Tough Love for Bank of America
Board: Bank of America
I was reading JP Morgan's 2010 annual report, letter to shareholders yesterday. Jamie Dimon is talking about capital levels and how much is enough. He mentions how JP Morgan went into the financial crisis a few years ago with a Tier 1 Common of 7%, and how with that level of equity, they were able to acquire both Bear Stearns and WaMu and simultaneously power through the crisis. Then he talks about how the BASEL III 7% Tier 1 Common standard is the equivalent of a 10% ratio under Basel I.
Currently BAC has a Tier 1 common of 8.65%, which is as high as it's ever been. If you think about this in relation to JPM, BAC already has more capital than JPM claims it needed during the crisis, and BAC is being forced to build another $40 or so billion of capital on top of this.
It also looks like BAC is being pressured to accelerate the growth of their levels where as once upon a time, it seemed regulators were okay with stretching out the capital builds over six years or more. BAC probably is thinking they won't be able to raise the dividend if they can't get levels up more quickly, and perhaps that's why BAC is now considering issuing shares at less than $7 to retire TruPS. I personally feel like if BAC can't secure some kind of a dividend increase in 2012, Moynihan may be looking for a new job... And I don't think Moynihan is doing a bad job, I think his strategy is right, but I think there's significant pressure from institutions to get a dividend that's more than one penny, and it doesn't help that Moynihan has done a poor job of communicating with shareholders over time.
All of the third paragraph here is simple speculation..
I say all of this though, because TMF Sandman stated a few days ago that BAC's current bargain-basement stock price is primarily due to lack of faith in its solvency,
I personally don't see how BAC could be even close to insolvent. Now, admittedly, I can easily be behind the curve because I gravitate towards monthly/quarterly statements from CEO's and CFO's for information rather than getting information from day to day headlines or minute to minute changes in Italian 10 year bond spreads. When Jamie Dimon says that 7% Tier 1 Common is plenty, and now banks are being forced to build nearly 50% more on top of that, I feel like banks are approaching a point of invincibility. When Jamie Dimon says that Italy is not insolvent, but simply faces a lack of liquidity and trust, I believe him.
It seems to me that the banks here, essentially all of them, but specifically BAC, JPM, BBT, STI, NYB (the ones I follow) are at the bottom of a very dark hole where no one believes them, no one trusts them, no one wants to own them, yet they are safer than they have ever been at any point in their histories.
Does anyone have any comments? Anyone actually agree with me or am I the lone idiot in the room?