Munger

Didn't say anything about your investment approach...just your views. They tend to rest on the shoulders of catastrophic consequences. Wrong again...but I more questoin why you would even go down this path? Silly.

treasurehunt -- "Even if the share count goes up by 50% as a result of a capital raise, the stock is a good investment at this price." That statement shows how the thesis has dramatically devolved...up until a few weeks, the potential for a capital raise was completely dismissed by all bulls.

can't make this stuff up... moore -- I am not comparing BAC to LEH...rather comparing your attitude re Fed as savior to Dick Fuld's...didn't work out so well for Dick, who was equally confident.

I do love the emotions -- e.g., PlanMaestro's most recent response has no relation the post he cites. Holy cow! Dick Fuld always believed the Fed would never let him fail in the way that moor_capital argues there is little risk in BAC because of our fiat system. Take deep breaths before posting.

"And that's all I'm saying. Folks like Blodget, or Smith, or Munger will have you consider that the worst case scenario is the likely scenario without actually attributing odds to that event occurring." Again -- I am not assuming anything...simply pointing out that bullish opinions have been based on platitudes not any insightful analysis. And your assumptions about my viewpoint and investment approach are ludicrous. txlaw -- You have now provided three posts that have no relation to what I've actually written. Go back and read again, which will also provide an answer to your question.

"But I guess Munger will say that the whole banking system is bankrupt." Ahem -- the banking system did implode...remember 2008? And the reason BAC has gotten destroyed is becuase unertainty about whether the assets are properly marked and legal liabs. No bulls have provided any evidence to support the oft quoted tangible book value.

moore_capital54 -- your last two post sound an awful lot like the arguments Dick Fuld made when resisting the push to raise capital. Didn't work out so well for him or Lehman. You could well prove correct as could all the bulls but let's recognize that NO ONE has provided any supporting fundamental analysis for their bullish positions and that ain't investing, that's speculating. And further, most of the bulls on BAC stock have already gotten slaughtered in their position -- so something was clearly wrong in the original analysis....a doubling of the stock from current levels will still only bring those longstanding raging bulls back to even. Berkowitz and Tepper bullish opinions were based on nothing but platitudes. Long positions based on nothing but platitudes carry great risk.

Munger I hope you realize that those estimates are less that 1/2 of one year of pretax pre-provision earnings. If that is your main worry you should not worry at all. If the consequences are so trivial, why wouldn't the company be highly conservative or even just realistic in their assumptions in this case. Further -- the point is that if the assumptions are so grossly and obviously flawed in this case, how can anyone have any confidence in the remaining assumptions underlying the determination of book value? Moreover, someone who was given a look under the covers suggests "factual records" are limited. Crazy.

txlaw -- I think you letting emotions get the best of you because I assume you can read. You write You're willing to quote Blodget, ZH, and Yves Smith as credible evidence that BAC will be overwhelmed by its liabilities and must go to $0. Actually, I think I've exaggerated your position. You think BAC will have to issue highly dilutive equity capital at the price it's trading at. Yet I have consistently written that I have no idea of BAC is a buy or a sell. I am questioning how anyone could be pounding the table on BAC as a BUY without any supporting analysis -- simply trusting management. Further -- the buy thesis has dramatically devolved over the past month, without any reconciliation by the bulls. Still waiting for any bull and/or management to address FHLB.

I remember being told not to buy WFC at $9 and GE at $7, because things could get worse. Easy to come up with worst case scenarios, but hard to come with probable scenarios. It's why some people missed the rebound in 2009 and 2010. Same reason they'll miss it again in the next year or so. Cheers! Again -- ZERO analysis supporting a bullish opinion. Some remember WFC and GE but have we forgotten BAC (the first time around), C, Bear Stearns, Fannie, Freddie, LEH etc where management maintained all was good right up until the end, with numerous "bulls" lapping up their every word while "loading up" on the opportunity of a lifetime? It's why some people missed the rebound in 2009 and 2010. Investors didn't have to blindly invest in speculative unknowable risk/reward positions in order to realize strong returns during this period and def not needed in order to realize strong returns in future periods.

