(Corrects first paragraph to say shares are at their lowest
level in 2 1/2 years, not the steepest drop)
* Investors spooked by capital worries after Blodget post
* BofA CDS rise to record levels, then retrace
* Shares close 2 pct lower after 6.4 pct intraday drop
(Adds details from JPMorgan analyst note, background on
mortgage repurchase settlement)
By Joe Rauch
CHARLOTTE, N.C., Aug 23 Bank of America Corp
(BAC.N) shares fell to their lowest level in 2-1/2 years on
Tuesday as investors worried that the biggest U.S. bank might
face big writeoffs.
The cost of insuring the bank's debt against default spiked
to record levels.
Bank of America shares closed 1.9 percent lower at $6.30
after falling as much as 6.4 percent during the day. The shares
pared losses, and credit swaps largely retraced, as a broader
stock market rally helped assuage investor fears about the
Graphic on Bank of America's share drop:
Graphic on B of A's declining valuation
Reuters Insider - Reuters Breakingviews Columnists say
investors are looking for any reason to dump B of A as
stock continues to plummet even though the bank has
significant holdings and growth potential:
B of A shares are down 2 pct as the bank's CDS surges to
record high: link.reuters.com/dyz33s
In a blog post on Tuesday, former securities analyst Henry
Blodget said the bank could have $100 billion to $200 billion
of writeoffs and troubled assets to sort through. These
potential write-offs could eat into a substantial portion of
the bank's $222 billion of book value.
"That's why Bank of America's stock is tanking. The owners
of that stock will be the first folks to get hit if Bank of
America has to raise more capital," Blodget wrote on Business
Insider, his collection of blogs.
Bank of America fired back at Blodget in a statement,
calling his claims "exaggerated and unwarranted," echoing
language the U.S. Securities and Exchange Commission used in a
2003 complaint against Blodget. Blodget, a former Internet
analyst at Merrill Lynch, was barred from the securities
industry as part of a settlement with the SEC over alleged
conflicts in his research.
Bank of America said the exposures that Blodget identified
as the source of possible losses were inaccurate, with his
sovereign exposure being off by a factor of 10.
The volley between Bank of America and Blodget was the
latest example of analysts and investors disagreeing with the
bank. Since June, a number of analysts have said Bank of
America needs to boost its capital levels by about $50 billion
to comply with new global standards. At least some of that
extra capital could come from issuing stock, several analysts
The bank itself says it can reach target capital levels by
selling assets and earning more money. The bank has some time
to comply with the Basel III capital rules, which are to be
phased in from 2013 through 2019.
Some analysts agree. Rochdale Securities analyst Dick Bove
told television news outlets on Tuesday that the bank does not
need to raise capital, whatever happens to its share price, and
that Bank of America has ample liquidity.
Chief Executive Brian Moynihan told investors on a recent
conference call that the bank did not view issuing more shares
as an option, after having already diluted its shareholders so
much during the financial crisis.
Some analysts have suggested the bank will need to raise
capital if the proposed $8.5 billion settlement over
Countrywide Financial Corp-created mortgage-backed securities
Outside investors have been pushing for the bank to
repurchase toxic mortgages from the securities, amid
allegations the loans do not meet initial guarantees made when
the securities were bought, and now total $100 billion in
Others said pressure on the bank is increasing the chances
of a capital raise.
In a note to clients, JPMorgan Chase & Co analysts upgraded
Bank of America's stock to neutral from underweight, on the
belief the declining stock price and rising debt insurance
costs will force a capital raise.
"We think it is getting more difficult for management to
ignore this sentiment," JPMorgan Chase analysts Kabir Caprihan
and Matthew Hughart said in a research note.
Regulators seem generally unconcerned.
At a news conference on Tuesday, the Federal Deposit
Insurance Corp's acting chairman said he is comfortable with
the overall amount of capital at U.S. banks.
"As a general matter I would say the answer to that is
yes," Acting Chairman Martin Gruenberg said in response to a
question about the amount of capital banks are holding.
The drop in the bank's shares on Tuesday was their fourth
consecutive daily decline.
"It's on a self-fulfilling downward spiral. I don't know
what's going to make BofA go up," said Mark Coffelt, head
portfolio manager at Austin-based money manager Empiric
The shares fell even as the KBW Bank Index .BKX and the
S&P 500 Index .SPX rose 3.3 percent and 3.1 percent,
Credit default swap insurance on the bank's unsecured debt
jumped as much as 65 basis points to 435 basis points, before
retracing to 385 basis points, meaning it would cost $385,000
per year for five years to insure $10 million in bonds,
according to Markit.
The level is just under the record level of 386 in March
2009, Markit data show.
Traders said weakness in credit derivatives helped fuel
downward pressure on the shares, as markets feed off each
other. Bank of America shares closed Tuesday at levels not seen
since March 2009.
The key arteries of the financial system -- the ability of
banks and other institutions to borrow from one another on a
short-term basis -- continued to show rising stress on Tuesday,
but not at levels associated with the panic of 2008.
The cost for a bank to borrow from another bank for three
months in U.S. dollars, known as the London Interbank Offered
Rate, continued to rise, hitting 0.31178 percent Tuesday
morning from 0.30300 on Monday.
The pressures were most acute at European banks, which
continued to pay more than other banks for short-term funding.
Most European institutions paid more than the LIBOR fixing.
(Reporting by Joe Rauch; additional reporting by Lauren
LaCapra, Jonathan Spicer, Karen Brettell and David Gaffen in
New York and Dave Clarke in Washington; editing by John
Wallace, Matthew Lewis and Bernard Orr)