|Bank Of America Stock|
Unease about the bank's continued malaise from the mortgage meltdown have grown in recent weeks, and some industry analysts pondered the possibility that the nation's largest consumer bank would have to seek additional capital to shore up its finances — especially if the nation heads into another recession.
On Monday, insurance giant American International Group Inc. added to those worries by filing a lawsuit seeking to recover more than $10 billion in losses on mortgage-backed securities.
AIG, which like BofA received taxpayer bailout funds, alleges that the bank and subsidiaries Merrill Lynch & Co. andCountrywide Financial Corp. misled investors about the quality of the securities. The lawsuit alleges that Bank of America was "engaged in a massive scheme to manipulate and deceive investors."
Also on Monday, rating company Standard & Poor's, which downgraded U.S. debt late Friday, similarly downgraded the debt of government-controlled mortgage financing firmsFannie Mae and Freddie Mac, both of which loaded up on Countrywide's risky subprime home loans.
BofA, which agreed in January to pay Fannie and Freddie $3 billion to buy back delinquent loans, disclosed Friday that the companies were demanding more — "in numbers that were not expected," the bank said.
"It was a perfect storm, with the downgrading of U.S. debt, the downgrading of Fannie and Freddie and the AIG lawsuit," said Paul Miller, managing director of FBR Capital Markets & Co. "It just becomes a death spiral. The same things happened to these companies in 2008."
In a broad-based and deep sell-off on Wall Street, financial stocks were hit hard, but none worse than BofA, which saw shares fall $1.66, or 20%, to $6.51. Bank of America stock, worth more than $50 a share before the 2008 financial crisis, is down more than 50% this year alone.
Other banks were hit hard Monday, in part because they are so closely tied to consumer behavior and the overall economy. Citigroup Inc. shares tumbled 16.4%, JPMorganChase & Co. fell 9.4% and Wells Fargo & Co. lost 9%.
"If the recovery stalls and unemployment remains elevated, there will be more defaults, more people out of work, and banks are especially vulnerable," said James Angel, associate professor of finance at Georgetown University's McDonough School of Business.
S&P's downgrade of U.S. debt could accelerate the troubles facing other banks, said Steven Ricchiuto, chief economist at Mizuho Securities. The equity market had assumed that the economy wouldn't be allowed to recede into a double-dip recession, and "now that's being called into question," he said.
BofA is taking longer to resolve mortgage issues than it had originally expected, said Mike Mayo, a financial analyst at Credit Lyonnais Securities Asia. Its difficulty in resolving mortgage problems, he said, could force the company to raise capital, a move the bank has said it would not need to do.
"U.S. banks will likely have the worst revenue growth this year since 1938," Mayo wrote in a note. Bank of America "still needs to get more aggressive with efficiency."
Besides agreeing to pay $3 billion to buy back loans sold to Fannie and Freddie, the bank said in June that it would take an additional $20 billion in charges related to home loans written by Countrywide, the aggressive Calabasas mortgage lender it acquired in 2008.
The largest component of those charges was $8.5 billion to settle claims from a group of large investors in mortgage-related bonds not backed by Fannie and Freddie. But New York state has urged a judge to reject the settlement as inadequate.
Analysts such as Richard Bove of Rochdale Securities said investors are blowing Bank of America's problems out of proportion. Though the blog Zero Hedge posted Monday morning that BofA was contemplating filing for Chapter 11, the bank actually has $140 billion in cash.
"I've been getting emails all day telling me that Bank of America is going under," Bove said. "There's no truth in it at all."
To calm worried investors, the bank needs to assure Wall Street that it does not need to raise capital and that it is working to resolve its mortgage lawsuits, said Nancy Bush, contributing editor to SNL Financial.
Bank executives will have that opportunity Wednesday in a conference call with investors hosted by Fairholme Capital Management, which owns 92 million shares of BofA, or nearly 1%.
"Being the weakest of a weak bunch is not an enviable position when there's a financial panic," Bush said. "But as the goat in a financial panic, there's just not a heck of a lot these companies can do."