And what about this...bulls never address... Sure enough, in a filing today at the Supreme Court in New York, the Federal Home Loan Banks which are pursuing more information from the bank in an attempt to generate greater recoveries, have suggested that the the entity conducting the recovery assumptions that generated the $8.5 billion settlement was potentially incompetent (and arguably criminally negligent - our assumption not theirs), and that a "reasonable settlement" would nearly triple the amount of money that Bank of America would have to charge off: a range of $22 billion to $27.5 billion. Of course, should BAC do this, its Tier 1 Capital would plunge, it would immediately be forced to access the equity capital markets, and confidence in the bank's books would evaporate instantaneously, with all the nightmarish AIG-esque consequences envisioned by Jon Weil materializing immediately. Let's take a look at the FHLB's filing: HERE IS THE CONCLUSION -- THE ASSUMPTIONS ARE LUDICROUS...HOW CAN ANYONE BE CONFIDENTLY BULLISH GIVEN THIS SAMPLE OF ASSUMPTIONS BNYM notes that it has now released on a website “all of the expert reports submitted to the Trustee in connection with the Settlement” and implies that those reports may provide all the additional information that the FHLBs need to decide whether to object to the proposed settlement. Unfortunately, however, the expert reports raise more questions than they answer. By way of example, BNYM published a report from Mr. Brian Lin of RRMS Advisors about the reasonableness of the $8.5 billion that BNYM agreed to accept as part of the proposed settlement. Mr. Lin concluded that “a settlement figure somewhere between $8.8 and $11 billion is reasonable.” But to reach that conclusion, Mr. Lin made certain assumptions, the bases for which are not fully disclosed in his report. Mr. Lin started with the full remaining principal balance of the loans in the 530 trusts that would be covered by the proposed settlement, plus the amount that the trusts have lost on loans that have already been liquidated. Together, Mr. Lin calculates that to be $208.9 billion. Mr. Lin then assumed that (1) only a certain percentage of those loans would go into default and (2) even for those loans that went into default, the trusts would recover between 45% and 60% of the principal balance through foreclosure. Both of these assumptions are quite controversial, and the FHLBs need to understand Mr. Lin’s basis for them. Using those assumptions, Mr. Lin concludes that the potential shortfall to the trusts, and therefore the amount that the trusts could potentially recover from Countrywide and Bank of America, is reduced from $208.9 billion to $61.3 billion. To get from $61.3 billion to a “reasonable” settlement range of $8.8 to $11 billion, Mr. Lin made two more assumptions. He assumed that only 36% of loans that go into default will have breached Countrywide’s representations and warranties about the quality of its underwriting. That assumption is difficult to understand. Mr. Lin did not do any independent analysis of this assumption. Instead, he simply adopted Bank of America’s estimates of this percentage, which in turn appear to have been based on a completely different portfolio of loans that were subject to the underwriting standards imposed by Fannie Mae and Freddie Mac. Moreover, Mr. Lin’s assumption is inconsistent with widely publicized reports by professional loan auditors that even Countrywide loans that are merely delinquent (that is, behind on payments but not yet in default) have a “breach rate” of well over 60% and often as high as 90%. Finally, Mr. Lin assumed that only 40% of loans that both go into default and have breached Countrywide’s representations and warranties could be successfully put back to Countrywide and Bank of America. This assumption similarly demands investigation. It is hard to imagine why a court would not require Countrywide and Bank of America to repurchase all loans, not just 40% of loans, that are both in default and have breached a representation or warranty. Each of these assumptions has a great effect on Mr. Lin’s estimate of the amount of a reasonable settlement. As an example, even if just the last assumption were changed from Countrywide and Bank of America having to repurchase all, rather than just 40%, of loans that were both in default and breached Countrywide’s representations and warranties, then Mr. Lin’s estimate of a reasonable settlement would rise from a range of $8.8 to $11 billion to a range of $22 to $27.5 billion. Modifying any of his other three assumptions would cause that range to rise much more. Similarly, BNYM also published a report by Prof. Robert Daines about Bank of America’s liability as a successor to Countrywide. But Prof. Daines’s report leaves unanswered several critical legal and factual questions. Indeed, Prof. Daines admits that his opinion is “limited by the available factual record and certain assumptions that I make,” and he concedes in several parts of his report that he relied on unverified information provided by Bank of America

Absolutely nothing but a combo of shoot the messenger and platitudes. Bulls are basing their positive outlook on hollow statements: The sovereign exposure is off by a factor of 10. The commercial real estate figures are off by a factor of four. Are you kidding me???? Where is the supporting analysis? The stock has been destroyed, with the company now valued at 0.32x supposed book value and the best management can do to refute the analysis and create confidence is to attack the messenger and throw out numbers without any supporting analysis? Stunning. Again -- I have no idea if the stock is a buy or a sell but I do know that I have seen NO legit analysis supporting a raging bull opinion.

