Bank of America

Traditionally we reserve the funny pages for Friday but for Dick Bove we will always make an exception. While his Buy call on Lehman days ahead of the firm's bankruptcy can never be toppled in the pantheon of financial humor, his recent Price Target track record vis-a-vis Bank of America stock is rapidly approaching Hall of Fame status. The chart below says it all. And for those confused, the "B" stands for Buy.

A few days ago when we demonstrated the most recent bond issuance by Bank of America in which the firm issued $2.5 billion in new bonds, we said "BAC is largely underreserved for a settlement of this size which means its Tier 1 capital ratio will likely be impacted due to a major outflow of cash." Obviously the implication was that a capital raise is imminent. And while we were not exactly expecting the bank to access the equity capital markets (immediately), we knew cash would have to come from somewhere. Sure enough, Bank of America just issued $2.5 billion in 5 year bonds. So just when does the equity raise come? Two questions: is this funding simply to replenish the cash to have a decent Tier 1 ratio, or is the bank merely preparing for a waterfall of litigation now that the seal has been broken?" Well, the reason why the bank's stock just tumbled to fresh multi-year lows, and just on top of John Paulson's cost basis is a report from Bloomberg's Hugh Son which confirms our worst fears about the bank: "Bank of America Corp. (BAC) may have to build its capital cushion by $50 billion and renege again on Chief Executive Officer Brian T. Moynihan’s pledge to raise the firm’s dividend as mortgage losses drain funds." Next up, after investors balk to buy bonds from the firm at preferential rates, is Bank of America coming to market with another equity raise in full confirmation that the emperor is indeed naked... and Moynihan is about to be sacked.

It was fun while it lasted. Next up: 1 to 10 reverse split? At least that way the bank will now only hit but triple John Paulson's $30 price target by the end of 2011. In the meantime, only $50 cents or so to go until BAC hits Paulson's cost basis.

Now that traditional alpha generation is long dead courtesy of central planning, and even levered beta no longer works as a strategy at least until such time as Benny and the Inkjets return with a whole printer cartridge full of goodies for the uberwealthy, and that old "sophisticated investor" go-to staple - insider trading - is no longer an option courtesy of the clamp down on "expert insider information leaking networks", what is a hedge fund to do to justify ridiculous terms such as 2 and 20 (or 3 and 45 in some soon to be Wall Street criminal folklore cases)? Simple: run, don't walk to Bank of America Merrill Lynch Countrywide and demand an immediate, if not sooner, hook up to the "Securities Lending GM Portal Locate System (SLGPLS)." Why the SLGPLS? Because it is the last remaining way to make money: isolate companies with large short interest and create a major covering spree. From the horse's mouth: "We are offering a brand-new technology for prime broker clients giving them the ability to do locates via the web. It is a user-friendly system that features instantaneous easy to borrow (ETB) locates and hard to borrows (HTBs) that are delivered to our securities lending desk personnel desktop. Additionally, clients have the ability to get color and email alerts on a select list of securities." Translated: BAC, seeing plunging PB revenues now that everyone is departing this bloated scam of a bail out with hundreds of billions in toxic RMBS, is offering the holiest of holies straight to the end user (for a price): all the names, that with just a little buying prod, would likely surge as shorts get spooked an cover en masse.

Yesterday, when sharing our latest thoughts and observations on the $8.5 billion Bank of America settlement we said, "One thing is certain: the final BAC settlement, if one even comes to fruition, will not be $8.5 billion." Once again: we may have been correct...

• NEW YORK INVESTIGATING $8.5 BLN BANK OF NEW YORK MORTGAGE DEAL
• NEW YORK ATTORNEY GENERAL SEEKS DATA ON BANK OF AMERICA ACCORD
• NEW YORK PROBE IS PART OF MORTGAGE SECURITIZATION INVESTIGATION
• NEW YORK SENDS LETTER TO GOLDMAN SACHS, BLACKROCK, ING, INVESCO

BAC stock not liking this latest development at all.

