Monday, September 12, 2011

The carnage at Bank of America: What did Warren Buffett know and when did he know it? 

In the largest single corporate layoff announcement this year, after the close of the market this afternoon Bank of America announced that it will eliminate 30,000 jobs -- 10% of its work force -- on top of the 6,000 already, er, synergized this year. And other financial firms are doing the same, if with less flair. If you hate bankers and their big incomes, this is your opportunity for schadenfreude. (Of course, all those hateful bankers require a lot of arguably innocent support staff that will also lose their jobs, but every class war has its civilian casualties.)

The Bank of America announcement comes less than three weeks after the Oracle's much-ballyhooed investment in that beleaguered institution. So here is my question: Did Warren Buffett invest in Bank of America because he knew these dramatic cuts were in the offing when other investors didn't, or did Buffett push Bank of America to slash the staff after he put his money in? Because it is pretty impossible to believe that this decision is wholly independent of Buffett's involvement.

I am not a judger -- for all I know, BofA CEO Brian Moynihan's testicular fortitude is all that stands between America's largest bank and oblivion -- but I would think that neither scenario is going to enhance Buffett's rep as the Democrats' second favorite billionaire.


By Anonymous Anonymous, at Mon Sep 12, 06:43:00 PM:

Obamanomics just "saved" 270,000 BOA jobs! Well done!  

By Anonymous Ignoramus, at Mon Sep 12, 06:51:00 PM:

What follows echoes what Anon Attorney was saying on a prior thread. There's a reason that BAC trades at a huge discount to book value.

We have several big Zombie banks. Of these, BAC is the most brain dead. Many of its business lines are actuall quite good. The problems are (1) knuckleheaded dysfunctional HoldCo management, (2) unrealized mortgage losses and (3) legacy legal liability from the financial crisis.

#1 is a given.

For years the second most powerful person at BAC has been the head of HR. HR actually has a staff of people who follow senior execs around who then report back. It's like the old Soviet system that used shadow political officers. This practice goes back to Hugh McColl days at the original NCNB.

BAC has been built on acquisitions. Anyone near top management is a political survivor, not a "producer".

The largest bank in the USA shouldn't be HQ'd in Charlotte. NASCAR, maybe.

#2. Who knows how bad this is. Rumor is that a full mark-to-market of home equity loans alone would wipe out a big chunk of equity.

#3. This is hard to quantify. Brian the CEO keeps lying about the extent, in the hopes that it may come out on the low end. He may be lucky, or not.

Sad to say, but I see BAC as a metaphor for the USA.

So here's the timeline of what transpired over the course of less than a week:
-- Timmy has a private meeting with Brian.
-- Warren has a revelation while in his bathtub and decides to call Brian.
-- Warren invests in Brian.
-- Warren announces he'll host a big fundraiser for Barrack.  

By Blogger Chris, at Mon Sep 12, 06:54:00 PM:

BoA was considered by many to be a zombie bank in the dark days of 2009. With the dark clouds over Europe, it looks like we are up for season 2 of the walking dead. I am sure Buffett made his latest bet with friends in government telling him BoA is considered to big to fail. Some how I think Buffett stands to lose more than his reputation.  

By Anonymous Anonymous, at Mon Sep 12, 08:57:00 PM:

If there is any integrity to OCC and Fed inspections, the portfolio of mortgages in foreclosure or behind in payments has been reasonably marked to market. Cynical we may all be, and with plenty of justification no doubt, but let's just for arguments sake agree to stipulate that the portfolio is reasonably clean.

The mortgage portfolio is still a huge drag on the stock, despite that stipulation, because the future legal and regulatory liabilities associated with Countrywide are both huge and unknowable, until more time has past and all the varieties of litigation has matured a little bit. Big, unknown liabilities aren't good for stock prices, especially in a near bear market. Another big issue, and really the biggest issue, is the future of our economy. If the Democrats and their handmaidens in regulatory agencies keep destroying jobs, like today's little job destruction in Texas, then we can look forward to plenty more deterioration in the BAC mortgage portfolio, and in the stock.

Happily, as Dick Bove said today, BAC and the banking system as a whole have more capital than at any time since the Depression. So they can absorb some losses. Hopefully, the economy grows and we don't find out the limits of that capital base.  

By Anonymous Ignoramus, at Mon Sep 12, 10:07:00 PM:

"the portfolio of mortgages in foreclosure or behind in payments has been reasonably marked to market"

Typically, BAC doesn't own the first lien -- it's been securitized. So there's nothing to mark directly as to BAC. BAC does own legal liability that the first lien should never have happened. YMMV.

Foreclosures have been back-logged. Who knows what's rock bottom in some markets.

Mortgage servicing is an issue. BAC probably is losing "normal way", but may be making it up by raping the securitization trusts in various ways. If so, it may come back to bite them.

BAC, like many others, holds a lot of home equity loans that sit on top of these first liens.

Ergo ....

That's First Order Magnitude.

Second Order is worse, but more speculative as to outcome. The world has a potential PUT back to these banks on a lot of mortgages.

