Thursday, 15 January 2009

Indigestion problems for Bank of America

I expended a lot of time criticizing B of A for their acquisition of Countrywide almost 16 months ago. In fact I have been critical of every one of these major takeovers such as JP Morgan's purchase of Bear Stearns and Washington Mutual.

The problem with these acquisitions is not that there are not some valuable assets up for grabs, it is that they simply paid too much for them. Every quarter, we learn that the value of assets on the major banks balance sheets are not what they were worth just one quarter ago.

Thus whatever the acquiring banks thought was fair value to pay for these assets turned out not to be. So is it any wonder that B of A is now balking at the Merril acquisition? From Bloomberg:

Bank of America May Receive U.S. Aid for Merrill Lynch Purchase
Bank of America Corp., the biggest U.S. bank by assets, may get more aid from the government to help absorb losses tied to this month’s acquisition of Merrill Lynch & Co., three people familiar with the matter said.

Details are likely to be disclosed on Jan. 20, the people said. That’s when Bank of America may post its first quarterly loss in 17 years as it digests the purchases of Merrill Lynch and Countrywide Financial Corp. The combined company has already received $25 billion from the U.S.

Bank of America, based in Charlotte, North Carolina, told regulators in December the takeover might be abandoned because of Merrill’s worse-than-expected results, said the people, who declined to be identified because the talks are private. The government insisted the transaction go forward because its collapse would create new turmoil in the financial system, they said.

“Bank of America has all kinds of problems with its acquisitions,” said Gary Townsend, president of Hill-Townsend Capital LLC in Chevy Chase, Maryland. “They’ve been so acquisitive, they find themselves with very little in tangible equity.”

The part in bold is the point here, the major banks are woefully under capitalized and as I have been saying for some time, the equity injections are not enough, they are just absorbing the losses, they are not being restored to financial health.

Again lets be clear, the major US financial institutions are insolvent, the only thing preventing their equity from going to zero is that the US government is standing behind them.

However according to Chris Whalen, who has been spot on with respect to the problems at the major US banks, the US government's presence may not be enough to stop the equity of firms like Citibank, B of A and JP Morgan from going to zero. Click on the image below to hear Whalen's latest thoughts.

JPMorgan Chase Earnings
JPMorgan Chase Earnings