We haven't commented extensively on the recently announced Bank of America $8.5 billion RMBS "non-settlement" settlement because frankly, it is a total travesty, ripe with so many conflicts of interest, it has no chance in hell of being final, and will likely see numerous revisions before it is complete, in the process costing BAC many more billions in legal fees and charge offs. We also expected that it was only a matter of time before politicians swarmed like a flock of crows on this rotting carcass of a deal, which will only make the life of BAC worse (we did share our amazement that BofA's stock rose on the news). Sure enough, here comes the first Congressman to contest that the proposed settlement is not an "arm's length transaction." And while our opinion of politicians is well-known, Miller's conclusion is spot on: "it is important that the American people know that their government is acting on their behalf, not on behalf of powerful financial institutions. It is important that the public and Congress be able to assess whether the enterprises settled claims that would limit taxpayer losses on a tough, arm's length basis, rather than providing another indirect subsidy to the banking industry." Alas, nobody even remotely believes that the government represents anything but the interests of the banks. But a bold effort. One thing is certain: the final BAC settlement, if one even comes to fruition, will not be $8.5 billion.

When we first discussed Bank of America's "non-settlement" settlement, which has achieved nothing to remove the legal liability overhang from the firm, and merely makes it far more vulnerable to future litigation, we said: "BAC is largely underreserved for a settlement of this size which means its Tier 1 capital ratio will likely be impacted due to a major outflow of cash." Obviously the implication was that a capital raise is imminent. And while we were not exactly expecting the bank to access the equity capital markets (immediately), we knew cash would have to come from somewhere. Sure enough, Bank of America just issued $2.5 billion in 5 year bonds. So just when does the equity raise come? Two questions: is this funding simply to replenish the cash to have a decent Tier 1 ratio, or is the bank merely preparing for a waterfall of litigation now that the seal has been broken?

Bank of America just can't catch a break. First it gets caught in a trap of a "non-settlement" settlement which will only expose it to billions more in legal fees and other reserve fund increases, and now this. From the WSJ: "New York state Attorney General Eric Schneiderman has issued subpoenas seeking new depositions from the Charlotte, N.C., bank's chief executive and other current and former executives, according to people familiar with the situation. The subpoenas are a sign that Mr. Schneiderman, who became New York's top law-enforcement official this year, doesn't intend to drop the civil-fraud investigation of Bank of America begun more than a year ago under predecessor Andrew Cuomo." Perhaps it is about time Ken Lewis finally get some primetime TV exposure where he belongs: on the defendant's chair. "Mr. Lewis, who retired partly because of rancor over the Merrill deal, declined comment through his lawyer. Mr. Price's lawyer couldn't be reached to comment." Considering the complete disaster New York prosecutors have now completed with the DSK arrest, they will need a very high profile arrest and conviction to make up for it. Kenny boy sounds like just the type to fit the bill.

According to CNBC's Kate Kelly, Paulson has given up on his $30 price target on Bank of America by the end of 2011, and instead has dumped a "substantial stake" in its holdings of the bank's stock. And so, the claims that the hedge fund which has now become the butt of all due diligence jokes, is about to eat more crow, especially as other objective skeptics have long been warning that the bank is massively underreserved for what is about to become a legal fee freeforall following the just announced non-settlement with the BlackRock, Pimco, New York Fed group, and thus a ticking timebomb. But no, Paulson is in it, so it must be a Buy, Buy, Buy. Idiots. Incidentally the market is only slowly getting to realize that the "settlement" announced a few days ago is actually horrendous news for the bank (but confirms that monkey throwing feces move the marginal money) as we said first upon hearing the news.

Some curious language in the BAC settlement: “…In addition, because the settlement is with the Trustee on behalf of the Covered Trusts and releases rights under the governing agreements for the Covered Trusts, the settlement does not release investors’ securities law or fraud claims based upon disclosures made in connection with their decision to purchase, sell, or hold securities issued by the trusts. To date, various investors, including certain members of the Investor Group, are pursuing securities law or fraud claims related to one or more of the Covered Trusts. The Corporation is not able to determine whether any additional securities law or fraud claims will be made by investors in the Covered Trusts and, if made, to reasonably estimate the amount of losses, if any, with respect to such asserted or potential claims…” Uh, just how is that a settlement.

