Bank of America

An expanded, if conflicted (it comes from one of the pillars of modern-day Keynesianism: Bank of America) overview of the full European bailout by "Europe", which will now rely on the Fed to purchase EU debt and fund hundreds of billions in FX swaps. Can we now drop the charade that the EU is a viable structure, and stop pretending that Europe is anything but America's most recent geographic and monetary acquisition, or is it still too early?

A few days after the economists have had some time to digest the latest GDP numbers, the results are coming in, and they aren't pretty... And to Obama's chagrin they aren't going to get any better. The end of the stimulus "sugar high" is approaching, and most likely will culminate with the mid-term elections: the attached piece by BofA only solidifies this observation. Bank of America, after Goldman, is now the latest major bailed out bank to join the bandwagon decrying US fiscal insanity (oddly enough, few have much to say about the lunatics in charge of monetary matters). And that's just for the medium-term. Speaking of lunatics, for those curious about the long-term, who can summarize it better than the Oracle of Constitution Avenue himself: "Unfortunately, we cannot grow our way out of this problem. No credible forecast suggests that future rates of growth of the US economy will be sufficient to close these deficits without significant changes to our fiscal policies." - none other than B.S. Bernanke. Furthermore, this is the real problem, forget all about G-Pap reelection chances (none to negative): Greece is just a pleasant distraction compared to what would happen if the US can't roll $700 billion in short-term debt each month.

More divergence in opinions between our team and the reporting of the MSM! Failing to provision for loan losses is not the same as making money, is it???

Bank of America Merrill Lynch is looking forward to your participation in the first annual US Securitization Research Conference. The conference will feature panel discussions, presentations, and breakout sessions. This conference is by invitation only. Clients interested in attending the conference should contact their BAML representative.

Today, one quarter of the volume in the market is attributable to trading in Citi shares. This is simply a ridiculous statistic, and shows that the broader equity market, which merely trades based on the momentum of one stock, is and has been busted for about a year, when we first wrote about this phenomenon. Yet this insane churn is not enough for some: The ISE has just announced it is introducing a "Modified Maker/Taker Fee Schedule" for the three most actively traded options products on its exchange: QQQQ, C, and BAC. In essence, the ISE will provide even greater rebates to "liquidity providers" in these three stocks. The entire market will soon consists of exactly two companies (both of which are wards of the state) and one ETF, as liquidity finds the path of least resistance and greatest (evaporating) profit margins. This is what "liquidity" in the market has become. And all the while, the latest DMM, GETCO, which is certainly not frontrunning its prop positions based on massive NYSE flow traffic, is laughing all the way to the bank.

Just because it worked so well the first time around... We can't wait for the totally unexpected mortgage reduction program announced by Bank of America... in 2012.

Breaking from Diana Olick: Bank of America will start offering principal forgiveness programs for most at risk mortgages. The bank will target subprime, pay option, and prime 2 year ARMs, no 30 year loans. Loans must have principal balance at least 120% of the value of the home. As the bank has over 1 million delinquent loans. The hit to BofA's balance sheet will be over $3 billion as the firm will need to write down its existing mortgage book (probably still at 99%) to fair value. Surely this is dictated by the government's desire to add some investor-funded oomph to its taxpayer-funded HAMP disaster. And with that, debt forgiveness for all begins! Max out all your credit cards now because the bank, per Barney Frank, will forgive it all. Oh wait, you already have... Carry on then.

I have a strong feeling that if you dig deep enough into the BofA innards, you will find some stinky stuff. Hey, it's just a feelin'.

A day after the Lehman Repo 105 scandal erupted, one, just one bank stepped up and said it had never used Repo 105-type transactions. The bank was Goldman Sachs. Of course, Goldman's claim is completely useless without a context as the proper refusal would be for Goldman's counsel to say that the firm had not used anything "substantially similar" to a Repo 105. The difference between that and the verbatim phrasing is like night from day. But at least the soundbite chasers bought it, and the whole topic of Goldman and Repo 105 promptly died away. We'll let that be... for now. Yet one bank which not only has not provided voluntary disclosure, but which has now gotten itself bogged down in semantics, after recently speculation had emerged that BofA had used "substantially similar" devices to Repo 105. Today, BofA provided a response on the record as to whether it had (ab)used Repo 105s and it appears, that inasmuch the firm is unable to say no, the answer is a resounding yes.

One of the world's largest pension funds is suing Bank of America for more than $90m over its 2008 takeover of Merrill Lynch, claiming the banking giant failed to disclose the full extent of losses at the US investment bank. It's about time pensions got tough, but is it too little, too late?

Bloomberg Headlines:

• Bank of America Considers Request to Halt Foreclosures for HAMP                                         
• FORECLOSURE HALT PERTAINS ONLY TO BANK-CONTROLLED LOANS                                         
• BOFA'S DESOER CONSIDERS FORECLOSURE REQUEST, SPOKESMAN SAYS                                                
• BOFA'S DESOER MET WITH HOUSING ADVOCATES SEEKING HAMP REVIEWS                                                  
• BOFA CONSIDERS REQUEST TO SUSPEND SOME HOME FORECLOSURES

A review of Bank of America's 4th Quarter Call Reports reveals obvious shift of Delinquency Liability to Taxpayers.

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.