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.*
* 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.