Taking in all of the above considerations, on August 24, 2011 the company announced Mr. Warren Buffett invested $5 billion in cumulative preferred shares with a coupon of 6%. Berkshire Hathaway also receives warrants to purchase 700,000,000 shares at a price of $7.142817 at any time for 10 years following the closing date. At the time of the announcement, the share price increased nine percent. Then the European crisis hit, the fears of a prolonged recession in the U.S. and the continuing suspicion with respect to the value of assets disclosed by the banks and the stock took a beating again.
Despite the bank’s Chairman, Charles O. Holliday Jr., stating at the August 25th, 2011 capital raise: “In the shaky couple of weeks we’ve gone through the financial markets, it’s a good time for this vote of confidence by a savvy investor. We didn’t need the capital, but it doesn’t hurt to have more in a volatile time.” The bank then filed prospectus documents on November 22, 2011 to raise a further $3 billion in common stock.
Financial body blows continued to hit the corporation during 2011. Bank of America acquired home loan corporation Countrywide in 2008 as part of the mortgage lending meltdown. An epic settlement of $335 million was reported in December of 2011, when the Justice Department announced that the bankagreed that Countrywide had discriminated against Black and Hispanic borrowers during the housing boom. It is the largest residential fair-lending settlement to date. Earlier in the December the bank paid $315 to settle claim that they misled investors about the about the mortgage backed investment sold through Merrill Lynch. These fines are on top of $108 million in fines paid out in 2010 for over-charging customers on home loans.
There is no further good news with respect to the capital markets as the crisis in Europe continues to plague both the equity and fix income markets. The fears of another recession and protracted slow growth in the U.S. before a legitimate recovery can be seen are also playing havoc with the bank’s shares.
In addition there has been much speculation about the value and performance of the mortgage and other loan assets that Bank of America holds both on and off its balance sheet. While Bank of America insists that its disclosure are in keeping with regulatory guidelines, there is much speculation that they are actually using off balance sheet transactions to inflate the value of performing loans and to diminish the value of non-performing loans. It appears that having already paid massive fines for the Countrywide debacle is not enough and the company will continue to be punished until all of those holdings are either disposed of or are represented at fair market value in all disclosure documents. Mortgages, home equity lines of credit and their delinquencies are reported as having a delinquency rate of 5%. This figure is suspicious for several reasons, namely the classification of the loans as home equity lines of credit which appear to be secured, which in fact may not be, and how customers and the bank move money around from these credit lines an loans to place them in the performing from not performing category.
In 2011, Bank of America sold down its interest in China Construction bank so that it owns only a five percent portion. The company sold off its European and Canadian card divisions, laid off 3,500 people and re-thought its position on charging debit card customers $5 per transaction after a customer petition threatened mutiny.
It has attracted new capital, put some austerity programs in place and continues to raise capital through debt and equity offerings.
Regardless of what the bank has done right, it continues to be plagued by the Countrywide acquisition, the suspicion of its treatment of loan performance and losses and the European crisis and the ongoing mess that is the North American capital markets and the slow growing, perhaps relapsing to recession, domestic economy.
It is not so much the off balance sheet activity that the shareholders should be worried about. It is more the dilution that all shareholders will continue to suffer as Bank of America continues to issue common shares, convertible preferred shares and convertible debt. It will take a very robust economy, capital markets that favour the investment in banks and banking institutions to favour the stock. While Berkshire Hathaway’s investment may be seen as a vote of confidence, keep in mind that it is receiving a 6% coupon per year, it is a long term investor and the warrants that are currently under water can always be re-priced. Unless there is some very good economic news soon, it may be time to look at Bank of America either in whole or some of its parts as an acquisition target.