Skip to main content

BofA Says Henry Blodget Isn't Qualified To Talk About Its Capital Hole; JPMorgan Thinks It Might Be

  • Author:
  • Updated:

BofA would like you to know a few things about its capital adequacy, including (1) that Henry Blodget is a schmuck, (2) that the Wall Street Journal agrees, and (3) look over there, earthquake!

Henry Blodget, who runs financial blog Business Insider, aggregated estimates from other sources to say the bank may face a capital shortfall of $100 billion to $200 billion.

In a statement Tuesday, Bank of America said "Mr. Blodget is making 'exaggerated and unwarranted claims,' which is what the [Securities and Exchange Commission] stated publicly when he was permanently banned from the securities industry in 2003."

Zing! But not everyone who thinks that BofA may need to raise capital has been banned from the securities industry. In particular, given the rumors swirling that that BofA is going to be rolled up into the One Bank To Rule Them All, it might be worth checking in with JPMorgan. Their credit analysts have a note out today, and they think the news is so bad it’s good:

Sentiment on BAC has become increasingly negative over the past few weeks, and is reflected in a roughly 40% decline in its stock price over the past month, vs. a 15% decline in the S&P 500, and the inversion of the CDS curve. We think it’s prudent for management to address concerns in the credit market, which is very stressed, given the inversion of the company’s CDS curve. Thus, we are upgrading our rating to Neutral from Underweight. In our view, the pressure from the credit and equity markets is at a point that is increasingly hard for management to ignore. We think this may actually increase the chances of a credit-positive development, such as a capital raise.

They add that “current valuations appear to us to reflect irrationality, rather than the true, manageable, scope of issues facing the company.” Valuations such as 445bp 5-year CDS, 550bp 1-year CDS, and oh yeah this:

So to recap, JPMorgan is positive on the credit because they think markets will force BofA to dilute shareholders with a capital raise. Dick Bove is positive on the equity because he thinks that's physically impossible. The markets - I guess they sort of seem to be in Bove's camp, what with CDS at all-time highs and inverted and the stock down just 2% today.

Whatever else that means, it suggests that credit investors are not believers in a JPMorgan takeover where the equity gets zero and the unsecured gets rolled over into JPM credit.*

BofA Defends Its Capital Amid Din of Naysayers [WSJ]

* Rolling into JPM credit is not theoretically required, but we're not aware of precedents for unsecured holders being haircut on a government-engineered takeover - and the notion of a government guarantee or capital infusion in the combined bank suggests that unsecured would be in good shape.


JPMorgan's Voldemort Probably Isn't That Magical

John Carney has hilariously convinced a bunch of people that JPMorgan whale-wizard Bruno Iksil could actually be running a synthetic bank on top of JPMorgan's actual bank. The theory, propounded to him by a mysterious trader and sort of supported by an old PIMCO client note, is that Iksil was tasked with hedging JPMorgan's inflation risk and did so by putting on a trade that was (1) long TIPS (for the inflation) + (2) long [write protection on] CDX (for the yield). Now I will tell you a thing, which is that I hedge my inflation risk by being (1) long TIPS (for the inflation) + (2) long MegaMillions tickets (for the yield),* but nobody calls me Voldemort. Here is Doug Braunstein's theory about Iksil: On a conference call with analysts, Braunstein said the positions are meant to hedge investments the bank makes in “very high grade” securities with excess deposits. (J.P. Morgan has some $1.1 trillion in worldwide deposits.) Braunstein said the CIO positions are meant to offset the risk of a “stress-loss” in that credit portfolio. He added the CIO position is made in line with the bank’s overall risk strategy. What can that mean? Presumably the sensible view to take from this is that this is actually part of a "stress-loss" hedge; the CIO is short (bought protection on) a lot of shorter-dated corporate credit and funds it by being long (selling protection on) a lot of longer-dated (5-year) corporate credit, so as to be relatively DV01-neutral but long jump risk. This has the advantage of (1) actually hedging a stress loss in high-grade short-term corporate securities, (2) fitting in with the relative lack of noise in the CIO portfolio,** (3) being what people have told Bloomberg he was doing, and (4) being what JPMorgan has actually said it's actually done in the CIO during the crisis. So it's probably true no? But it's fun to pretend! If you pretend Carney is right you can have one of two views.*** One is Izabella Kaminska's, which is "sure, I guess this is a hedge, but boy is it a mysterious one." You can buy this if you have - as she does - a pretty postmodernist view of what a hedge is. I do too, mostly.