Op-Ed: Bank of America's War of Independence-Minyanville

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Op-Ed: Bank of America's War of Independence

Minyanville Staff Feb 25, 2009 9:35 am

Op-Ed: Bank of America's War of Independence


		Nationalization wholly unnecessary.

Editor's Note: As an emerging-markets banking analyst, James Kostohryz has firsthand experience of banking collapses and their subsequent resolutions in Mexico, Argentina and Southeast Asia. Since leaving his position as Head of International Investments at Brazil's Banco Pactual in 2000, James has worked as an independent trader and investor.

I estimate that the pro forma combined market capitalization of the companies that now constitute Bank of America (BAC) -- Bank of America, Merrill Lynch, Countrywide Financial, et al. -- was once in excess of $372 billion. At last Friday’s closing price, the market capitalization of the combined entity was barely north of $24 billion - an incredible $348 billion has been wiped away with breathtaking speed.

As if that weren't enough, various commentators are saying that Bank of America is worthless and needs to be nationalized. But are they right?

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First, let’s take a look at its pro-forma balance sheet.

Click to enlarge

Bank of America currently has tangible common shareholder equity (or TCE) of about $67.5 billion. However, a reasonable estimate of the “hold-to-maturity” (or HTM) value of the losses the bank may sustain over the next few years would be about -$330.3 billion. Thus, if the bank were forced to immediately “mark” these HTM losses, it would have a tangible book value of -$263.1 billion.

The fact that it has negative tangible equity on a mark-to-HTM basis has done a great deal to spark nationalization fears.

As I explained in Are US Banks Worthless?, book value and intrinsic value are very different things. As long as Bank of America is allowed to carry its assets at acquisition cost and charge off its losses over time, the bank can organically generate enough value to pay for its losses, and still have a substantial amount of value for common shareholders. In other words, despite currently being $263 billion in the hole, Bank of America still has a positive NPV due to its ability to generate positive cash flows over time.

Click to enlarge

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tags:

NATIONALIZATION, HTM, NPV

Comments (23)

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Mr Bacan

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02-25-2009, 8:12 pm
"There are some risks to this analysis. First, it's assumed that, unlike Citibank (C), Bank of America doesn't have significant off-balance-sheet exposure that isn't reflected in its financial statements. Second, while the los Read More

Michael Eiseman

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02-25-2009, 10:54 pm
I think you are missing the basic argument that I and Mr. Bacan are making is that this leaves ALL market participants with less sense of TRUST. Markets are about psychology not fundamentals, or perhaps i should say that psychology is the primary fu Read More

Watson Robert

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02-26-2009, 1:19 am
Changing the rules of the game during a match is not the same as changing them between matches when the change is not particularly contentious. Read More

Realist Theorist

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02-26-2009, 3:45 am
>> 6. I believe that one aspect of FAS 157 should be preserved in that investors >> should be shown in a trasnparent fashion how the market is valuing assets at >> any given point in time. However, this should not be t Read More

Ricardo Guimaraes

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02-26-2009, 9:39 am
In Relation to this and the "Are US Banks Worthless" by James Kostohryz. Finally for a change Minyanville presents a reasonable wellâ��founded series of articles that don't appeal to almanac psychology or " Read More


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