Good Money After Bad

In case you thought Congress knew what it was doing when it passed the Emergency Economic Stabilization Act last October, refer to the graphic above, which charts Bank of America's stock price over the past six months. Does that look like a company that has been fixed?

As you can see, the first hiccup came in mid-September, when Bank of America agreed to rescue Merrill Lynch. Traders bid the stock down because Bank of America was over-paying for Merrill's troubled assets. Relief came a week later when Congress (ta-dah!) first started talking about a bailout bill for the banks. Then the stock tanked again when the House initially voted the bailout down--one of those rare instances when lawmakers actually listened to their constituents. The Senate, listening instead to their cronies on Wall Street, revived the bill. The end result was the Troubled Asset Relief Program (TARP), whereby the U.S. Treasury would spend up to $700 billion buying up those nasty Merrill assets, among others.

Treasury officials soon realized that this was a program built to fail. If they started pricing distressed assets, banks across the land would have to mark down balance sheets, inviting the mother of all bank runs. So TARP morphed into something else, a program to inject liquidity directly into the banks through purchases of equity. That way, mark-to-myth accounting could be prolonged a while longer.

Bank of America got $25 billion from TARP, essentially buying shareholders' approval of the Merrill takeover at a December 5 meeting. (In the interest of price discovery, I had hoped that B of A shareholders would nix the deal, but of course company executives control shareholders as securely as they do Congressmen and -women.) After the shareholders' vote, management let on that Merrill's portfolio was even more toxic than originally thought. The hand went out for more TARP money.

Early today they got it. In addition to a $20 billion cash infusion, the U.S. Treasury will "provide protection against the possibility of unusually large losses on an asset pool of approximately $118 billion of loans," according to a joint statement by the Treasury Department, Federal Reserve, and Federal Deposit Insurance Corp. It is becoming increasingly clear that the Merrill deal was orchestrated by government officials as a gun-to-head proposition for Bank of America, which should be running, not walking, away from the acquisition. "They were probably one of the best banks out there, balance sheet-wise, until they did the Merrill deal," says Cassandra Toroian at Bell Rock Capital.

Now they are going under. Hours after the latest TARP announce- ment, Bank of America released its earnings statement for the fourth quarter. Ug-LEE. Instead of an expected profit, B of A reported a 48-cents-per-share loss, with billions in charge-offs for uncollectable debts and coming layoffs of 35,000 employees. Revenues lagged the consensus estimate by 25%, a miss so bad that one wonders if anybody knows anything in the financial sector these days. Or else the ones who know aren't telling. In its last earnings report as an independent entity, Merrill Lynch announced its own loss of $15 billion. All yours, Ken Lewis.

In a speech Tuesday in London, Fed Chairman Ben Bernanke called for “a comprehensive plan to stabilize the financial system and restore normal flows of credit." Specifically, he talked about creating a so-called bad bank to "purchase assets from financial institutions in exchange for cash and equity." Funny, I thought that was what TARP was supposed to be doing. Look again at the graph up top and see how well that's working.

[update, 1:00 p.m.--]
Despite Uncle Sam's helping hand, BAC is down another 15% in today's trading to $7 a share. With the dividend all but gone, there is no longer any reason to own the common stock. Taking down bank equity these days is like wading into the Gulf of Maine on New Year's Day. Think shrinkage.