Bank of America

While everyone's attention is focused on just what unconventional policy Benny and the Inkjets will pull out of their collective sleeves to prevent another financial implosion (fear not, something will appear), it is time to redirect once again to the copper plated elephant in the room, China, which last week became the target of a "Hard Landing" vendetta by Bank of America's David Cui (noted here). Well, the China strategist just fired a follow up shot with "Four systematic risks & potential for financial market turmoil." So, for all those who need one more nail in the "China Bubble" coffin here we go, first textually... "we have sensed that the financial markets in China have become increasingly unstable and that the risk of a hard landing is rising. In this report we outline four systematic risks that we believe have the potential to cause financial market turmoil: 1) private lending (a current issue); 2) property price correction (potentially over the next three to twelve months); 3) bank bad debt write-off and eventual recapitalization (potentially over the next two to three years); and 4) “hot money” outflows (event driven and highly unpredictable). Many of these risks are intertwined which is why we refer them as systematic risks, i.e. difficult to mitigate via diversification. As a result, we suggest investors remain defensive in their portfolio construction in the medium to long term (although we recognize that some short term tactical bounces in the market are possible after the recent sharp sell-off)." And, more importantly, visually...

As of milliseconds ago, one share of Bank of America stock is now $5.99, a level it has not seen since the apocalypse back in March 2009, and upon penetrating it, a huge volume surge followed as an avalanche of sell orders were activated. However, we are confident this will be temporary. According to largely amusing rumors, Bank of America will follow through with its expropriation procedure and withdraw $5 from longs' brokerage accounts for each share they hold, effectively doubling the market cap in the process. So you see: there is nothing to worry about. Warren: resume your bath, both literal and metaphorical.

When we reported that Bank of America will be the first bank to institute debit card fees we made the following less than insightful observation: "The problem is that the bulk of depositor clients will simply walk away from Bank of America (which had $1,038 billion in deposits as of June 30), and any other institutions that piggy back on this, and from a game theory perspective, everyone has to do it, or nobody will do it." Well, Citigroup, which had no other choice, has just decided to follow in BofA's footsteps, which i) proves there is indeed a collusive move of desperation by the bank cartel, which in a normal country would see at least a statement from Eric Rip Van Holder, and ii) our thesis about America's impatience with petty theft - they are more than ok with grand scale larson such as that by the Fed via shadow inflation and currency devaluation, but when it comes to paying up an additional $5/month, well, just look at Netflix, which instituted a $6/month price hike two months ago... and is now fighting for survival. As for the exemption requirements, they will likely be the same as Bank of Countrywide Lynch's: either have a mortgage with the TBTF behemoth, or have $20k in a deposit account - both which will likely not be much of a help to 90%+ of the bank clients. The biggest problem is that suddenly at risk are $1.9 trillion in deposits - $1 trillion at BofA, $866 billion at Citi. While the financial crisis did little to dent the banks' deposit buffer, it will be highly ironic if it is an act of the banks themselves that begins the great bank run that resets it all...

Anyone exiting the third quarter with a Bank of America (or Wells, or JPMorgan, or Citi) short on their books will be delighted to learn that the "other" mortgage fraud scandal, not the putback litigation which is sure to cost Bank of America billions in incremental legal fees now that that particular settlement appears to be challenged and banks even across the Atlantic are joining in the legal free for all, but the "Linda Green" robosigning affair, which various conflicted attorneys general had held a tenuous grasp over with a settlement in process, has just blown out wide into the open once again, after California joined New York AG Schneiderman in pulling out of the talks, and leaving Iowa Atty. Gen. Tom Miller with a completely lost cause. We expect all other states to promptly follow New York and California's examples. The net impact is quite adverse for all mortgage lenders, as this development will merely snarl the traditional foreclosure process for even longer, and while beneficial to borrowers, it will put even less cash into the depleted coffers of the banks that so desperately need it. Since few if any will actively pursue distressed, or any, housing sales, it will not only hinder further balance sheet repair of the banking sector, but will keep a lid on any potential housing market improvement, which as BCG indicated a few days ago, is the most critical missing link to any economic recovery. Without it the hands of the Fed chairman are  tied even more, and leave him (and the middle class) with just one, nuclear as it may be, option.

