Thoughts on Bank of America: Thanks for vaporizing my capital
In an analyst note released yesterday, Jaime Peters of Morningstar said she felt the situation at BAC was deteriorating. BAC received less government funding than others and probably used a good chunk of it to absorb losses.
Peters feels that BAC, like Citi, may have to seek additional government assistance. Given how the government seems to be influencing management decisions at Citi, any assistance to BAC will come with strings. The end results may (or may not) be good for society in general, but will be poor for BAC's beleagured shareholders - like me.
BAC's stock price certainly seems to be consistent with worries about the government stepping in. My cost basis is about $48 a share (ouch). Fortunately, this is a small position (and it's getting quite a bit smaller).
I'm not sure what to do with my stake. I don't see the danger of outright financial distress yet. Given what happened to Citi, if BAC were rescued, the terms would be stringent, but not AIG-like. In addition, BAC probably has at least some regulatory goodwill after snapping up Countrywide and Merril - even if they overpaid. BAC also has a nationwide banking franchise and Merril's army of brokers. Those assets are hard to replace. If the bank survives without government aid, rewards for long-term shareholders could be substantial. The stock price is also a bit too depressed to sell right now.
I'm holding on with a queasy stomach on this one. Deep value investors might get attracted at some point, but I'm not one of those.