michael Widmer explaining his call, as well as the full upgrade report from BAC, which lately has far, far greater problems than getting its commodities call right or wrong.

...35 points wider: the highest since April 6, 2009. But fear not - credit has a reputation of being always wrong, while equities (especially short covering squeezes) are always right.

Bank of America is doing all it can to delay the inevitable equity issuance. Reuters has just broken the news that the bank is in active negotiations with Kuwait and Qatar sovereign wealth funds to sell its $17 billion China Construction Bank stake. There are several problems with this approach: first, the petrodollar sovereign wealth funds just lost over 20% of their AUM courtesy of the global equity rout and of the plunge in oil by more than 20% in less than 2 weeks; Second: everyone recalls what happened to Alwaleed when he bought his "Blue Light" citi stake; third: if BAC does indeed sell its CCB stake, it will leave it with zero disposable assets and will have no choice but to approach the equity market. Fourth, the fact that it needs this cash is validation of all the rumors that the bank's capitalization may be urgently strapped very soon, and that today's Berkowitz call was nothing but lies (in typical BAC style); last, since the final cash need when all is said and done, when all the litigation is over and when the NY AG is done with the bank, BAC will need far, far more cash than $17 billion. Which is why any BAC bounce in the AH session should be viewed very skeptically.

Ahead of today's Bank of America conference call organized by Fairholme's Bruce Berkowitz which has one purpose only: to rescue his losing investment in Bank of America, which is down almost 30% in the past week, below, courtesy of Manal Mehta, we present 6 prepared questions which we are confident will all get their due attention by Mr. Berkowitz because unless these core questions, which go to the heart of all investors fears about Bank of America, are not answered, and instead nothing but fluff is discussed, the whole exercise will lead to an even greater panic in Bank of America stock. And what would be more ironic than another 20% drop in the BAC stock during this call. Also, in addition to the questions below, we post the following, based on an analysis by Compass Point Research & Trading, which matches an analysis conducted independently by Zero Hedge, and according to which BofA could be forced to repurchase between $28.4 and $62.2 billion, or between $10.6 and $44.4 billion above the bank's current reserves, which would immediately impair the firm's Tier 1 Capital, trimming it by more than 50%, and forcing the company to immediately issue an equity follow on, which will likely lead to a stock price also about 50% lower.

BAC default risk at 265-270 bps as of this morning. About 30 tighter from yesterday's epic rout which saw the final bid/asl around 290/310, or well over 100 wider on the day. The longer BAC keeps mum, the worse this will get, and we expect the bleed wider to resume shortly, slowly at first, then very fast if no curve steepening QE3 Operation Twist is announced.

Following today's apocalyptic trading in Bank of America, David Faber disclosed that one of the biggest cheerleaders of the increasingly doomed bank, David "Balls to the Wall" Tepper, had cut his entire stake in BAC and Wells Fargo (despite presenting the most laudatory powerpoint back at the 2010 Ira Sohn conference which predicted BAC going to $27... no comment). That's great, however, as we disclosed the other stock that is currently causing Paulson to scramble and to extract "value" out of every non MTM 2nd lien currently held by the fund, is none other than Citigroup which tumbled just a little less than BAC, closing down 17%. The issue is that as per the just released Appaloosa 13F, Citi is the top stock held by the hedge fund currently... Although probably not after today. Which is surprising because if Tepper expected Bernanke to announce QE3 tomorrow, he would pull more of his on screen antics and instead of dumping his financial holdings, he would be adding. Then again as the chart below demonstrates, Tepper is a guy who is happy to buy high and sell low, if in the meantime he can take advantage of the Fed's generosity with taxpayer capital to make billions in his Christmas bonus. Anyway, while Tepper may or may not have been skewered on his top position today, below is the complete summary of all position changes between Q1 and Q2.

With Bank of America getting taken to the woodshed, we can only hope that Paulson managed to sell all of his stock in the name, or otherwise just like Bruce Berkowitz is organizing a call to defend Bank of America on Wednesday, Bank of America would have to organize a call today to protect JP from his LPs. Alas, Bank of America is just the start of Paulson's problems. For a just as big problem we shift our attention to the next worst bank in America, Citigroup, which as the excerpt below demonstrates, was a bragging point in the firm's January 2011 letter. Alas, there is little to brag about these days. Which is why we wish to caution investors to be vary careful with liquidation-like selloffs in gold. Should D-Day strike at Paulson, the firm's multi-billion GLD "gold share class" will likely have to be sold very fast to preserve liquidity. When that happens we may see a 20-30% correction in gold in one day. This is just a theoretical warning, and we hope to have some sense of when, if at all, it would take place. But just something to keep in the backs of your heads...

With Bank of America investors finally realizing it is game over for the company as a going concern, at this point there are just two options for Brian Moynihan: the spin off of CFC as a bad bank, backstopped by the Fed, or, well, Chapter 11, which for a bank is essentially liquidation (and with CDS trading up 50 bps to 260 a bankruptcy seems increasingly inevitable). It also means that another TARP is on the way. And once America realizes that another several trillion have to be put into its insolvent banking sector, it will get quite violent. The biggest irony: it is AIG which takes down the financial system for the second time after its lawsuit against BAC filed last night kills Bank of America.

