A major controversy has erupted in the blogosphere over the value of Bank of America's balance sheet, and whether the bank will be forced to raise capital in the near future.
At the center of the debate is my colleague Henry Blodget, who touched off a maelstrom Tuesday with a blog that concluded Bank of America might need to raise up to $200 billion in capital.
"The trouble is that the market doesn't believe Bank of America's assets are worth anything close to what Bank of America says they are worth," Henry writes, citing the following items other observers think should or will be subtracted from the bank's $222 billion of book value:
- $15-$20 billion in Increased mortgage-litigation reserves. Zero Hedge thinks BOFA is understating the liability for mortgage litigation costs by this amount. See explanation here.
- Some percentage of $80 billion of "second mortgages." Yves Smith thinks these should probably be written down by 60%, or $48 billion. You can pick your own number.
- Some percentage of $47 billion in commercial real estate loans.* The "extend and pretend" game in commercial real-estate is even more pronounced than in residential real estate. So as Yves Smith observes, there's almost no chance those loans are actually worth $47 billion. (UPDATE: Our original post said BOFA's CRE exposure was $182 billion, which was a number cited by Yves Smith. BOFA said this number was off "by a factor of 4." Yves has since rechecked the filings and realized that she made a mistake. I apologize for relaying it.)
- A healthy percentage of $78 billion of "goodwill." Bank of America built itself by acquisition. "Goodwill" is what's left over when management overpays for something. As Yves Smith observes, Bank of America's former CEO Ken Lewis loved overpaying for things. He overpaid for Countrywide, for example, which has since been written off to zero, and Merrill Lynch, which he could have had for free by waiting a couple more days.
- Untold amounts of exposure to collapsing European banks and sovereign debt.* Yves Smith says Bank of America says its European exposure is $17 billion. (UPDATE: Bank of America issued a statement clarifying that its "sovereign" exposure--to the debt of PIIGS countries--is $1.7 billion. The overall European exposure is $17 billion. But the big concern here is not just sovereign exposure--debt of countries--but bank exposure. Along with the associated derivatives.) Really? Has the firm not written any credit default swaps protecting customers in the event that European banks or countries go belly up? Might the firm have to post some cash "collateral" to satisfy these contracts? That's what Lehman had to do, after all. And that's what made Lehman go from "having plenty of capital" to being broke overnight.
"The market also doesn't believe that Bank of America has reserved anywhere near enough to pay the costs of litigation surrounding its mortgage behavior during the housing boom," for which it has already paid $13 billion in settlements, Henry added.
Bank of America's response was quick and ruthless: "Mr. Blodget is making 'exaggerated and unwarranted claims' which is what the SEC stated publicly when he was permanently banned from the securities industry in 2003," the bank declared.
Shoot the Messenger
The bank took umbrage with Henry's figures on its exposure to sovereign debt and commercial real estate (which were corrected from as noted above) as well other conclusions and the motivations of some of his sources. "The mortgage analysis was provided by a hedge fund that has acknowledged it will benefit if our stock price declines," BofA said. (For the record, Henry is long Bank of America stock and thus has no incentive to drive the shares lower, as some critics contend.)
Some bank analysts, including Dick Bove and Meredith Whitney have come to Bank of America's defense. "There's no reason for the bank to have to out and raise capital whatsoever," Bove told Bloomberg TV.
Meanwhile, JPMorgan upgraded BofA stock to neutral from underweight, and Bank of America shares were rallying sharply midday Wednesday, albeit from depressed levels. Bank of America, meanwhile, dismissed a rumor that it was in talks to be acquired by JPMorgan.
On the other hand, several high profile bloggers and financial writers such as Barry Ritholtz, Chris Whalen, Yves Smith, Michael "Mish" Shedlock and Zero Hedge have entered the fray in support of Henry's critique.
As Henry and I discuss in the accompanying clip, the whole Blodget and the Bloggers vs. Bank of America debate may make for a good Twitter-spat, but obscures the much bigger issue: Nobody really knows what's one the bank's balance sheet and BofA didn't take the opportunity to offer more clarity in its spirited defense yesterday.
Meanwhile, Bank of America shares have fallen nearly 50% in the past month and the price of insurance against default has surged to record levels.
"I'm sorry if BOA thinks the market is stupid," Henry says. "We went through this in 2008; all the banks said 'we're perfectly capitalized, we're in great shape'; three months later they were revealed to be rotted to the core. The concern is that's what's going on here."
For the record, I reached out to BofA's representatives for comment and will update the story if and when they respond. We've also extended an open invitation to CEO Brian Moynihan to appear on The Daily Ticker and address these and related issues.