Bank of America may be about to part with more money than it has earned since 2008 in what will soon be the biggest financial settlement in the industry to date According to the WSJ, the Charlotte, NC-based bank is preparing to pay $8.5 billion to settle mortgage (mis)representation claims (aka the Mortgage putback issue) brought on by such high profile figures as BlackRock, Pimco, MetLife and, of course, the Federal Reserve, previously discussed on Zero Hedge. "A deal would end a nine-month fight with a group of 22 investors that hold more than $56 billion in mortgage-backed securities at the center of the dispute, including giant money manager BlackRock Inc., insurer MetLife Inc. and the Federal Reserve Bank of New York." Keep in mind that this is actually not good news for the bank, contrary to what the company's stock is doing after hours, as this still keeps the company exposed to a multitude of other rep and warranty litigation (which will now be largely underreserved), not to mention fraudclosure issues, which are totally unrelated, and which will plague the bank for years and years. Lastly, BAC is largley underreserved (see below) for a settlement of this size which means its Tier 1 capital ratio will likely be impacted due to a major outflow of cash.

Yesterday Zero Hedge pointed out that in addition to the 54,000 NFP number missing every single economist estimate, another very troubling statistic was that the BLS added some 206,000 "jobs" courtesy of its monthly birth/death adjustment: numbers which tend to be added on a monthly basis and then subtracted (especially during periods of economic contraction) in one annual benchmark revision which is largely ignored by everyone. In fact, as Peter Tchir pointed out, over the past 4 months, the NFP has added 752k jobs, of which 610k have been birth death jobs. B/D has added 271K jobs YTD in 2011, 510K in 2010, 585K in 2009, 825K in 2008, 883K in 2007, 1002K in 2006, etc, in in the last decade has never once subtracted from the full year tally, which would subsequently be revised lower. You get the picture. Well, yesterday, Bloomberg's Tom Keene sat down with Bank of America chief economist Ethan Harris, who just like every other Wall Street economist has been clueless on the direction of the economy in 2011, and asked him to explain just what the B/D model is, why it exists, and whether it represent data manipulation. The relevant segment begins just over 5 minutes into the clip below.

"The Justice Department is now contemplating whether to use the HUD audits as a basis for civil and criminal enforcement actions, the sources said. The False Claims Act allows the government to recover damages worth three times the actual harm plus additional penalties."

So much for the financial stock renaissance. David "Balls to the Wall" Tepper appears to have played out his QE card, and at least in the quarter ended March 31, decided to dump a substantial portion of his financial holdings, cutting his stake in Bank of America, Citi and Wells Fargo by 31.3%, 34.8% and 58.6% respectively. Tepper also appears to have lost his faith in GM, trimming his holdings from over a million shares to just 38,700 shares. On the additions side, Tepper did add 200,000 shares of Apple, his biggest new position, followed by a new $76 million Valero Energy position and a new $67 million MetLife holding. Based on this report we fail to see Tepper as showing up on CNBC for another Tepper rally iteration any time soon.

Zero Sum trading (in which the banks make money and taxpayers lose it) continues: following previous reports of trading perfection at both D-grade trading "powerhouse" Bank of Countrywide Lynch, and FRBNY-lite JP Morgan, Goldman craps the bad by being the only big bank so far to post a trading loss day in Q1 (even if it was for $0-25 million). This is unacceptable. As a result SLP latencies will be cut from 0 nanoseconds to -10, as Goldman will proceed to a Tachyon based trading infrastructure. In beta tests, such "frontrunning to the future" trading has already posted solid results: in addition to the humiliating trading day loss, GS had 32 days with profits of ">$100 million." And it still failed to impress... Now that HFT "girl around the block" Citi is no longer there for the taking by anyone with a growing liquidity rebate itch, this number will plunge.