Tuesday, August 16, 2011

You're Outta Here!

BofA CEO Brian Moynihan gives Canadian cards the thumb.

Bank of America announced yesterday the sale of its MBNA-branded Canadian credit-card portfolio to TD Bank Group for $8.5 billion. This is the latest in a series of divestitures as the firm exits its entire international credit-card business. It must have been a painful decision for BofA's CEO, Brian Moynihan. Credit-card lending has been a relative bright spot for the company, which has suffered staggering losses in recent quarters. But regulators must be satisfied, and the move will help the company comply with enhanced capital requirements being phased in over the remainder of the decade.

Investors are running, not walking, from Bank of America. Recent filings with the SEC have revealed that two of the world's best-known hedge-fund managers, David Tepper and John Paulson, shed substantial stakes in BofA during the second quarter. Tepper's Appaloosa Management L.P. sold 7.2 million shares in Q2, this after ditching 8 million shares in Q1. The 10 million shares remaining are less than a third of what Tepper held at the beginning of 2010. Paulson's axe was even heavier. He sold 63.2 million shares in Q2, or more than half of what he held when the quarter began. That is some serious dumpage.

So who was on the other side bidding? Why, MainePERS, of course, scooping up 63,358 shares during the same three months. They must know something that the rest of us do not.

[update 08-21-11:]

Christopher Whalen suggests that Bank of America should be headed toward receivership. Owners of the company's common stock would be at the bottom of the food chain in any subsequent workout. The conversion of debt to equity would severely dilute shareholders:

"Once the FDIC is in control of BAC, the process will then proceed like a typical bankruptcy, with the operating units continuing to do business in the normal course. For consumers and business customers, the situation at BAC will be mostly the same. But for investors and especially creditors, the situation will be far from normal.

In a Dodd-Frank resolution, the creditors of BAC will have an opportunity to file claims, much as with any failed bank. Unlike a bankruptcy, however, the FDIC will make all depositors of the subsidiary banks whole before considering claims of creditors of the parent, a significant difference investors ought to consider. Most important, however, will be the process of converting debt to equity in the restructured BAC, providing the resources to absorb losses, fund continuing operations and restructure."

[update 08-23-11:]

Henry Blodget estimates that Bank of America will need to raise at least $100 billion, and perhaps as much as $200 billion, of new capital to survive. If true, existing shareholders will get hosed. With a water cannon. Memo to MainePERS: an umbrella will do no good.

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