Third Order is that all these Shithead Banks multiplied the effect of the foregoing with derivatives. I've been out of the market so long that I don't have a good sense of this. That's because CDSs, etc -- to me at least -- never made economic sense, but served only as way to create more "game" and to fuck with capital and accounting rules.

ps Dick Bove is a fucking idiot.  

By Anonymous Ignoramus, at Tue Sep 13, 08:42:00 AM:

I take back the Dick Bove remark.

If what Bove is saying is that banks are trading at a big discount to book value, and so have potential upside, then he's got a point. That this discount exists because there's a lot of unrealized losses and there's a lack of transparency isn't a good thing. This is a drag on growth. Witness Japan.

All the subprime mortgages created during the bubble amount to a few hundred billion at most. There's something else that's been going on.  

By Blogger W.LindsayWheeler, at Tue Sep 13, 08:52:00 AM:

Yes, I would like to know what happened to the 63 TRILLION in Credit Default Swaps. It is all Junk bonds. The Icelandic banks failed. Ireland who bought much of these CDC's is flailing.

Somewhere, sometime, they, the Credit Default Swaps, have got to be reckoned with.

Where did 63 TRILLION go? Didn't Bank of America have its hands full of this stuff as Fannie, Freddie and Countrywide?  

By Anonymous Anonymous, at Tue Sep 13, 11:03:00 AM:

Anon Attorney here.

@ Ignoramus: man crush, huge. LOL.

BOA was insolvent in 2009. One need only look at the Case-Shiller index to deduce that if BOA was insolvent in 2009 it is still insolvent in 2011. The Countrywide acquisition was a disaster--severe exposure to mortgage losses. Merrill acquisition was just as bad. I suspect the public will never know the extent of losses or how much taxpayer money and Federal Reserve Juice gets pumped into this corpse to keep it walking.

BOA is an illustrative case in point of my thesis that the American economy cannot resume a growth trajectory because the excess capital generated by the economy is being sucked by the and pumped into these Zombie banks to keep them afloat.

And yes, the sequence of events of Buffet's investment is transparently corrupt. Every day I wake up, read the financial news, and feel like I am in Russia, circa 1995-2000.

I'm going long on guillotines if the American people ever wake up.  

By Blogger Georg Felis, at Tue Sep 13, 01:06:00 PM:

Disclaimer: I have no money invested in BofA. Which is easy, I have no money.

Opinion: Buffett investing in BofA is strictly a Reputation move. Buffett is considered (correctly or not) to be Connected, and any bank that has him as an investor will be (hopefully) considered Too Big To Fail, and will get a bailout in case of disaster. If this gives enough "Cred" to BofA for them to struggle along for another year or so, they may be able to grow out of this current hole and become solvent again. At which time they will start doing the stupid (censored) that got them into the hole in the first place.

In other news, BofA is also buying four-leaf clovers, rabbits feet, and horseshoes by the truckload...  

By Anonymous feeblemind, at Tue Sep 13, 01:31:00 PM:

Wall St Journal says the layoffs are caused by Dodd-Frank regulations.


By Anonymous Anonymous, at Tue Sep 13, 09:35:00 PM:

When I went to to the WSJ *article* referenced by feeblemind that purports to explain why Dodd-Frank caused BAC to announce 30,000 layoffs, I expected to see something sexy as the reason therefor, like "Limits on PropTrading by former Big Swinging Dicks crush profitability -- Bonuses down -- High-end NYC call-girls weep", or some such.

What I got was: "Dodd-Frank puts caps on debit card swipe fees" and an argument that this is the source of BAC's ills. The "article" itself leads with: "{BAC] didn't say this, but we will"

So, without any foundation, the WSJ *suggests* that if only BAC could better "hose" its customers for micro.pennies at the gas pump for debit card usage "all would be well".

And feeblemind "repeats" this by propagating it with the meme "Dodd-Frank causes BAC layoffs".

And we wonder why we're so collectively stupid.  

By Anonymous ignoramus, at Tue Sep 13, 09:38:00 PM:

The last post was mine. I'm never an Anon  

By Anonymous Anonymous, at Wed Sep 14, 10:31:00 AM:

Nah, Warren probably just knew that BoA stock was getting pummeled a lot more than it deserved. Besides, remember, he bought preferred stock rather than common. His investment is relatively safe. I pity all the ignorant investors out there who never stop to consider buying preferreds. They pay a much better dividend than commons right now, and they are higher in the pecking order if a company has to restructure its equity and debt.  

By Blogger Gary Rosen, at Thu Sep 15, 02:23:00 AM:

"they are higher in the pecking order if a company has to restructure its equity and debt."

... until BO steps in to give it all to the unions.  

By Anonymous Ignoramus, at Fri Sep 16, 11:03:00 AM:

As a folow-up, Bloomberg News now reports that BAC is considering putting Countrywide into bankruptcy as a way to avoid its legal liabilities. Article here

I doubt this will work. There's already one court ruling (on appeal) that BAC has successor liability for Countrywide. Also, the "optics" of this are awful. Banking depends on confidence.

I thought one of the main ideas of Dodd-Frank was to give the FDIC increased resolution powers to end Too Big Too Fail.

Developing ...  

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