Bearish Case for Bank of America
Of course, the same factors that weigh in Bank of America’s favor in a recovering economy are the anchors that will drag it down if the economy declines further. The stress test results released by the government require BAC to raise $34 billion by November 9th. That number suggests the bank’s operations are on a finely tipped balance over a large cliff.
If the economy continues down, or if it manages nothing but a dead cat bounce, Bank of America stands right in the way of the downtrend. Its vaunted credit card business could suffer massive write offs (expansion of that business came, no doubt, with lesser standards for many new card holders prior to the crash) in a prolonged depression.
Likewise, the mortgage and investing units would likely be hit hard as well.
Of course, the big question mark is CEO Ken Lewis. It was Lewis who masterminded and bungled the acquisition of Merrill Lynch which let the government in the front door in the first place. Lewis’ tough talk now about not needing the government’s money like it was never a factor seem a little bit too much like a youngster trying to change facts that don’t make him look good. Even worse, Lewis seems to have learned little from BAC’s brush with death, bemoaning the government stress test results as an “extreme" scenario. No doubt, Lewis would have considered projections based on the real life economic data of the past two years “extreme" as well if presented in the months before the banking crisis.
All of this comes AFTER the government already allowed the banks to negotiate over the stress tests and caved-in allowing the use of more benign data for the computations. One wonders exactly what scenario Mr. Lewis is willing to accept as not extreme that doesn’t include anything but sunshine and rainbows.
If things go south, expect Bank of America and Mr. Lewis to be behind the curve and struggling to catch up.