It's deja vu all over again. The stock of a humongous American bank, Bank of America (BAC), is collapsing.
This is stoking fears that Bank of America will go bust, taking the whole economy down with it.
Why is Bank of America's stock tanking?
Because the market thinks Bank of America is worth much less than Bank of America's management says it is.
In fact, in what is fast becoming a formal law of bank-stock thermo-dynamics, the more the bank insists that everything's fine, the more investors take this as a signal to run for the hills.
Meanwhile, the more the bank's stock drops, the more expensive and painful it will be for it to raise cash if and when it finally admits that the market was right all along (the next formal law of bank stock thermo-dynamics being that the market is generally right.)
And given that Bank of America has now persuasively broken the $7 barrier and now has a mere $65 billion of equity value left, this death spiral can't continue much longer. (The good news, we suppose, is that the stock can't fall below zero).
Let's leave aside for a moment the question of what will happen if Bank of America's stock keeps tanking. After observing the government's behavior during the financial crisis, the obvious bet would be that Treasury Secretary Tim Geithner is even now cooking up some new bailout scheme that, per usual, will save the bank and hose taxpayers. But Americans certainly have gotten sick to death of bailouts, so maybe that isn't such a foregone conclusion this time. (A year or so ago, if memory serves, the Treasury was trumpeting "financial reform" that allows it to go in and seize any huge institution whose failure threatens the economy, so maybe that's also a possibility. But the government had that power last time, too--at least with respect to the banks--and it refused to use it. So we're not sure why it would use it this time.)
The question for today is why is Bank of America's stock collapsing? What does the market see that Bank of America's management and auditors don't?
Thanks to the efforts of a few tireless Bank of America observers, including Zero Hedge and Yves Smith at Naked Capitalism, we have our answers.
Bank of America has about $222 billion of "book value"--the amount that's supposedly left over when you subtract Bank of America's stated liabilities from its stated assets.
The trouble is that the market doesn't believe Bank of America's assets are worth anything close to what Bank of America says they are worth. The market also doesn't believe that Bank of America has reserved anywhere near enough to pay the costs of litigation surrounding its mortgage behavior during the housing boom.
And when you put a more reasonable value on Bank of America's assets, the market thinks, the difference between that reasonable value and today's current value will have to be subtracted from the company's "book value." And that subtraction, the market thinks, will so demolish Bank of America's book value that the company is basically insolvent. (And, therefore, will need to raise more capital or go bust).
Here are some of the things that the Bank of America observers think should or will be subtracted from the bank's $222 billion of book value:
This is stoking fears that Bank of America will go bust, taking the whole economy down with it.
Why is Bank of America's stock tanking?
Because the market thinks Bank of America is worth much less than Bank of America's management says it is.
In fact, in what is fast becoming a formal law of bank-stock thermo-dynamics, the more the bank insists that everything's fine, the more investors take this as a signal to run for the hills.
Meanwhile, the more the bank's stock drops, the more expensive and painful it will be for it to raise cash if and when it finally admits that the market was right all along (the next formal law of bank stock thermo-dynamics being that the market is generally right.)
And given that Bank of America has now persuasively broken the $7 barrier and now has a mere $65 billion of equity value left, this death spiral can't continue much longer. (The good news, we suppose, is that the stock can't fall below zero).
Let's leave aside for a moment the question of what will happen if Bank of America's stock keeps tanking. After observing the government's behavior during the financial crisis, the obvious bet would be that Treasury Secretary Tim Geithner is even now cooking up some new bailout scheme that, per usual, will save the bank and hose taxpayers. But Americans certainly have gotten sick to death of bailouts, so maybe that isn't such a foregone conclusion this time. (A year or so ago, if memory serves, the Treasury was trumpeting "financial reform" that allows it to go in and seize any huge institution whose failure threatens the economy, so maybe that's also a possibility. But the government had that power last time, too--at least with respect to the banks--and it refused to use it. So we're not sure why it would use it this time.)
The question for today is why is Bank of America's stock collapsing? What does the market see that Bank of America's management and auditors don't?
Thanks to the efforts of a few tireless Bank of America observers, including Zero Hedge and Yves Smith at Naked Capitalism, we have our answers.
Bank of America has about $222 billion of "book value"--the amount that's supposedly left over when you subtract Bank of America's stated liabilities from its stated assets.
The trouble is that the market doesn't believe Bank of America's assets are worth anything close to what Bank of America says they are worth. The market also doesn't believe that Bank of America has reserved anywhere near enough to pay the costs of litigation surrounding its mortgage behavior during the housing boom.
And when you put a more reasonable value on Bank of America's assets, the market thinks, the difference between that reasonable value and today's current value will have to be subtracted from the company's "book value." And that subtraction, the market thinks, will so demolish Bank of America's book value that the company is basically insolvent. (And, therefore, will need to raise more capital or go bust).
Here are some of the things that the Bank of America observers think should or will be subtracted from the bank's $222 billion of book value: