Ask anyone what the most immediate threats to the global financial system are, and the obvious answers would be the European sovereign-debt crisis and the off chance that the U.S. won’t raise its debt ceiling in time to avoid a default. Here’s one to add to the list: the frightening plunge in Bank of America Corp.’s stock price.
At $9.85 a share, down 26 percent this year, Bank of America finished yesterday with a market capitalization of $99.8 billion. That’s an astonishingly low 49 percent of the company’s $205.6 billion book value, or common shareholder equity, as of June 30. As far as the market is concerned, more than half of the company’s book value is bogus, due to overstated assets, understated liabilities, or some combination of the two.
That perception presents a dangerous situation for the world at large, not just the company’s direct stakeholders. The risk is that with the stock price this low, a further decline could feed on itself and spread contagion to other companies, regardless of the bank’s statement this week that it is “creating a fortress balance sheet.”
It isn’t only the company’s intangible assets, such as goodwill, that investors are discounting. (Goodwill is the ledger entry a company records when it pays a premium to buy another.) Consider Bank of America’s calculations of tangible common equity, a bare-bones capital measure showing its ability to absorb future losses. The company said it ended the second quarter with tangible common equity of $128.2 billion, or 5.87 percent of tangible assets.
That’s about $28 billion more than the Charlotte, North Carolina-based company’s market cap. Put another way, investors doubt Bank of America’s loan values and other numbers, too, not just its intangibles, the vast majority of which the company doesn’t count toward regulatory capital or tangible common equity anyway.
So here we have the largest U.S. bank by assets, fresh off an $8.8 billion quarterly loss, which was its biggest ever. And the people in charge of running it have a monstrous credibility gap, largely of their own making. Once again, we’re all on the hook.
As recently as late 2010, Bank of America still clung to the position that none of the $4.4 billion of goodwill from its 2008 purchase of Countrywide Financial Corp. had lost a dollar of value. Chief Executive Officer Brian Moynihan also was telling investors the bank would boost its penny-a-share quarterly dividend “as fast as we can” and that he didn’t “see anything that would stop us.” Both notions proved to be nonsense.
The goodwill from Countrywide, one of the most disastrous corporate acquisitions in U.S. history, now has been written off entirely, via impairment charges that were long overdue. And, thankfully, Bank of America’s regulators in March rejected the company’s dividend plans, in an outburst of common sense.
Last fall, Bank of America also was telling investors it probably would incur $4.4 billion of costs from repurchasing defective mortgages that were sold to investors, though it did say more were possible. Since then the company has recognized an additional $19.2 billion of such expenses, with no end in sight.
The crucial question today is whether Bank of America needs fresh capital to strengthen its balance sheet. Moynihan emphatically says it doesn’t, pointing to regulatory-capital measures that would have us believe it’s doing fine. The market is screaming otherwise, judging by the mammoth discount to book value. Then again, for all we know, the equity markets might not be receptive to a massive offering of new shares anyway, even if the bank’s executives were inclined to try for one.
We can only hope Bank of America’s regulators are tracking the market’s fears closely, and have contingency plans in place should matters get worse. Yet to believe Moynihan, there’s nary a worry from them. When asked by one analyst during the company’s earnings conference call this week whether there was any “pressure to raise capital from a regulatory side of things,” Moynihan replied, simply, “no.”
If that’s true, the banking regulators should share blame with Moynihan for the current mess. It would be impossible for any lender to have too much capital in the event that Europe’s debt problems, for example, morph into another global banking crisis. It’s also hard to believe Bank of America has enough capital now, given that the market doesn’t believe it.
There undoubtedly are plenty of brave investors eyeing Bank of America’s stock price who trust the numbers on the company’s books and see a buying opportunity. Perhaps they’ll even be proven right. We should hope so, for our own sakes. There’s more at stake here, however, than whether Bank of America’s shares are a “buy” or a “sell.”
The main thing the rest of us care about is the continuing menace this company and others like it pose to the financial system, knowing we never should have let ourselves be put in the position where a collapse in confidence at a single bank could wreak havoc on the world’s economy. Here we are again, though. Curse the geniuses who brought us this madness.
(Jonathan Weil is a Bloomberg View columnist. The opinions expressed are his own.)
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