Thursday, August 4, 2011

Ticket To Ride

Bank of America stock sinks to a new 52-week low.
[graph from ZeroHedge]

MainePERS beneficiaries took a piggyBAC ride down today, along with all other pensioners long the stock market. The Dow was down 500 points, or over 4%. Bank of America's common stock slid even faster, off over 7%.

Let's do the math, shall we? MainePERS holds 2.6 million shares (after adding to its stake in Q2). Multiply that times 73 cents per share, today's price chop. That gives us $1.9 million lost since 9:30 this morning. Gone. Vaporized.

And we pay the portfolio managers how much?

[update 08-05-11:]

Another day, another $1.7 million. Look (out) below:

BAC, 3-month chart

The nosedive comes after the company's latest 10-Q filing with the Securities & Exchange Commission late yesterday. If you click on the link, you will find over 200 pages, most of it repetitive boilerplate. Of particular interest is management's discussion of future risks to the company and, by extension, to investors (yeah, YOU, MainePERS), risks that were neither eliminated by prior settlements nor fully provisioned in the company's Q2 financial disclosure. Some choice nuggets:

  • The company's experience with the GSEs (e.g. Fannie Mae, Freddie Mac) "continues to evolve," which, fully and precisely translated, means they have our nuts in a vise and they are tightening. "The recent FNMA announcement regarding mortgage insurance rescissions, cancellations and claim denials could result in increased repurchase requests from FNMA that exceed the repurchase requests contemplated by the estimated liability" [emphasis added]. The company's exposure? "It is not possible to reasonably estimate..." yada-yada. In other words, the sky's the limit. Page 179.
  • Non-GSE exposure keeps growing as well. "We currently estimate that the range of possible loss related to non-GSE representations and warranties could be up to $5 billion over existing accruals at June 30, 2011." At least they put a number to this one, subject of course to later revision. Page 219.
  • The so-called BNY Mellon settlement for $8.5 billion announced at the end of June is not a done deal. Court approval is still pending, and some of the parties want out. Or want more. "The Corporation's future representations and warranties losses could be substantially different than existing accruals...and consequently could have a materially adverse effect..." etc. etc. [company's emphasis]. Page 220.
  • I especially like this one: "A downgrade in the U.S. Government's sovereign credit rating...could result in risks to the Corporation...[and] could impact our ability to obtain funding that is collateralized by affected instruments, as well as affecting the pricing of that funding...[Such action] could result in a significant adverse impact to the Corporation" [company's emphasis]. Right on cue, Standard & Poor's tonight downgraded its triple-A rating for U.S. debt to AA+ and attached a negative outlook warning of further cuts. First time in history. The cost of banking business just went up. Page 221.
  • Market risk in the mortgage sector: "For each one percent change in home prices, the liability for representations and warranties on unsettled GSE originations is estimated to be impacted by $125 million based on projected collateral losses and defect rates." Home prices are still declining. So the company's liability keeps on growing. Page 123.

Bottom line: hold the stock at your own risk.

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