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BAC = Big Accounting Chargeoffs

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January 24, 2011 – Comments (2) | RELATED TICKERS: BAC

Bank of America earnings last Friday wrapped up the big bank earnings reports.  BAC was the only one of the big four to report a loss for both the last quarter and 2010.  BAC would have posted gains except for goodwill impairment charges. 

Goodwill impairment? Who is Will, and if he's good, why is he impairing Bank of America's earnings?  In this article, I continued pulling the thread on banks with a quick look at BAC.

Bottom line?  BAC's valuation looks attractive, but it isn't trading at much, if any, discount to its peers.  And I think it has more risk from mortgage putbacks and continued write downs than the other big banks.  After all, they didn't buy Countrywide.  BAC might do just fine, but I think any of the other big four would be a better investment.

Sidebar:  The $2 billion Q4 impairment charge was in the Home Loans and Insurance segment.  The earnings report doesn't say, but a reasonable guess would be the charge is related to the 2008 Countrywide acquisition. Nearly all of the $3 billion settlement with Fannie and Freddie is related to Countrywide loans.  BAC acquired Countrywide about three years ago in a stock transaction then valued at about $4 billion.  If the speculation is correct, that $4 billion acquisition generated nearly $5 billion in charges in just one quarter.

Fool on!

Russ

2 Comments – Post Your Own

#1) On January 24, 2011 at 9:54 PM, webline (< 20) wrote:

I already own it and hope this isn't another decline like in Nov.  I did buy some at the low point then and bac has outperformed the s&p since then.  I just wish I had sold a week ago but it will come back and I think go toward 20 eventually.  Thanks for the update.

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#2) On January 25, 2011 at 2:45 AM, awallejr (79.57) wrote:

This was another bank I played and suggested others to play, stock and optionwise back in 2009.  I wouldn't touch it now. It was totally mismanaged under Ken Lewis, who took his golden parachute after destroying shareholder equity. 

Being in the real estate business, I can tell you how sloppy Countrywide was and how incompetent BAC still is.  A classic example is a result of the new financial regulations, banks are now on the hook if certain good faith closing cost estimates exceed actual charges.  BAC screws up more than any other bank I have dealt with. 

New construction or some foreclosure actions normally have the buyer pick up transfer costs (typically a seller expense). The underwriter doesn't bother to read the contract of sale and fails to list those transfer costs (which can add up to several thousands of dollars) as a buyer cost.  Come closing the bank is now obligated to reimburse the buyer for the inevitable difference.  No wonder this bank is still bleeding losses.

If you have a 10 year horizon, maybe, otherwise the reward isn't worth the risk in my opinion.

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