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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?

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

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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.

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No positions in stocks mentioned.

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