Everyone who may have just heard the unprecedented rant by Jim Cramer bashing Bank of America, now that it is at its multi-year lows, may be a little confused. After all it was just on January 6, 2011, when Bank of America was at its multi year highs, that he released the following "report" titled "10 Reasons to Buy Bank of America." We all enjoy the laugh, but we ask Comcast? Is this is the comedian that CNBC wishes to destroy any remaining viewership it has and commit ratings suicide?

Last week, when discussing the ongoing collapse in the house of cards that Ken Lewis built and which Brian Moynihan is helping bring down, we asked readers if they "Got Bank Of America CDS?" both in general, and in the aftermath of the disclosure that "New York AG Says BAC's $8.5 Billion Settlement Is "Unfair and Misleading"." We hope the answer was yes for most, as BAC CDS just jumped to the highest since June 2009, hitting 235 bps after exploding by almost 10% overnight. And with the stock now trading with a $7 handle, we are very much concerned TARP 2 is coming soon, only this time BAC will be formally split up, for no other reason than to spin Countrywide off and most  likely see it end up with Fed funding. Wherein lies the rub: what will end up happening when BAC loses its TBTF status is that CDS referencing CFC will grind tighter to a spread pari with the US, while those referencing BAC (and/or MER) will initially tighten only to surge on the realization that BAC will have lost its government backstopped status (courtesy of the "conservatorship" of its most atrocious division).

When we last looked at the Bank of America joke of a "non-settlement" settlement for a paltry $8.5 billion when $424 billion in total misrepresented (530 in total) Countrywide mortgage trusts were at stake, we said, "we are confident that the legal process will prevail and that the presiding judge on this case, and if not him then certainly the New York District Attorney, will step up and demand a thorough reevaluation of the settlement process." We were, oddly enough, correct. According to a just released filing from the New York Attorney General Eric Schneiderman, Bank of America (and Bank of New York Mellon, one of the tri-party repo banks mind you), violated New York state law and "misled investors." In a knock out punch to Bank of America (and Brian Lin who was profiled here previously), the  bank allegedly violated the New York’s Martin Act and misled investors about its conduct tied to mortgage securitization as Bloomberg summarizes. Schneiderman said he has "potential claims" against Bank of America Corp. and its Countrywide Financial unit. As Zero Hedge alleged all along, "The proposed cash payment is far less than the massive losses investors have faced and will continue to face." What does that mean? Well, as the countersuit by the FHLB indicated (which we are certain will be the basis for the NY AG claims), the likely final settlement is probably going to be about $22 to $27.5 billion. Which also means that the bank's Tier 1  capital is about to be discounted by about 25% lower. Which, lastly, means that the stock is about to plunge due to a massive litigation reserve shortfall which will have to be plugged with, surprise, a new equity capital raise. Which brings us to our original question: got CDS (which closed around 200 bps today, roughly 25 bps wider - it is going much wider tomorrow, especially if the expected Sarkozy-Merkel-Zapatero meeting achieves absolutely nothing)? Cause this baby is going down...and it is probably about to be broken up into good BAC and bad bank, consisting almost entirely of all legacy Countrywide operations. Said otherwise, it could well be time for a CFC-BAC CDS pair trade.

For the sake of John Paulson, we sure hope he sold his BAC holdings which are now well below his cost basis. For the sake of everyone else, we also hope they sold their BAC stakes, if any. That said, we can't wait for the Fairholme Capital's conference call with Bank of America's Brian Moynihan on August 10 from 1 to 2:30 pm in which they explain to the market why it is oh so wrong on the most insolvent bank in America.

As had been rumored over the past few weeks, the WSJ reports that Bank of America is actively pursuing a deal in which it would get "broad release" from legal claims against the lender (which if provisioned properly and in their full amount will destroy the bank) in exchange for cutting the amounts owed by borrowers. The bank is "discussing the proposal with state and federal officials who are prodding the country's biggest banks toward a multibillion-dollar deal to atone for foreclosure errors…As the discussions dragged on past the mid-June target set by U.S. officials, Bank of America began pressing officials for a speedy resolution, and it put forward its principal reduction proposal in one-on-one talks with state and federal officials. Meanwhile, negotiations continue with the banks as a group…Bank of America has told officials it wants protection against future litigation relating to mortgage servicing, said people familiar with the situation. In exchange it is willing to agree to a program in which troubled borrowers would have to prove financial distress to qualify for a writedown of the principal owed on their mortgage…The principal amount would have to be $1 million or less in certain geographic areas, one of these people said, and a reduction would apply to the bank's own mortgages and those its services for private investors…The more modifications the bank agrees to, the less it will pay in cash as part of an eventual settlement, one of these people said." So in summary, in order to protect itself from being destroyed in the courts, Bank of America is happy to spread the Bernanke Put love on all of its deadbeat clients, in the process further exacerbating the class warfare that is emerging to be the most successful legacy of the Obama administration.

Just out from the office of David Grais of Grais & Ellsworth: "We also conferred, per the Court’s request, with the office of Attorney General of the State of New York. The Attorney General’s office has asked us to inform the Court that it is completing its analysis."