When all is said and done, Bank of America will have no choice but to charge its 6 to 8 remaining clients about one million dollars each time an ATM transaction is executed because the bank will be so deep in mortgage putback litigation it will have a negative market cap. The latest news for the bank is about the worst possible kind: the wave of lawsuits filed against the Countrywide toxic mortgage receptacle has just jumped across the Atlantic, and after the Norwegian sovereign wealth fund recently started proceedings, the real threat, German banks, have just realized that Bank of America is nothing but a legal liability piggy bank and have sued Moynihan's house that taxpayers built. Furthermore, since it is precisely purchases of toxic MBS and RMBS from BAC and other banks that caused the collapse of the Landesbanken system, with Germany going on the offensive and now trying to recoup as much money as they can, look for gray market putback estimates to soar by another $20-40 billion, which will result in BAC selling the other half of its stake in the Chinese Construction Bank any minute, especially with Chinese banks starting to tumble like dominoes on Chinese slow down concerns.

Just when we thought we had seen every imaginable form of stupidity out of Bank of America, they go ahead and stun us all over again. The latest shock is that starting next year, the repository of hundreds of billions in underreserved (apparently the SEC finally figured out what was obvious to Zero Hedge readers since October 2010) toxic Countrywide mortgages, instead of shoring up capital, will do the opposite and start charging anyone with a debit card $5 a month fee for said card usage. Needless to say, this is obviously a collusive attempt by all the big banks, who are so desperate to generate some revenue (with the 2s10s flatter than at any time in the past 2.5 years) they are willing to drive away millions of paying customers. The problem is that the bulk of depositor clients will simply walk away from Bank of America (which had $1,038 billion in deposits as of June 30), and any other institutions that piggy back on this (and from a game theory perspective, everyone has to do it, or nobody will do it), and instead pull cash out of any and all checking and time deposit account forms. As a result, the key buffer that big banks have had during the entire financial crisis, cash from deposits, is about to disappear. This comes at a time when every US bank is fighting tooth and nail against Basel III implementation which forces banks to have more not less tangible capital (read cash, up to and including deposit cash). Alas, doomed for failure such idiocy can only come out of the US banking system which should have long been insolvent and replaced, but instead the Fed's policy of intercontinental Moral Hazard continues to encourage such "survival of the anti-fittest" decisions with pride. It goes without saying that we urge any and all of our 5 million monthly readers to pull any funds they may have from Bank of America in retaliation for this insanity.

Earlier today Bank of America released a presentation and a conference call in which the firm's head of China equity strategy David Cui spoke about the dreaded "China Hard Landing" or the event that would kill all decoupling dreams for ever and ever, and probably lead to a world depression. It seems that the latest down move in the market is being partially attributed to just this notification finally making the rounds as can be seen in the note below: "BofAML’s David Cui is the Markets’ #1 rated China Strategist according to the 2011 Institutional Investor All-China Survey. While he is not responsible for our China GDP forecast, he sees significant Chinese specific financial market risks that could trigger lower than expected Chinese growth. He sees that those financial market risks as having increased considerably. He will expand on this on the call, but he sees these financial stresses as having a very high probability of triggering lower than expected growth. That lower growth could well be sub 7%, and therefore by Chinese market standards would be termed a “hard landing”, clearly a HUGE issue for all global markets." Granted this is not news to those who have been following the Chinese situation (as fringe blogs have been for over a year), but the market does tend to have a habit of being about 12-18 months behind the curve. Here is what Bank of America had to say...

Yesterday's downgrade of BAC was potentially problematic for credit markets.  I am less concerned about the holding company downgrade.  Downgrading the bank to A2 from Aa3 could become problematic.  That is the entity most derivative counterparties will face.  A2 is still fine, but I suspect many counterparties will be having meetings over the next few days to discuss how comfortable they are facing BAC as a derivative counterparty.  It might be wrong, and unnecessary, but it is something that will be occurring.  BAC should be doing everything in their power to address this potential risk immediately. The risk of ratings downgrades to a bank is twofold.  On a basic level, it may reduce the flows they see as counterparties prefer to trade with higher rated entities for their derivative trades.  That is manageable.  The bigger, and far more problematic issue, will be if firms cut their lines to that bank.  This would cause banks to unwind or assign existing trades, or to buy protection on the downgraded banks to "hedge their hedge".  Protection buying would drive their spread higher (if this was all exchange traded, it wouldn't be an issue).  Unwinds could force the bank to raise some cash.  Most hedge funds will have one way collateral agreements with banks, so that on any positive mark to market, they are posting collateral to the bank, which the bank can typically use "rehypothecate".  Hedge funds will unwind or assign profitable trades, which will force the bank to return collateral to the hedge fund.  It is a subtle, but painful, way for a bank to experience a run.  It happened with Bear and with Lehman. 