This bank is trading at 0.32 times book now. I'll also ask that unless you've seen all of the loans and understand all of the assumptions underlying reported book value, how do you have any confidence in reported book value? Not once have I seen any "bull" support their conclusion with an analysis of the "assets" and the assumptions that underly reported tangible book value. Further, the bull story has now devolved from the stock being a screaming buy at $11-12 to the stock is now a screaming buy because the company will almost certainly soon get a capital infusion through the sale of pfd shares. Well if book value is so sound and the stock was a screaming buy at $11-12, why would management and any shareholder even consider taking outside money? -- wouldn't make any sense if book value is legit

will be interesting to see how this plays out...no opinion here maybe someone could adress these issues instead of just responding w platitudes, which is all i've seen from the bulls From CNBC So what's going on? Henry Blodget at Business Insider sums up the "bear case" against Bank of America [bAC 6.30 -0.12 (-1.87%) ]. The short version: a lot of people don't believe that Bank of America is correctly valuing its assets and liabilities. Here are some of the things that the Bank of America observers think should or will be subtracted from the bank's $222 billion of book value: $15-$20 billion in increased mortgage-litigation reserves. Zero Hedge thinks BoA is understating the liability for mortgage litigation costs by this amount. See explanation here. Some percentage of $80 billion of "second mortgages." Yves Smith thinks these should probably be written down by 60%, or $48 billion. You can pick your own number. Some percentage of $182 billion in commercial real estate loans. The "extend and pretend" game in commercial real-estate is even more pronounced than in residential real estate. So as Yves Smith observes, there's almost no chance those loans are actually worth $182 billion. A healthy percentage of $78 billion of "goodwill." Bank of America built itself by acquisition. "Goodwill" is what's left over when management overpays for something. As Yves Smith observes, Bank of America's former CEO Ken Lewis loved overpaying for things. He overpaid for Countrywide, for example, which has since been written off to zero, and Merrill Lynch, which he could have had for free by waiting a couple more days. Untold amounts of exposure to collapsing European banks and sovereign debt. Yves Smith says Bank of America says its sovereign exposure is $17 billion. Really? Has the firm not written any credit default swaps protecting customers in the event that European banks or countries go belly up? Might the firm have to post some cash "collateral" to satisfy these contracts? That's what Lehman had to do, after all. And that's what made Lehman go from "having plenty of capital" to being broke overnight. So, taking some back of the envelope numbers, it looks as though we could easily come up with, say, $100-$200 billion in write-offs and exposures to "clean up" Bank of America's balance sheet.

Article shines a bright light on the reality that bank and investment bank executives have no qualms about lying to their investors -- the lack of leadership and integrity is highly concerning given the current stresses. A culture of ignorance and corruption still runs throughout Wall Street. My guess is that the problem is even greater in Europe. Another lesson here is that many who rose to the top of these banks and investment banks over the past 20 years are not smart people -- seems their greatest talents were 1) the ability and willingness to lie and 2) the eagerness to take enormous and dumb risk without any consideration of the potential adverse consequences. The Fed fulfilled its responsibility to provide liquidity during periods of stress but the lies by the banks and investment banks about the "strength" of their balance sheets is stunning. Trust current proclamations of bank soundness with great caution. From Bloomberg Two weeks after Lehman’s bankruptcy in September 2008, Morgan Stanley countered concerns that it might be next to go by announcing it had “strong capital and liquidity positions.” The statement, in a Sept. 29, 2008, press release about a $9 billion investment from Tokyo-based Mitsubishi UFJ Financial Group Inc., said nothing about Morgan Stanley’s Fed loans. That was the same day as the firm’s $107.3 billion peak in borrowing from the central bank, which was the source of almost all of Morgan Stanley’s available cash, according to the lending data and documents released more than two years later by the Financial Crisis Inquiry Commission. The amount was almost three times the company’s total profits over the past decade, data compiled by Bloomberg show. JPMorgan Chase & Co. (JPM), the New York-based lender that touted its “fortress balance sheet” at least 16 times in press releases and conference calls from October 2007 through February 2010, took as much as $48 billion in February 2009 from TAF. The facility, set up in December 2007, was a temporary alternative to the discount window, the central bank’s 97-year-old primary lending program to help banks in a cash squeeze. Linke to full article -- http://www.bloomberg.com/news/2011-08-21/wall-street-aristocracy-got-1-2-trillion-in-fed-s-secret-loans.html

"Bank of America’s bond-insurance prices last week surged to a rate of $342,040 a year for coverage on $10 million of debt, above where Lehman Brothers Holdings Inc. (LEHMQ)’s bond insurance was priced at the start of the week before the firm collapsed." -- Bloomberg

