The real reason Bank of America stock is below cash

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By Steven Greer  August 9, 2011

Bank of America stock (ticker BAC) sank below the $7 per share cash value yesterday into the $6’s. This was part of a 50% decline over the year. The press has posed many explanations (mortgage litigation, Fannie and Freddie downgrades by S&P, etc), but none of them explain the reason BofA might be a worthless company selling below cash.

Recall, back in 2008, during the heat of the financial crisis portrayed well in HBO’s “Too Big to Fail” and other documentaries, Treasury Secretary Hank Paulson and Federal Reserve Chairman Ben Bernanke pretty much forced Bank of America’s CEO, Ken Lewis, to acquire Merrill Lynch. Merrill was teetering on bankruptcy and was soon to go the way of Bear Stearns and Lehman Brothers but for this merger.

Why was Ken Lewis so reluctant to acquire such a good brand as the “Thundering Herd” Merrill Lynch, with one of the largest retail trading desks and network of brokers in the world? It was because Merrill had accumulated possibly the largest amount of those now-infamous toxic debt instruments called CDO’s (i.e. derivatives loosely based upon real home mortgages, many of subprime nature and worthless).

Prior to being acquired, or saved one could say, by BofA, Merrill Lynch likely lied to investors about the liabilities on the balance sheet from those CDO’s. Whatever happened to these festering pockets of puss in the bowels of the bank?

Did they spin off a “bad debt” bank? No.

Did they ever fully account for the total liabilities? Does anyone to this day know what the real balance sheet of BofA looks like? No and no.

Sell side bank sector analyst Dick Bove said on Bloomberg TV today that BofA was oversold because it holds so much in assets ($140 Billion in cash, $300 Billion in securities, $200 Billion in common equity). He said, “If the question is whether to buy BAC at less than $7 per share, the answer is obviously “Yes””.

The flaw in Mr. Bove’s fundamental analysis and investing logic is that he does not factor in the 800-pound gorilla in the room, which is the mysterious, still unaccounted for, mortgage backed security liabilities held in the metaphorical secret vaults of Bank of America. The amount still owed on these could make those assets listed by Mr. Bove seem like small potatoes.

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