Time for another bath. This time metaphorical. And based on Moody's downgrade methodology, a Citi downgrade is imminent. "The downgrades result from a decrease in the probability that the US government would support the bank, if needed. Moody's believes that the government is likely to continue to provide some level of support to systemically important financial institutions. However, it is also more likely now than during the financial crisis to allow a large bank to fail should it become financially troubled, as the risks of contagion become less acute. Moody's is therefore lowering the amount of support it incorporates into Bank of America's ratings to levels reflected prior to the crisis."

When it comes to playing the endspiel for Bank of America, there are two binary outcomes: A) either the stock goes to zero in a slow, painful bleed, accompanied by periodic mega squeezes on headlines such as Buffett taking another bath; or B) the stock surges following some substantial government bail out and a quick and painless resolution of the mortgage putback litigation, the robosigning debacle, and somehow the bank finds a way to make money in an environment in which the 2s10s is about to tumble to record lows following the "Torque." As is well known, our personal belief is that all signs point to A) however with limited upside (one can only double their money by shorting) and a constant threat of short squeezes (hence unlimited downside), especially with the stock as depressed as it is and in this massively rigged and centrally planned market, puts a perpetual damper for those who wish to short the name to death. Which brings up an interest tangent: is there a way to profit from the collapse in Bank of America in a mirror image situation, i.e., with unlimited upside and limited downside? The answer is yes, and it very well may be in the form of MBIA, where as we indicate below, the upside may not only unlimited semantically, but practically as well, courtesy of shades of that most epic moves of 2008: that of the short squeeze in Volkswagen stock. Is there a chance that MBIA, with its 27 million short interest, and its 98% long institutional ownership could be the next Volkswagen? Perhaps. Read on.

We hardly needed confirmation that a) Bank of America is a den of criminals and thieves, that b) its toxic $1.3 trillion mortgage division, better known as Countrywide, is an even scarier and more putrid den of criminals and thieves, and that c) it retaliates against anyone who dares to remind the bank that there are such things as laws, and the aforementioned criminals and thieves actually have to follow these. Yet this is precisely what we just got after the Department of Labor said that it must pay $930,000 to an employee who led internal probes of abuses at its Countrywide Financial unit and was fired in violation of whistleblower protections.  Bloomberg reports "the employee, who also must be reinstated, had claimed that people who tried to report fraud to Countrywide’s employee- relations department suffered persistent retaliation, the agency said today in a statement. He was fired after Charlotte, North Carolina-based Bank of America’s 2008 purchase of Countrywide, according to the statement." So is it possible that the general public can now get the documentation that said whistleblower was fired for attempting to bring to his retaliating superiors' attention? And just how damaging will this development be to a bank which is already embroiled in litigation with virtually every single entity that has every transacted in mortgages both in America, and now abroad?

While two weeks ago the notable feature in the NYSE short interest update was that it had grown by a whopping 1 billion shares, or the most in over two years, this week's highlighted feature is that in the second half of August evil "speculators" did not relent in their negative bias, and brought the total NYSE Group short interest to a two year high or 14.9 billion shares, a 484 million share increase from the prior week, and the highest since July 2009 when the market still was unaware that central planning was the name of the game, and being short actually meant taking on the Chief Printing Officer head on (and fewer still realized that being long gold was the only effective way to "fight the Fed"). And just like last week when we speculated that we can "expect some even more furious short covering sprees to send the S&P much higher on an intraday basis" courtesy of this massive short interest overhang (which will without doubt be used by stock custodians to create a rally if and when needed, just like back in March of 2009, by making recalling shorts in every name), the probability of a massive "face off" rally grows as more and more join the ranks of those believing that the US capital market still plays by the rules. Newsflash: it does not. And anyone trading stocks, on either the long or short side, is guaranteed to lose.

The irony could.not.possibly.be.any.damn.funnier; Just as Sgt. Obama had the not so lonely unemployed club band huddled around him to tell America to "PASS THIS BILL", literally that very minute Bank of America released a statement it is sacking 30,000. Because Banana republic is so 2010, we are now officially an Onion republic.