...this analysis is correct, which I believe is probable (and have for some time). Video is worth watching -- analysis details the numbers behind the panic. I have no opinion on the solutions offered but doubt they will be followed. Michael Lewis' recent article on Germany suggests no willingness to bailout the rest of Europe. With commercial paper being pulled from the European banking system, several large Euro banks could well be zero's in the not too distant future. Analysis also speaks to the problem created by a collapsing stock price during periods of stress. Continued patience is probably a good approach -- there are selective opportunities emerging but always demand a high margin of safety from Mr. Market. Personally -- still hold roughly 45% cash, having put about 5% new capital to work over the past 2 weeks. Remember, we still have the Japan mess to get through -- which will happen at some point over the next 5 years...no doubt. Here is the video link... http://video.cnbc.com/gallery/?video=3000040348

Rabbitisrich -- you keep trying to twist my words. As a result, you're not worth responding to... Hope you do well with your bank stocks. And here is one thought that is looking pretty good -- not buying BAC when Berkowitz was trying to tell everyone else to buy.

"If you think unsecured loans are "air," then you must consider equites "less than air" since they rank behind unsecured debt." I agree -- the value of equity becomes worthless when a company defaults on its debt. "If that is the case how do you rationalise investing in stocks?" I don't invest in overleveraged companies. Listen -- I passed along a comment by Denninger. After thought, I agreed with his assertion. At this point, further debating w me is pointless -- the stock prices have collapsed in the past week. If you've done good analysis -- load up...you should be loving this market -- you're gonna get rich if you're right.

"Munger, you are changing your argument halfway. You say that you will defend your position that a bank lends against its market capitalization, then you proceed to argue that a loan that goes to zero is worthless and can't be "accessed". Yes, if a loan goes to zero it can't be accessed." It is obvious to me you don't understand the difference between unsecured and secured assets and the implications for bank capital. No doubt a rough day for BAC holders -- hang in there man...and don't beat yourself up...if you're confident, you'll make a fortune by loading up -- so look on the bright side. I'm simply agreeing with Denninger who pointed out how accounting for capital understates risk to investors durign periods of stress.

"Am I wrong that you are making the assumption that at some point all unsecured loans will default?" Here is the point again -- as the stock price collapses, the % of unsecured assets that need to go bad in order for the equity to be impaired decreases.

with AIG, BAC, JOE etc imploding -- how does Berkowitz survive...what do his redemption requests look like when he shows up in the office tom morning

Rabbitisrich -- I see from your prior posts that you are long BAC, which I'm sure explains your tone. Never fun to own a stock down 20% in a single day. Hang in there man -- if you're confident in your analysis, you should be loving today...Mr. Market gave you an opportunity of a lifetime.

Wrong Rabbitisrich -- another guy who likes to throw aroung personal attacks. Somehow you can't understand that implicit in counting unsecured assets in the capital base is an assumption about the stability of the value of common stock. Unsecured assets by definitition are not true capital because there is no collarteral -- the value of the common stock is mistakenly seen as a backstop. Capital has value (i.e., protection) because it can be accessed during periods of stress -- during a period of stress, unsecured assets that default are worthless...no contribution to capital AT ALL. This is exactly what Denninger meant. Loading up the balance sheet with unsecured assets is what is incredibly stupid. And no -- the "air" doesn't generate any cash if an economic downturn renders the debtor unable to pay.

"If gyratians in bank's stock prices effected capital ratios and could render them insolvent (as was suggested), why would any bank go public? And how could any bank survive for a long period of time?" Without question, a collapsing stock price can render a bank insolvent. Here is the problem -- bank stocks only collapse during periods of stress...during periods of stress, the value of the assets come into question...if unsecured credit defaults (which happens a lot during periods of stress) -- the bank's capital ratios implode becuase there is no recourse value...at that point, you can't sell enough stock to replinish the capital or if you do, you essentially wipe out existing shareholders (which by the way has already happened with C and BAC)...implicit in counting non recourse loans in the capital base, is the assumption that you could utlimately sell stock to re-capitalize any losses associated with such loans because there is NO collateral underlying the non-recourse loans included in the capital base against which the bank lends...however, during periods of great stress, you can't recapitalize without destroying existing shareholders if the stock price is too loo To reiterate -- I have no idea what is going to happen...but I do believe that a collapsing stock price and unsecured loans greatly heightens the risk of insolvency during periods of stress. And if these banks collapse, you can bet that unsecured loans will not be included in the capital base in the futre.