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Is Bank Of America In Trouble?

Is Bank Of America In Trouble?

Trading and Investing

The recent Bank Crisis in America threw over $15 billion in deposits towards Bank Of America. As a result of scared consumers looking for a proverbial port in a storm. Which the great big Bank of America appears to most people. A gigantic financial fortress where you can stash capital. However, we wonder just how strong is this financial fortress really?

Yes, we know all accounts possess FDIC: Federal Deposit Insurance Corporation insurance which allows for protection of up to $250,000. However, President Biden recently announced that in fact all US bank deposits find themselves insured. Which essentially means: Nothing to worry about, in fact thats what the famous short investor and grumpy market cynic feels. Michael Burry that is. Burry feels the financial crisis has run its course. And now fear will evaporate and as a result stocks should appreciate as well. See our piece: What is Michael Burry holding?

However, many don’t trust the president or the government!

Furthermore, they wonder still if Bank of America is in trouble? Will one of the great American banks face demise for purchasing too much debt at the height of the recent bond bubble. And of course not hedging that debt with proper risk management. Similar to Silicon Valley Bank. See our piece: What caused the run on Silicon Valley Bank?

 Are we in a financial crisis? Will the Federal Deposit Insurance Corporation take over Bank of America as they did Silicon Valley. Again we find another American banking giant in hot water for purchasing too much debt at the height of the recent bond bubble. Additionally proper hedging did not become enacted. Any reasonable Chief Risk Officer would hedge that debt with proper risk management. Similar to Silicon Valley Bank. See our piece: What caused the run on Silicon Valley Bank?

Bank of America should have purchased more protection to financially protect itself from rising rates. Now, their unrealized losses on their Hold To Maturity book has reached staggering levels above tens of billions in losses.

Writing On The Wall

Hints that that Bank of America headed into negative territory appeared in 4 consecutive quarterly statements showing increases in loan losses. Additionally, this is on top of the publicly available loan losses that Bank of America experienced on their long-dated duration bond portfolio.

However, how bad is the situation?

Below we have a chart showing unrealized depreciation on Hold to Maturity Securities (HTM) for top 100 banks versus equity. 

These unrealized losses are NOT reflected in profits or a deduct to equity via Other Comprehensive Income (OCI) – only in the footnotes! Moreover, we don’t find these losses reflected in stress tests or measures of capital adequacy. 

Furthermore a 25 bp (1/4 of 1 percent) increase in rates for a 10-year security causes approximately 2 points in losses (100 par to 98 to reflect yield discount). 

We don’t think its anywhere near Silicon Valley bad. Silicon Valley had negative book value after accounting for loan losses. Whereas Bank of America’s unrealized loan loss amounts to a high fraction of net tangible assets. Yes alarming, we agree. But, a $100 billion loss does NOT wipe out over $200 billion of equity. Don’t forget the Fed pumped them with money over the last 15 years. Banks have been tripping over capital. Now, that capital suddenly finds itself becoming tight everyone worries about what shoe is next to drop?

Will Silicon Valley Bank become the spark to light the bank crisis fuse? We don’t think so.

As we wrote in our piece: Is SVB Systemic?

“…back in 2008 Lehman Brothers failed because of bad debt that all of the big banks held. Today the big banks are flush. In addition, Silicon Valley had terrible risk management. How can you not hedge your bank’s largest asset?”

Will Bank of America collapse? We’ll see, but odds are in its favor for survival. If a Bank was too big too fail. B of A would certainly fit the bill!

B of A finds itself loaded with net unrealized losses, see chart:

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Are we in a financial crisis?

In conclusion, these days to most people it feels like all we can read about anywhere are more banks failing! Now some worry Will Bank of America Collapse? And many others worry whether or not Will Wells Fargo Fail?. And of course many others worry about whether the more local establishments. Will First Republic Bank Fail ? & Is my money Safe in Schwab?

Moreover, the history of Bank of America dates back to 1904 when Amadeo Giannini, an Italian-American businessman, founded the Bank of Italy in San Francisco.

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Amadeo Giannini

The bank was established to provide financial services to immigrants and small businesses that were often overlooked by larger banks.

In 1928, the Bank of Italy merged with the Bank of America, Los Angeles to form the Bank of America National Trust and Savings Association. The bank continued to grow through a series of mergers and acquisitions, including the acquisition of the largest bank in California, Security Pacific National Bank, in 1992.

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Logo of the former Bank of America (BA), 1969–1998

In 1998, the bank officially changed its name to Bank of America Corporation in addition continued to expand globally through acquisitions, including the acquisition of FleetBoston Financial in 2004. Thus made Bank of America the largest bank in the United States by assets.

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Bank of America logo used from 1998 to 2018

During the financial crisis of 2008, Bank of America acquired the investment bank Merrill Lynch, which skirted death to the subprime mortgage crisis. As a result, the acquisition made Bank of America the largest financial services company in the world at the time.

In conclusion, today, Bank of America is one of the largest banks in the world. Lastly, with operations in more than 35 countries and a diverse range of financial services, including consumer banking, investment banking, wealth management, and insurance.

Will Wells Fargo Fail?

Will Bank of America Collapse?

  1.  “Federal Reserve Press Release” (PDF). Federal Reserve. August 17, 1998. Archived (PDF) from the original on November 23, 2020. Retrieved January 29, 2020.
  2. Jump up to:a b “US banking mega-merger unveiled”BBC News. October 27, 2003. Archived from the original on June 25, 2004. Moreover, retrieved February 27, 2009.
  3. ^ “Bank of America To Buy U.S. Trust”Forbes. November 20, 2006. Archived from the original on October 12, 2007. Retrieved August 22, 2007.
  4. ^ Tom, Henderson (April 14, 2008). “BOA to ‘paint the town red’ with LaSalle name change”Crain’s Detroit BusinessArchived in addition, from the original on June 5, 2008. Furthermore, retrieved May 5, 2008.
  5. ^ Fitzpatrick, Dan; Lublin, Joann S. (October 2, 2009). “Bank of America Chief Resigns Under Fire”The Wall Street JournalArchived from the original on February 11, 2010. Retrieved March 29, 2010.
  6. ^ La Monica, Paul R. (February 24, 2010). “BofA: No longer hated on Wall Street”CNNMoney.comArchived from the original on February 25, 2010. Moreover, retrieved March 29, 2010.
  7. ^ Salas, Caroline; Church, Steven (August 23, 2007). “Countrywide Gives Bank of America $447 million Gain