Is Bank of America in Trouble?

Origially posted on 11/7/08 at www.TheAffordableMortgageDepression.com

Bank of America is a monster. It is the largest bank in the US. This is a company that believes itself to be "too big to fail".

The market has already recognized that BAC's business faces a tough operating environment as the economy falters and interest rates fall. BofA's stock is down from $50 a share to $20 as of 11/5/08.

Bank of America has already subscribed to the government's $700 billion bail-out and has access to further Treasury funds should the need arise. Under normal circumstances the prospect of BofA failing would not be conceivable. But these are not normal times. Fannie Mae and Freddie Mac, with an implicit government backing, were thought to be unsinkable just a year ago.

Bank of America has created market concern through its own actions and missteps. Management foolishly invested in Countrywide at $18 a share and then acquired the mortgage broker for $6 a share mere months later. BofA could have picked through the worthless subprime broker during bankruptcy proceedings, but apparently executives preferred an acquisition.

BofA purchased Merrill Lynch in September 2008 for $50 billion. ML was willing to sell itself out of concern over its ability to survive. BofA executives were willing to pay a hefty premium to current market value for its wealth management and capital advisory services. Based on the residual values of Bear Stearns and Lehman Brothers, who had similar issues, Merrill may not end up being worth anywhere near the acquisition price.

Bank of America remains transfixed by the prospect of acquiring national, retail distribution networks. The Countrywide mortgage origination infrastructure and Merrill's army of retail brokers theoretically represent one-of-a-kind opportunities. This perspective ignores the reality of the challenges that these two companies face and the impact that the looming economic depression will have on their core operations. BofA would have been better served going on a buying spree towards the end of the downturn rather than before it began or by picking through the remains of bankrupt operations .

BofA also is one of the country's largest credit card companies. This industry is going to be pounded by the economic contraction, rising foreclosures, increasing unemployment, higher credit card rates, lower credit quality and declining demand for consumer debt within the securitization market. Credit card reserves and write-offs have already begun to climb and are unlikely to plateau until the housing market and broader economy stabilize.

Falling interest rates obviously have a negative impact on BofA's core retail banking operations. Contracting economic activity and the prospect of deflation degrade its lending activities.

At what point does the laundry list of BofA's woes impact its ability to finance itself or degrade its earnings to the point where investors start to pay attention? Ongoing charges associated with Merryll Lynch, Countrywide and credit card write-offs will be increasingly hard to ignore.

BofA is just pennies away from its 10 year stock price low. This is shocking given how dramatically the business has been transformed over the past decade. The federal government will ensure that BofA has access to capital and does not overtly fail, but that may not be of much consolation for BAC shareholders.