- Posted October 05, 2011
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Business Smart money is divided on Bank of America Bank has been crippled by losses from poorly written mortgages
By Pallavi Gogoi
AP Business Writer
NEW YORK (AP) -- The smart money is split on Bank of America.
Big investors George Soros and John Paulson are selling shares of the nation's largest bank. But Bruce Berkowitz, Thomas Brown and other fund managers find the stock so attractive that they are buying up boatloads. Billionaire investor Warren Buffett also invested $5 billion in the bank.
So, who's right?
For now, the sellers are winning this bet. Bank of America Corp.'s stock plunged 44 percent in the third quarter. On Monday it sank another 9 percent to $5.53, a level not seen since the financial crisis in March 2009. There has been customer backlash over a recently-announced $5 fee on debit cards and a several-day outage of its website.
The Charlotte, N.C. bank has been crippled by losses from poorly written mortgages, especially those from Countrywide Financial Corp., the subprime mortgage lender the bank bought in 2008. It's also fighting a barrage of lawsuits from the government and other large investors who say the bank should either buy back billions of dollars of faulty mortgage securities or pay damages. In the first half of the year alone the bank paid out $12.7 billion to settle such claims.
The best-known seller is Soros, who sold 1.2 million Bank of America shares in the second quarter. Paulson and David Tepper of Appaloosa Management each sold half of their Bank of America holdings in the same quarter.
Other investors are enticed by the low price of the stock. At around $6 a pop, the shares of Bank of America are the cheapest among large U.S. banks. Goldman Sachs Group Inc. trades above $90.
"Bank of America right now is very, very cheap," said Thomas Brown, CEO of hedge fund Second Curve Capital, who has been buying the stock in recent months.
Brown's recent shift turned heads because he was one of the most vocal critics of Bank of America for years when he was a widely followed financial analyst at Smith Barney and Donaldson Lufkin & Jenrette. Brown particularly disliked the bank's strategy of pursuing growth via acquisitions.
"It's poorly managed and it's still too big, but getting smaller, which is a good thing," said Brown.
Another optimist is Buffett, the renowned investor and CEO of Berkshire Hathaway Inc. Buffett paid $5 billion for preferred shares that will earn him an annual dividend of 6 percent. He also gets the option to purchase 700 million shares of common stock at $7.14 per share. Buffett's warrants are worthless for now.
Fairholme Capital Management's Berkowitz bought another 7 million shares in the second quarter for a total of 99 million, making him one of the 10 largest shareholders of the bank. Berkowitz, who was named stock manager of the decade by research firm Morningstar Inc. last year, said he believes the bank has the ability to generate enough cash to be well capitalized.
The reason the stock is so battered is that as the nation's largest mortgage lender, Bank of America holds the largest amount of troubled loans following the housing market bust. Investors fear that Bank of America might run short of capital because of large mortgage-related settlements it has struck with angry investors who bought securities backed by those problem loans.
Brian Moynihan, Bank of America's embattled CEO, has been desperately trying to shore up the bank's financial standing by selling parts of the company to raise cash. He also shook up the bank's top management ranks last month and slashed 30,000 jobs, after cutting 6,000 jobs earlier in the year. The bank says it is looking for more cost savings.
Bill Smith, the CEO of Smith Asset Management, also thinks the stock is cheap. Smith believes the stock lost more than what the whole business is worth. "Its parts are worth more than the whole," Smith said.
The best measure of how investors' value a company is market capitalization. Bank of America's market cap now is $57 billion. However, that's just a fourth of the bank's "book" value, a measure that investors like Smith watch closely. Book value is the value of a company's assets if it were to be liquidated. That value, calculated from the bank's balance sheet -- assets minus liabilities -- is $230 billion.
Currently, stocks in the S&P 500 trade at almost twice their book value. While many other banks are also trading below book value currently because of worries about the economy, the gap at Bank of America is the worst among the large banks.
That valuation gap has led to market speculation that Bank of America could be forced to spin off its more profitable brokerage and investment banking operations under Merrill Lynch and put its troubled Countrywide unit into bankruptcy.
Other well-known investors say it is a folly to believe that stock investors stand to gain if that happens. Charles Bobrinskoy, vice chairman and director of research at Ariel Investments, believes it will be hard for Bank of America to put Countrywide into bankruptcy because of the variety of investors and stakeholders involved. Besides, equity investors are usually the first to lose if a company is broken up, he said.
Bobrinskoy's funds have so far stayed away from Bank of America.
"You should never invest in something that you can't analyze -- Bank of America is unanalyzable," said Bobrinskoy.
Published: Wed, Oct 5, 2011
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