Bank of America Corp (BAC)

When panic struck Wall Street on September 28, 2008 because The House of Representatives
defeated a $700 billion emergency rescue package (ignoring urgent pleas from President Bush)
many feared a complete meltdown of the nation’s banking system. The media, as usual,
perpetuated the problem, and has done a fantastic job continuing to frighten the American people
into a mass exodus from financial stocks. Granted, some fear was founded as no less than fifteen
banks have failed since then, starting with Washington Mutual and most recently 1st Centennial
Bank.

On September 26, 2009, Bank of America closed at $35.88 per share. As I type this, it trades at
$5.77 per share. Why? Well, part of the reason, is indeed, real fear that The House of
Representatives will get it wrong again, and newly elected President Obama’s “hopes” for a
successful passage of an economic aid stimulus bill will leave him quite disillusioned. This sort of
general fear, again exasperated by the media, has helped create a serious disconnect between Bank
of America’s book of business and current market valuations thereof. However, one real reason for
the price decline is Bank of America’s acquisition of Merrill Lynch & Co. Inc. on New Year’s
Day.

While the acquisition made Bank of America the largest bank in the country, with about $2.7
trillion in assets, it was later revealed that John Thain, the CEO of Merrill Lynch, had for all
intents and purposes bamboozled BOA head Ken Lewis and covered up Merrill’s $15.31 billion
fourth quarter loss. Thain was subsequently fired during a fifteen minute meeting between the two,
and if BOA shareholders have their way, Lewis is sure to follow.

So, that is the situation with Bank of America now. Many fearful investors believe the banking
giant is heading the way of Washington Mutual and 1st Centennial. And because of this fearful
disconnect, I believe that Bank of America will not only survive, but may represent an incredible
buying opportunity.

Henry Paulson and the U.S. Treasury made Bank of America “too big to fail.” Following the
collapse of Lehman Brothers the government essentially forced Bank of America to acquire
Merrill Lynch and gave them $20 billion of taxpayer money to do just that. After giving away $20
billion to save Merrill, there’s no way the Treasury or the Obama administration is about to let
Bank of America collapse.

You’re getting two companies for the price of one. Whether you believe Merrill Lynch is already
healing or not (I do), the chances that Bank of America will even be able to hold on to Merrill
Lynch are close to nil. After the Great Depression, Congressed passed the Glass-Steagal Act, a law
that permanently separated investment banks from commercial banks. Under the Clinton
administration, Congress repealed Glass-Steagal, in a move that put depositors at risk and also
allowed banks to take on leverage as high as 40-to-1. So, here we are today, unfairly blaming
former President Bush for the collapse of Morgan Stanley, Bear Stearns, Lehman, and Merrill
Lynch. Under an Obama administration, Clinton’s mistake will be fixed. After it is, it is highly
unlikely that we will see Bank of America hold on to Merrill Lynch. Think about it. Bank of
America is essentially a “government guaranteed” company that is now trading under $6.00 per
share; a company that traded at $12.75 a month ago; a company that traded at $22.49 three months
ago, and a company that traded at $37.51 a year ago.

With the chairman of the British parliament's Treasury Committee urging the government to
nationalize Royal Bank of Scotland and Lloyds Banking Group, American investors are becoming
even more fearful that the United States will do the same. They point to Freddie Mac and Fannie
Mae, but there is no comparison to those previously quasi-governmental agencies and Bank of
America. In fact, since 1917, the United States has nationalized only the railroads, the Tennessee
Valley Authority, the Transportation Security Administration, and Freddie and Fannie. Moreover,
on January 22, 2009 incoming Treasury Secretary, Tim Geithner, rejected the idea that the
Treasury Department would consider nationalization of financial institutions. He said,
"Encouraging private investment in our banks and drawing private capital that is now on the
sidelines is critical to ensuring that our financial institutions are stable and that our capital markets
can return to more normal and healthy functioning.”

Here are a few other reasons to believe Bank of America will survive:

· While BOA has reduced their dividend substantially, they are still paying .04 per share annually.
This may not sound like much, but it translates into $250,000,000 or one-quarter billion dollars per
year. Insolvent banks do not do this.
· Since January 20, 2009 insiders have purchased a total of 715,500 shares of their own stock. That
translates into $4,128,435. Would they do this if the thought BOA was not going to survive?
· Perhaps the greatest investor ever, Warren Buffett, is buying up shares of major banks such as
Wells Fargo and Bank of America. That in itself is good enough for me.

How will banks in general survive?

Suspension of mark-to-market accounting would stop the deterioration in bank balance sheets and
allow time to heal without taking down the entire economy in the process. Mark-to-market
accounting existed in the Great Depression and was a leading cause of many bank failures. In
1938, Franklin Delano Roosevelt called on a commission to study the problem and the rule was
finally suspended. Rather than waiting eight years as we did in the 1930s, the new president could
fix this problem immediately. Bad loans significantly increase fear about the underlying value of
banks and restrain new investment and new lending. As long as these bad loans have the potential
to be marked down, bank capital is at risk, and investors will remain skeptical and banks will
remain cautious, which impinges their willingness to lend.